Wall Street is a competition, a Darwinian battle for the almighty dollar. Gordon Gekko said that greed is good, that it captures "the essence of the evolutionary spirit." A hedge fund hunts for an edge and then maniacally guards it, locking down its trading data and barring its traders from joining the company next door. The big bucks lie in finding market inefficiencies no one else can, succeeding at the expense of others. But Richard Craib wants to change that. He wants to transform Wall Street from a cutthroat competition into a harmonious collaboration.
This morning, the 29-year-old South African technologist and his unorthodox hedge fund, Numerai, started issuing a new digital currency—kind of. Craib's idea is so weird, so unlike anything else that has preceded it, that naming it becomes an exercise in approximation. Inspired by the same tech that underpins bitcoin, his creation joins a growing wave of what people in the world of crypto-finance call "digital tokens," internet-based assets that enable the crowdsourcing of everything from venture capital to computing power. Craib hopes his particular token can turn Wall Street into a place where everyone's on the same team. It's a strange, complicated, and potentially powerful creation that builds on an already audacious arrangement, a new configuration of technology and money that calls into question the market's most cherished premise. Greed is still good, but it's better when people are working together.
Based in San Francisco, Numerai is a hedge fund in which an artificially intelligent system chooses all the trades. But it's not a system Craib built alone. Instead, several thousand anonymous data scientists compete to create the best trading algorithms---and win bitcoin for their efforts. The whole concept may sound like a bad Silicon Valley joke. But Numerai has been making trades in this way for more than a year, and Craib says it's making money. It's also attracted marquee backers like Howard Morgan, a founder of Renaissance Technologies, the wildly successful hedge fund that pioneered an earlier iteration of tech-powered trading.
Richard Craib
The system is elegant in its way: Numerai encrypts its trading data before sharing it with the data scientists to prevent them from mimicking the fund's trades themselves. At the same time, the company carefully organizes this encrypted data in a way that allows the data scientists to build models that are potentially able to make better trades. The crowdsourced approach seems to be working—to a point. But in Craib's eyes, the system still suffers from a major drawback: If the best scientist wins, that scientist has little incentive to get other talented colleagues involved. The wisdom of the crowd runs up against Wall Street's core ethos of self-interest: make the most money for yourself.
That's where Craib's new token comes in. Craib and company believe Numerai can become even more successful if it can align the incentives of everyone involved. They hope its new kind of currency, Numeraire, will turn its online competition into a collaboration—and turn Wall Street on its head in the process.
Everyone Wins
In its first incarnation, Numerai was flawed in a notable way. The company doled out bitcoin based on models that performed successfully on the encrypted test data before the fund ever tested them on the live market. That setup encouraged the scientists to game the system, to look out for themselves rather that the fund as a whole. "It judged based on what happened in the past, not on what will happen in the future," says Fred Ehrsam, co-founder of marquee bitcoin company Coinbase and a Wall Street veteran.
But Craib feels the system was flawed in another way—the same way all of Wall Street is flawed. The data scientists were still in competition. They were fighting each other rather than fighting for the same goal. It was in their best interest to keep the winnings to themselves. If they spread the word, the added competition could cut into their winnings. Though the scientists were helping to build one master AI, they were still at odds. The fund and its creators were at cross-purposes.
Today, to fix that problem, Numerai has distributed Numeraire—1,000,000 tokens in all—to 12,000 participating scientists. The higher the scientists sit on the leaderboard, the more Numeraire they receive. But it's not really a currency they can use to pay for stuff. It's a way of betting that their machine learning models will do well on the live market. If their trades succeed, they get their Numeraire back as well as a payment in bitcoin—a kind of dividend. If their trades go bust, the company destroys their Numeraire, and they don't get paid.
The new system encourages the data scientists to build models that work on live trades, not just test data. The value of Numeraire also grows in proportion to the overall success of the hedge fund, because Numerai will pay out more bitcoin to data scientists betting Numeraire as the fund grows. "If Numerai were to pay out $1 million per month to people who staked Numeraire, then the value of Numeraire will be very high, because staking Numeraire will be the only way to earn that $1 million," Craib says.
It's a tricky but ingenious logic: Everyone betting Numeraire has an incentive to get everyone else to build the best models possible, because the more the fund grows, the bigger the dividends for all. Everyone involved has the incentive to recruit yet more talent—a structure that rewards collaboration.
