Data is the lifeblood of the digital era. But how can one trust data if the purveyor doesn’t have a stake in providing accurate information?
Erasure protocol is designed to rectify this problem by creating data markets based on the accuracy of on-chain information.
Numerai — Erasure’s Precursor
Numerai.ai is a San Francisco-based blockchain project launched by Richard Craib in October 2015. Numerai combines machine learning (AI) algorithms with blockchain to create stock forecasting models.
Numerai operates similarly to a quantitative hedge fund. It uses multiple predictive models to generate an overarching meta model to manage on-chain funds. Because machine learning algorithms self-correct over time, this leads to reduced portfolio risk.
In turn, a reduced portfolio risk allows for greater space to take leveraged positions, potentially leading to greater returns. In 2017, the platform launched its native Numeraire token, which is compatible with the Ethereum ecosystem as an ERC-20 token.
NMR tokens have been used to deliver rewards in Numerai’s tournaments, originally paid through PayPal. Numerai regularly runs these tournaments where users can submit their own stock market model predictions to earn crypto rewards.
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These tournaments involved data scientists who would predict certain market outcomes. Based on their accuracy, they would win NMR tokens as prizes, or lose up to 25% of their NMR stakes if they failed.
When such losing streaks happen, NMR is not merely lost, but burned — permanently removed from the token’s circulating supply. A year after NMR launched, in 2018, Numerai upgraded its platform by launching the Erasure Protocol.
Erasure Protocol Explained
Both traditional and blockchain finance relies on data. The Federal Reserve itself relies on economic data measuring inflation rates, unemployment, savings, and wages, among others.
On an individual investor level, it is paramount to rely on accurate information to make profitable trades. Many investors rely on social media influencers to do their research for them and go with the flow. But what if there is a way to create a transparent system of trust?
This is the purpose of Erasure, an Ethereum-based protocol that allows anyone to publish information. If that data is incorrect, the publisher is penalized with a reduction of their staked capital. If the data is accurate, the publisher is rewarded.
How Does Erasure Work?
Erasure works by managing incentives. When people deposit their tokens in the Erasure Protocol, they are locked in a smart contract. This smart contract governs those funds based on the accuracy of information provided by the depositor.
So depositors must be confident that they provide accurate information because their financial stake is at risk if they don’t. Erasure’s data can be used to support prediction markets. Before we delve into specific examples, here are the three key steps the Erasure protocol follows:
- When a depositor publishes data tied to their funds, Erasure records it on its publicly accessible ledger, just like any Ethereum transaction on Etherscan.io. This immutable transparency allows potential buyers to verify the purveyor’s track record, i.e., their predictive performance.
- Erasure Protocol provides NMR token to serve as an escrow for its payment-settling smart contract called Erasure Escrow registry. Likewise, funds in the escrow can be reduced if false information is supplied.
Erasure and other dApps built on Erasure’s data market use Numeraire (NMR), the native Numerai token exchangeable for any other ERC-20 token. The staked NMR plays a critical role in settling disputes. Through a so-called “griefing agreement,” buyers and sellers of information use NMR ratio to impose penalties.
Case in point, a grief ratio of 1:5 would allow the buyer to use 1 NMR to burn 5 NMR from the seller’s staked deposit. Data sellers pick these grief ratios beforehand, as a way of tweaking their risk confidence.
All smart contracts on the Erasure protocol have grief ratios, including the time period in which griefing agreement can be triggered. Because of its reliance on grief ratios, Ensure Protocol doesn’t have to rely on an oracle network like Chainlink.
Erasure’s Top dApps in Action
How does the Erasure-based data market work exactly? We can find the answer on Erasure Bay, one of the most popular dApps using Erasure Protocol. Effectively, Erasure Bay aggregates mini-jobs as data requests. It is similar to Fiverr but without any mediators because smart contracts handle the conditions for payment to be released.
For example, let’s say you need someone to verify if an Excel spreadsheet contains the right data in the right data field categories. The data requester would then attach a reward to the smart contract, including the grief period and how much stake does the data supplier have to supply. This way, the data supplier/verifier can be penalized.
With all those conditions fulfilled, Erasure protocol on Erasure Bay manifests like this.
Because Erasure Protocol is hosted on Ethereum, this means that all transactions can then be verified on Etherscan.io. In this case, the fulfiller’s contract can be found here, under the “contract” tab.
Erasure Bay showcases that Erasure is an extremely flexible protocol, going outside its market forecasting model into the data-oriented micro-job territory. But what if you consider yourself a professional trader and want to take advantage of Erasure?
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In that case, Numerai Signals is the place to go. Up until November 2022, traders have placed over 1,000 market signals, staking over $2M funds. Numerai Signals platform compares the originality and the performance of the submitted signal against all others.
This market signals for specific stocks fall into four categories:
- Fundamental signals: profit-to-earnings (P/E), analyst ratings, dividend yields, cash flows, etc.
- Technical signals: Relative Strength Index (RSI), Moving Average Convergence/Divergence (MACD), and other commonplace signals in trading.
- Alternative signals: social media sentiment, credit card transactions, satellite images, etc.
- Blended signals: Barra risk factors, Fama French factors
When picking stocks for these signals, for example, Tesla (TSLA), the submitter then fills the stock ticker column and signal column, ranging in values from 0 to 1. The submission also has to have at least ten rows that use the signal prediction for specific stocks.
With staked NMR, market signal submitters then have the potential to earn NMR if their market signal performs better than others. Interestingly, Numerai Signals allow prediction files to be submitted even without staking, if someone just wants to check their signal performance.
This flexibility allows traders to train their skills without having to worry about losing NMR stakes. To further increase the competitive streak among traders, Numerai Signals has a Leaderboard showing the best all-time performers.
Source: Numerai Signals.
Trustless Data Markets Here To Stay
Although Erasure Protocol is delegated to a niche user base, it shows that people can trust strangers with information if the right incentive balance is achieved. In the era of misinformation, when anyone can say anything, there will be a strong demand for objective information that goes through the survival-of-the-fittest process.
In the end, as the Erasure Bay example showed, the protocol’s use cases are yet to be fully explored.
This series article is intended for general guidance and information purposes only for beginners participating in cryptocurrencies and DeFi. The contents of this article are not to be construed as legal, business, investment, or tax advice. You should consult with your advisors for all legal, business, investment, and tax implications and advice. The Defiant is not responsible for any lost funds. Please use your best judgment and practice due diligence before interacting with smart contracts.