A look at NFA Labs and why $NFAi is more than an AI meme coin - by ApeStrategist
Overview
NFAi is a decentralized hedge fund that leverage trades cryptocurrencies on decentralized exchanges, such as dYdX. NFAi uses a self-learning neural net and a lending protocol, codenamed Canis, on Shibarium. The team generated and designed three models around technical analysis, sentiment analysis, and a combined version that can adjust itself from mistakes over time. NFAi uses a 6/6 buy and sell tax that funds Athena's development, marketing, and trading wallet. Currently, the treasury stands at around 600k USD.
PROJECT ATHENA
Athena’s development has three phases so far:
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The deployment and testing of the three models, starting with Athena Alpha (technical analysis and machine learning), followed by Beta (sentiment analysis), and then finally Gamma (combined).
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Deployment of the DAO, staking, and Canis.
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Handing over ownership of Athena and Canis to the DAO. There is still discussion on whether there will be a single DAO governing both Athena and Canis, or if two separate DAOs are needed.
In phase one, the team will gradually increase the amount the AI uses to make trades to fine-tune each version of Athena and ensure no catastrophic mistakes are made. All profits are used to buy back and burn $NFAi. Three models are deployed to minimize the risk of any catastrophic failure of any single model. Each model is designed by two siloed teams of 5-10 quantitative analysts each to ensure that the three models do not share critical design flaws as well as ensure that these models have different decision-making processes. This ensures that at any time there is at least one model running to deploy capital into and profit from.
In phase two, the DAO will vote on the distribution of the profits between buybacks and staking rewards as well as a portion being allocated for maintenance and development of future phases. Canis will also be released and all revenue generated by the two projects will be subject to voting on the distribution method.
Leverage usage will vary by model: ranging from 3x to 15x.
PROJECT CANIS
Canis will be the primary lending protocol on Shibarium, allowing not only the collateralization of stables and ETH, but also Shibarium’s native tokens such as $SHIB, $BONE, and $LEASH. Representing over 7 billion USD of collateralizable assets, this will be the first lending protocol to service this collection of assets.
Canis also serves as a data point for Athena. Before large moves in BTC price, interest rates on lending markets increase in volatility. This volatility can be analyzed by Athena and the accuracy of her sizing + directionality of her positions will be improved from the data fed into her. THERE IS NO CANIS TOKEN.
EVALUATION OF NFAI’S POTENTIAL MARKET CAP
As both Athena and Canis have yet to launch, we are left to speculate on the likelihood of the products being delivered, their success, and evaluate their market cap based on comparables.
Let us start with Canis.
It is highly likely that project Canis has been designated the primary lending protocol of Shibarium. Shytoshi (Shiba Inu’s founder/cult leader) has been dropping hints about “sending a friend on a special mission for Shibarium”, as well as NFAi’s CEO mentioning that he met the core team of NFAi while working on Shiba Inu.
If Canis becomes the primary lending protocol for $SHIB, then a portion of the $7 billion USD worth of $SHIB collateral will be TVL for Canis, with no competition. A comparison could be made with BenQi: the native lending platform on AVAX that is currently worth $40 million USD and at its peak worth $120 million. However, BenQi incentivizes liquidity via token inflation and has major competition in AAVE which also launched on AVAX. It is likely that NFAi’s valuation as the beneficiary of Canis’ revenue will be higher and more stable. A conservative TVL is estimated at under 15% of $7 billion USD, and a market cap in the $60-$120 million dollar range.
Athena’s potential is more difficult to evaluate due to being a first mover.
According to the team, Athena alpha currently trades at a 70% win rate and with a Sharpe ratio of 2.5-2.9 while leveraging 3-15x. A Sharpe ratio is the evaluation of a given portfolio’s risk-adjusted returns, i.e. how well it provides a return compared to a risk-free asset (like T-bills) when considering the volatility of price movement of a portfolio. A Sharpe ratio of 2.5 is considered “very good”. In comparison, holding BTC has a Sharpe ratio of 0.22 and currently, the SPY has a Sharpe ratio of -0.2. What this means is that despite leveraging 3-15x per trade, Athena’s return is not subject to the wild price fluctuations associated with just holding crypto, however, it does not say anything about the magnitude of Athena’s potential returns.
Nonetheless, if Athena is trading with size on 3x-15x leverage, it is likely that the magnitude of potential returns is very large, as demonstrated by live tests by the team using their personal funds:
Conclusion
Currently, there exists no equivalent project like NFAi in crypto. The closest comparable is Numeniare, a reward token that is used by a hedge fund to reward data scientists that contribute profitable AI models that they use in their trading. However, there is no profit sharing, the value of the token comes from buyers, and scientists that submit unprofitable models have their staked tokens burnt (as staking is required to earn rewards, the greater the stake amount the greater the reward/burn). Numenaire is worth 120 million at the time of writing.
CHART ANALYSIS
Risks of investing in NFAi:
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Team could rug (would be the most elaborate rug ever, they did AMAs with dYdX multiple times)
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Concept could fail
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Smart contract risks (as always)
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Gary Gensler hates staking. Sorry AmericaPoors, only capital gains for you
Despite these risks, I believe that a conservative estimate of a potential market cap between $100 million to $200 million is reasonable in the short term. Currently, NFAi’s market cap is $16 million. I won’t guess what the long-term market cap would look like because it would make me sound like a moon boy.