The Economics:

Now that we understand the pain points Enigma Catalyst is attempting to solve, I will explore the economics of the platform. There are three key stakeholders that we need to consider: 1) quants, 2) investors, and 3) Catalyst platform owner. We will do this by answering the following questions:

What is the potential market size for Enigma Catalyst?

How much could quants be expected to earn? Is there enough incentive for them to participate in this market platform?

How much can investors be expected to earn?

How much money can Catalyst platform be expected to earn?

Answers to above questions will inform us of the viability of this project.

Taking the answer first approach, I summarize my findings below. You can also read the detail of my analyses in subsequent paragraphs:

Expected # of users: 50K — 100K in the first five years (Catalyst only)

50K — 100K in the first five years (Catalyst only) Expected annual earnings for quant: USD 72.5K — 517.5K

USD 72.5K — 517.5K Expected return for investors: 40–120%

40–120% Expected income for Catalyst platform: ~ USD 25–150Mn in the next 5 years

~ USD 25–150Mn in the next 5 years Conclusion: Economics is attractive for all stakeholders to participate in the platform

We can use quantopian as a good benchmark for some of the data points required for our analyses. After 4 years of operations, Quantopian has over 130,000 members and over 500,000 algorithms developed on its platform.

Given crypto asset class is still relatively new, there might only be a subset of quants who are interested to participate in it. I believe a reasonable number of users would be a range between 50,000–100,000 in the first five years.

Next, we will calculate how much a quant can expect to earn on the platform. To do this, we need to make several assumptions, namely:

Capital under management (both own capital and investor’s capital)

Portfolio leverage

Trading algorithms return

Royalty fee

The figures I use rely heavily on the discussion posted on Quantopian (see reference #5) However, I adapt some of the figures based on my judgement to reflect the specific nature of Catalyst platform.

Capital under management: Unlike Quantopian, Catalyst does not plan to manage the allocation of capital to quants. Quants will instead need to rely on investors’ and their own funds for their trading algorithms. For our analysis, I will assume an allocation of USD 1–3Mn from investors to each performing algorithm (based on ranges used by Quantopian.) Quants might not have access to a lot of their own fund for investment and I will assume this amount to be USD 50k.

Leverage: Algorithmic trading portfolios are leveraged to achieve higher return on capital. While the range varies greatly depending on the strategy employed and asset class being traded (e.g., Fx trades use higher leverage than equity), I will assume a leverage range of 5x — 10x which is a typical range for equity trade.

Trading algorithm’s return: This figure is very difficult to estimate as return can vary greatly for different algorithms. Quantopian uses ~8% return in an example to calculate earning for a quant. Given lower competition from other algo traders in the crypto market, at least in the first few years when the market is still nascent, there might be potential to earn higher return. For this reason, I will assume 10% — 15% range of return in our calculation.

Royalty fee: No detail is provided by Enigma team in regard to how much the platform plans to charge, and how much quants can expect to earn as royalty fee. As such, I will assume 20% with 50/50 split between quants and platform, which is the management fee implemented on Quantopian, as proxy.

Based on our calculation above, a performing quant can expect to earn between USD 72.5K — 517.5K annually. This figure should be attractive for many of them, with top performers having potential to earn up to 10x avg. US household income. Participating on the Catalyst platform seems to be a natural extension for quants who want to have exposure in crypto asset class. The incremental effort required to be on the platform should also be relative low as existing algorithms can be adapted. For these reasons, I believe the economics incentives for quants to be strong.

The investors are also well-rewarded. Even after 20% management fee, they can expect to earn 40% — 120% return on capital. This figure seems high partly because of our assumption on portfolio leverage (5x — 10x). Once track records are established for high-performing quants, I expect many investors to allocate a portion of their portfolio to quantitative trading to seek higher return.

Now, I attempt to estimate how much Catalyst platform will earn. As of this writing, there is no detail provided on how much Catalyst plans to charge for the use of platform or how much profit cut (if any) it will take. The only mention is that ENG token will be needed to access data. To understand potential earning, I will assume that Catalyst takes a 10% cut of the profit (using Quantopian figure as a proxy.) Our task then comes down to estimating the total profit pool and asset under management on the Catalyst platform.

If we look at the overall market, the size of hedge fund industry is at USD 3,000Bn at the end of 2016 according to Finalternative. Quantopian aims to become a USD 10Bn platform, and has agreed with Steve Cohen to allocate up to USD 250Mn to the best algorithms on its platform. While there are opposing views and on-going debates on whether Quantopian can scale up to USD 10Bn, I believe it is possible for Catalyst platform to achieve USD 1Bn AUM level if it’s properly executed.

For our analysis, we just want to get estimate at an order of magnitude level, so let’s assume that the asset under management would be in the range of USD 0.5–1Bn.

Based on our analysis, Catalyst platform has a potential to earn between USD 25–150Mn in the next 5 years, if it chooses to charge usage fee of the platform.