One of the most prominent facts about cryptocurrencies is that they are incredibly volatile. And with the market being exposed to significant levels of volatility, it can be challenging to understand how to manage risk and make investment and trading decisions across the board.
Over the past few years, several traders and investors have applied the stochastic model to crypto investment. This model essentially helps to forecast the outcomes of different investment decisions based on various conditions, with the use of random variables.
With the stochastic modelling system, data is presented, and outcomes are predicted while accounting for different levels of variation and unpredictability. In the financial sector, planners, portfolio managers, and analysts use this model to effectively manage their portfolios and optimize their performance. However, perhaps no industry needs this like crypto.
NEST Protocol: Effective Crypto Asset Management Using the Stochastic Model
If there is one thing we can all agree on about crypto, it is that the industry isn’t perfect as it is right now. Liquidity is still a bit of a problem, with many small-cap assets being unable to effectively handle proper liquidity, especially in periods of massive volatility.
Even with the more established coins, transaction and payment settlement can still be a bit of an issue. So, one can only imagine how bad things can get when you’re using less popular assets that might not have the credibility and adoption levels of these established coins.
Then, there is the issue of volatility in supply. Cryptocurrencies are still exposed to significant volatility levels, meaning that investors looking to get more utility out of their coins might not necessarily be able to do so.
NEST Protocol is looking to solve these problems and more with the use of its stochastic NEST token. The platform, which is gearing up for a full rollout, provides an asset that can quickly be issued and destroyed in response to market conditions. Essentially, NEST will be a stochastic asset whose supply will be adjusted based on market conditions. Thus, liquidity can be maintained at all times, with users being able to generate on-chain assets with any risk-return structure they choose.
With a deflationary token and a highly resilient asset, the NEST Protocol is looking to take on several challenges that are currently facing the market at the moment. We sat down with the platform’s developers to talk about the objective for this project, and what they believe their innovative solution could be:
- What was the vision for the NEST protocol?
NEST has always believed that the expansion of on-chain functionality has always been the mainstream direction of blockchain development. Ethereum is not an enhancement of Bitcoin's performance, but an extension of Bitcoin's functionality. The success of Ethereum lies in the development of Bitcoin's scripting language into a Turing-complete virtual machine;, an improvement that greatly expands the scope of blockchain applications.
Bitcoin's innovation was in turning information, like data balances, into assets. The innovation of Ethereum is to turn functions of underlying vectors, like address and balance, into assets. But, the innovation of NEST goes even further: to assetize a flow of random information or even a random process. This disruptive paradigm is sure to lead to the next generational explosion.
NEST aims to work with like-minded projects, and individuals, to explore the boundaries of the decentralized world, find more possibilities of decentralized applications, and continuously enrich the endogenous value of data on the chain.
- How do you think the stochastic model can be applied to crypto investing and model creation?
The Stochastic model is a new paradigm. By assetizing random variables or random processes, rather than deterministic variables (data), a whole new class of things is created: Stochastic Assets.
A stochastic asset cannot use an existing token as a unit of value. It must have an on-chain token that can be issued and destroyed at any time to ensure the settlement of the stochastic asset when determining its sample value, and the mechanism to ensure this issuance is the OMM (Omnipotent Market Maker).
There’s a token used as the value unit of stochastic assets, which we call Universal Coin. Its risk-return structure comes entirely from the chain and is not only different from the structure of traditional assets, such as gold, real estate, stocks, bonds, etc. But, it’s also different from ETH and USDT, which is a brand new asset type. According to the classical portfolio theory, investors should not put all their eggs in one basket: stochastic assets provide a new basket for investors to allocate their assets. It helps investors to diversify their asset allocation more and thus manage risk better.
Stochastic assets, as the assets of random information, do not lose their natural information properties and we can still program them. In addition to the part of this programming done within the traditional smart contract virtual machine, the more important part is the adjustment of the Stochastic asset distribution. And this programming is close to some kind of editor of mathematical equations; any risk hedging or asset synthesis, prop synthesis, and economic relations, just need to be expressed into mathematical equations, and can quickly generate the corresponding contract.
Stochastic assets have an extremely wide range of uses in real life, and almost all financial derivatives are stochastic assets. Common financial services can also be understood in terms of stochastic assets, such as lending and borrowing, or even trading. Such a structure can unify almost all of DeFi without the need to develop them one by one. Similarly, the prop synthesis relationships of different games have almost equal intrinsic value (the added value of the game can be called a premium) as long as they have the same mathematical structure, so that different games are completely interoperable and do not break their respective economic systems. And when it comes to some new things, such as new revenue streams based on random distributions, such as exponential assets, squared assets, open-square assets or game props and economic relations corresponding to these revenue streams, they can be designed quickly.
In short, stochastic assets or probabilistic virtual machines provide a broader class of applications that are related to uncertainty, and combinatoriality. They don’t need the preparation of asset pools, LPs, complex underlying development, or the operation of newly issued base tokens. This will significantly accelerate industry development, reduce development costs, and close the economic loop quickly.
- Considering that the protocol and its asset are relatively new, how do you plan to build trust and credibility?
We are pleased to see that NEST has already had a million community members, and the number of coin-holding addresses continues to grow. We know that every success of NEST is inseparable from the trust and support of the community.
Specifically, NEST recently proposed a Stochastic asset, which is an innovative expansion of NEST's on-chain functions based on Ether. During our marketing process, most of the feedback from customers has been very positive. But, we understand that they might have some doubts too. Most of the doubts come from the lack of understanding of Stochastic assets.
We feel that trust-building comes from two aspects. One is the further explanation of NEST principles, the design of NEST has its uniqueness and especially complexity. This requires us to be patient and communicate well with potential users so that they really understand the mechanism and features of NEST. According to our previous marketing experience, once users really understand how NEST works, their trust in NEST will increase significantly.
In addition, our research institute, the NEST Research Academy, will also unite with researchers in the academic circle and KOLs in the cryptocurrency circle to do a good job of explaining the principle of NEST and providing a strong theoretical endorsement for the rationality of the principle of NEST.
Second, on top of the subtle theoretical design, NEST also focuses on the implementation of the project. We actively participate in blockchain conferences held around the world, communicate and collaborate with many projects at multiple levels, and listen to their feedback on NEST. We are planning a hackathon based on the NEST development platform to encourage developers to use NEST and illustrate the superiority and convenience of NEST with actual development cases of developers. We are also working hard to secure strategic collaboration with leading projects in various fields. With the logical completeness of the theory combined with the third party's practical cases, together, we believe that NEST will continue to enhance its credibility and gain the trust of more and more people.
- Are there any regulatory constraints you could see your protocol encountering?
So far, we have not found substantial constraints on NEST from the established regulation. However, we do expect that potential constraints will come with the strengthening of regulation in various countries.
There is not much concern about NEST itself, because the biggest innovation of NEST comes from its theoretical design, which is a theoretical innovation based on BTC and ETH. According to our speculation, the design itself is very unlikely to be subject to regulation.
For other possible regulations, whether to NEST or projects developed on NEST, NEST will effectively communicate with the regulatory authorities of each country with the assistance of professional lawyers and actively cooperate, in order to obtain regulatory understanding and support, so as to better serve all kinds of users.
- What is your view of the market when crypto becomes more universally adopted and volatility reduces?
Universal adoption and volatility reduction are not separate events. In fact, they are closely linked, and volatility stems from two main sources: the various risks faced by cryptocurrencies themselves and the trading of cryptocurrencies in the secondary market.
Let's talk about risk first. The risks faced by cryptocurrencies can be divided into three levels: the risk of the project itself, the risk of the market segment the project is in, and the systemic risk of the entire cryptocurrency industry at a higher level. Obviously, these three types of risk are decreasing in their intensity. A cryptocurrency that is adopted by just one project will be exposed to all three types of risk at the same time. And just one project risk is enough to keep that cryptocurrency in great volatility for a long time.
A cryptocurrency that can be used by one market segment, then the risk of one project within that segment will become relatively unimportant. A cryptocurrency that is acceptable to all segments will only face industry systemic risk. For example, the volatility of Bitcoin’s price is almost a reaction to the systemic risk of cryptocurrencies as a whole, and the risk of a single project will generally not affect the volatility of Bitcoin (although, of course, some major risks that occur in larger volume projects may affect bitcoin price movements in the short term).
The volatility caused by secondary market transactions is better understood. The larger the volume of a cryptocurrency and the higher its market cap, the higher the cost of causing its price volatility, which is of course relatively more difficult to occur. The more universal adoption a cryptocurrency has, the larger the volume is likely to be.
The design of NEST follows these principles. As a universal coin, NEST provides liquidity for each project through Stochastic assets that are used in all scenarios, maximizing the impact of the risk of individual projects and individual tracks on the whole system. In addition, at the summation level, NEST allows for better management of the long-term supply and short-term volatility of tokens.
We believe that the market for cryptocurrencies will continue to grow and develop. This growth will no longer be in the form of large amounts of hot-money investments attracted by its huge volatility, but in the form of various application scenarios that can actually improve the well-being of individuals, thus attracting more users of existing projects and more developers of new ones. To achieve the latter, a cryptocurrency with universal adoption and reduced volatility is likely to be one of the necessary prerequisites, and NEST is working in this direction.