Overview
High Level Idea
Our miners act like traders. To score well and receive incentive, they place orders on our system against different trade pairs. The magnitude of each order is determined by its leverage, which can be thought of as the percentage of the portfolio used for the transaction. An order with a leverage of 1.0x indicates that the miner is betting against their entire portfolio value.
The first time a miner places an order on a trade pair, they will open a position against it. The leverage and directionality of this position determines the miner’s expectation of the trade pair’s future movement. As long as this position is open, the miner is communicating an expectation of continued trade pair movement in this direction. There are two types of positions: LONG and SHORT.
A long position is a bet that the trade pair will increase, while a short position is a bet that the trade pair will decrease. Even if the overall position is LONG, a miner can submit a number of orders within this position to manage their risk exposure by adjusting the leverage. SHORT orders on a long position will reduce the overall leverage of the position, reducing the miner’s exposure to the trade pair. LONG orders on a long position will increase the overall leverage of the position, increasing the miner’s exposure to the trade pair.
Basic Rules
- Your miner will start in the challenge period upon entry. This 60-day period will require your miner to demonstrate consistent performance, after which they will be released from the challenge period, which may happen before 60 days has expired. In this month, they will receive a small amount of TAO that will help them avoid getting deregistered. The minimum requirements to pass the challenge period:
- 2% Total Return
- 5% Max Drawdown
- No single day’s change in portfolio value should exceed 20% of your total 60-day return.
- A single position should not account for more than 25% of your total return.
- Miner will be penalized if they are not providing consistent predictions to the system or if their drawdown is too high. The details of this may be found here.
- A miner can have a maximum of 200 positions open.
- A miner’s order will be ignored if placing a trade outside of market hours.
- A miner’s order will be ignored if they are rate limited (maliciously sending too many requests)
- There is a 10-second cooldown period between orders, during which the miner cannot place another order.
Scoring Details
The primary scoring mechanic in our system is Risk Adjusted Returns. We look at all of your positions in the prior lookback period, 90 days, and evaluate the returns from these positions. Notably, to determine the return of a miner, we look at the returns from closed positions and from open positions in loss. In filtering for open positions, we will also filter against any positions which have been open for more than 90 days. If they are in loss and still open, they will count against your score. We do this to avoid the scenario where a losing position is never closed, and the miner is able to avoid the penalty associated with this loss.
While our primary scoring mechanic is returns, consistency plays a substantial role in scoring our miners as we look to prioritize miners with a consistent track record of success. Additionally, we have a layer of costs and penalties baked into PTN, to simulate the real costs of trading.
There are two primary systems which live in parallel to give us a stronger perspective on the quality of our miners: Positions and Portfolio Value.
Scoring Metrics
We use four scoring metrics to evaluate miners based on their mid trade scores: Short Term Risk Adjusted Returns, Long Term Risk Adjusted Returns, Sharpe and Omega.
We measure miner risk as their maximum portfolio drawdown, the largest drop in value seen while we have been tracking the behavior of the miner. We use a blend of recently seen max drawdown values and historically likely values to make this determination, with the most recent values having the most weight. Details on this mechanic may be found in our proposal 9.
To find the risk adjusted return, we take the product of all positional returns as the current miner return. We then divide this by the drawdown term. If, for example, a miner has a total 90-day return of 7.5% and a drawdown of 2.5%, their long term risk adjusted return would be 3.0.
Short term returns look at positions opened in the prior 90 days, but closed in the last 5 days. Like the long term returns, these use losing positions to calculate the return.
The sharpe ratio will look at the positional return divided by the standard deviation of the returns. To avoid gaming on the bottom, a minimum value of 0.5% is used for the standard deviation.
The omega ratio is a measure of the winning trades versus the losing trades. It serves as a useful proxy for the risk to reward ratio the miner is willing to take with each trade. Like the sharpe ratio, we will use a minimum value of 0.5% for the denominator.
| Metric | Scoring Weight |
|---|---|
| Long Term Realized Returns | 100% |
| Short Term Realized Returns | 25% |
| Sharpe Ratio | 25% |
| Omega Ratio | 25% |
Scoring Penalties
There are four primary penalties in place for each miner:
- Max Positional Return: A single position should not represent more than 15% of total realized return.
- Realized Return Distribution: No more than 30% of the miner’s realized returns should be from positions all closed in a single week.
- Max Portfolio Value Change - Daily: A single day of trading should not represent more than 20% of the total unrealized return.
- Max Portfolio Value Change - Biweekly: A single two-week period should not account for more than 35% of total unrealized return.
Portfolio value is tracked in realtime against positions, regardless of if they are closed or open. If the measured volatility on the portfolio value is too high relative to the total returns from the miner, we will flag them as inconsistent, even if their closed positions meet the requirements. This is meant to protect from the scenario where most of a miner’s value comes from a single interval, but their positions may close over a longer period. Full details on the logic associated with each proposal may be found in proposal 9.
Fees and Transaction Costs
We want to simulate real costs of trading for our miners, to make signals from PTN more valuable outside our platform. To do this, we have incorporated two primary costs: Transaction Fees and Cost of Carry.
Transaction fees are proportional to the leverage used. The higher the leverage, the higher the transaction fee. We use cumulative leverage to determine the transaction fee, so any order placed on a position will increase the fees proportional to the change in leverage.
Cost of carry is reflective of real exchanges, and how they manage the cost of holding a position overnight. This rate changes depending on the asset class, the logic of which may be found in our proposal 4.
Implementation Details
| Market | Fee Period | Times | Rates Applied | Triple Wednesday |
|---|---|---|---|---|
| Forex | 24h | 21:00 UTC | Mon-Fri | ✓ |
| Crypto | 8h | 04:00, 12:00, 20:00 UTC | Daily (Mon-Sun) | |
| Indices | 24h | 21:00 UTC | Mon-Fri | ✓ |
The magnitude of the fees will reflect the following distribution:
| Market | Base Rate (Annual) | Daily Rate Calculation |
|---|---|---|
| Forex | 3% | 0.008% * Max Seen Leverage |
| Crypto | 10.95% | 0.03% * Max Seen Leverage |
| Indices | 5.25% | 0.014% * Max Seen Leverage |
Leverage Limits
We also set limits on leverage usage, to ensure that the network has a level of risk protection and mitigation of naive strategies. The positional leverage limits are as follows:
| Market | Leverage Limit |
|---|---|
| Forex | 0.1x - 5x |
| Crypto | 0.01x - 0.5x |
| Indices | 0.1x - 5x |
We also implement a portfolio level leverage limit, which is the sum of all the leverages from each open position. This limit is set at 10x a “typical” position, where a typical position would be 1x leverage for forex/indices and 0.1x leverage for crypto. You can therefore open 10 forex positions at 1x leverage each, 5 forex positions at 2x leverage each, 5 forex positions at 1x and 5 crypto positions at 0.1x, etc.
Incentive Distribution
The miners are scored in each of the categories above based on their prior positions over the lookback period. Penalties are then applied to these scores, and the miners are ranked based on their total score. Percentiles are determined for each category, with the miner’s overall score being reduced by the full scoring weight if they are the worst in a category.
For example, if a miner is last place in the long term realized returns category, they will receive a 0% score for this category. This will effectively reduce their score to 0, and they will be prioritized during the next round of deregistration.
We distribute on an exponential decay, with the top 40% of miners receiving 90% of emissions.