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 must register on the Bittensor network to participate.
- There is a registration fee of 2.5 TAO on mainnet.
- There is an immunity period of 9 days to help miners submit orders to become competitive with existing miners. Eliminated miners do not benefit from being in the immunity period.
- Your miner will start in the challenge period upon entry. Miners must demonstrate consistent performance within 150 days to pass the challenge period. During this period, they will receive a small amount of TAO that will help them avoid getting deregistered. The minimum requirements to pass the challenge period:
- Have at least 120 full days of trading
- Don’t exceed 10% max drawdown
- Score at or above the 25th miner in main competition. The details may be found here.
- Positions are uni-directional. Meaning, if a position starts LONG (the first order it receives is LONG), it can’t flip SHORT. If you try and have it flip SHORT (using more leverage SHORT than exists LONG) it will close out the position. You’ll then need to open a second position which is SHORT with the difference.
- Position leverage is bound per trade pair. If an order would cause the position’s leverage to exceed the upper boundary, the position leverage will be clamped. Minimum order leverage is 0.001. Crypto positional leverage limit is [0.01, 0.5]. Forex positional leverage limit is [0.1, 5].
- Leverage is capped at 10 across all open positions in a miner’s portfolio. Crypto position leverages are scaled by 10x when contributing to the leverage cap. View for more details and examples.
- You can take profit on an open position using LONG and SHORT. Say you have an open LONG position with .5x leverage and you want to reduce it to a .25x leverage position to start taking profit on it. You would send in a SHORT signal of size .25x leverage to reduce the size of the position. LONG and SHORT signals can be thought of working in opposite directions in this way.
- Miners that have passed challenge period will be eliminated for a drawdown that exceeds 10%.
- Miners in main competition who fall below the top 25 will be observed under a probation period.
- Miners in probation period have 30 days from time of demotion to be promoted back into main competition.
- If they fail to do so within this window, they will be eliminated.
- A miner can have a maximum of 1 open position per trade pair. No limit on the number of closed positions.
- 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 of the same trade pair, during which the miner cannot place another order.
- Avoid reusing hotkeys that have been previously deregistered.
Scoring Details
Risk-Adjusted Returns is a heavily weighted scoring mechanism in our system. We calculate this metric using a combination of average daily returns and a drawdown term, assessed over different lookback periods. This approach allows us to measure each miner’s returns while factoring in the level of risk undertaken to achieve those returns.
While returns is a significant scoring mechanic, consistency and statistical confidence each play 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.
We calculate daily returns for all positions and the entire portfolio, spanning from 12:00 AM UTC to 12:00 AM UTC the following day. However, if a trading day is still ongoing, we still monitor real-time performance and risks.
This daily calculation and evaluation framework closely aligns with real-world financial practices, enabling accurate, consistent, and meaningful performance measurement and comparison across strategies. This remains effective even for strategies trading different asset classes at different trading frequencies. This approach can also enhance the precision of volatility measurement for strategies.
Annualization is used for the Sharpe ratio, Sortino ratio, and risk adjusted return with either volatility or returns being annualized to better evaluate the long-term value of strategies and standardize our metrics. Volatility is the standard deviation of returns and is a key factor in the Sharpe and Sortino calculations.
In determining the correct annualization factor, we weigh more recent trading days slightly higher than older trading days. This should encourage miners to regularly update their strategies and adapt to changing market conditions, continually providing the network with the most relevant signals. The most recent 10 days account for 25% of the total score, the most recent 30 days account for 50%, and the most recent 70 days account for 75%, with a pattern that tapers exponentially over time.
Additionally, normalization with annual risk-free rate of T-bills further standardizes our metrics and allows us to measure miner performance on a more consistent basis.
Scoring Metrics
We use five scoring metrics to evaluate miners based on daily returns: Calmar Ratio, Sharpe Ratio, Omega Ratio, Sortino Ratio, and Statistical Confidence (T-Statistic).
The miner risk used in the risk adjusted returns is the miner’s maximum portfolio drawdown.
Calmar Ratio will look at daily returns in the prior 120 days and is normalized by the max drawdown.
The sharpe ratio will look at the annualized excess return, returns normalized with the risk-free rate, divided by the annualized volatility which is the standard deviation of the returns. To avoid gaming on the bottom, a minimum value of 1% is used for the volatility.
The omega ratio is a measure of the winning days versus the losing days. The numerator is the sum of the positive daily log returns while the denominator is the product of the negative daily log returns. It serves as a useful proxy for the risk to reward ratio the miner is willing to take with each day. Like the Sharpe ratio, we will use a minimum value of 1% for the denominator.
The sortino ratio is similar to the Sharpe ratio except that the denominator, the annualized volatility, is calculated using only negative daily returns (i.e., losing days).
Statistical Confidence uses a t-statistic to measure how similar the daily distribution of returns is to a normal distribution with zero mean. Low similarity means higher confidence that a miner’s strategy is statistically different from a random distribution.
| Metric | Scoring Weight |
|---|---|
| Calmar Ratio | 20% |
| Sharpe Ratio | 20% |
| Omega Ratio | 20% |
| Sortino Ratio | 20% |
| Statistical Confidence | 20% |
Scoring Penalties
There are two primary penalties in place for each miner:
-
Max Drawdown: PTN penalizes miners whose maximum drawdown over the past 5 days exceeds the predefined 10% limit.
-
Martingale: Miners are penalized for having positions that resemble a martingale strategy. Two or more orders that increase leverage beyond the maximum leverage already seen while a position has unrealized loss may result in a penalty. More details on this can be found here.
The Max Drawdown penalty and Martingale penalty help us detect the absolute and relative risks of a miner’s trading strategy in real time.
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) | |
| Equities | 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 |
| Equities | 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 |
| Equities | 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, 2x for equities, and 0.1x leverage for crypto. You can therefore open 10 forex positions at 1x leverage each, 5 equities positions at 2x leverage each, 5 forex positions at 2x leverage each, 5 forex positions at 1x and 5 crypto positions at 0.1x, etc.
Incentive Distribution
Miners are scored in each of the categories above based on their prior positions over the lookback period. Penalties are then applied to each score for exceeding max drawdown and their perceived risk profile. Each scores are ranked per category for each miner and multiplied by their rank percentile.
For example, the lowest ranked miner in the long term realized returns category will receive a percentile score of 1/N, where N is the total number of miners scored in that category. In contrast, the highest-ranked miner will retain 100% of the score weight for that category.
We distribute using a softmax function, with a target of the top 50% of miners receiving 90% of emissions. The softmax function dynamically adjusts to the scores of miners, distributing more incentive to relatively high-performing miners.