The dTAO model was launched just a month ago, and cracks are already showing.
Author: donn
Translation: Deep Tide TechFlow
I have always been fascinated by novel tokenomics. Observing how crypto protocols adjust their incentive mechanisms is always captivating; sometimes they seem very enticing—until they inevitably collapse. So, when Bittensor launched its dynamic $TAO (dTAO) system on Valentine's Day, I was immediately drawn in.
The idea is simple: to provide a new, more "fair" distribution method for the issuance of TAO across subnets.
But just a month later, problems have emerged. It turns out that seemingly perfect designs do not always operate as intended in a free market.
The Mechanism of dTAO
Here’s a simplified overview of how dTAO works:
Each subnet has its own subnet token ($SN), existing in the form of a native TAO-SN UniV2 type pool. Confusingly, although users "stake" TAO in exchange for SN, functionally this is no different from "exchanging" TAO for SN. The only difference is that users cannot add liquidity to the liquidity pool or trade directly between subnet tokens (e.g., SN1 → SN2), but can do so through TAO as an intermediary (SN1 → TAO → SN2).
The issuance of TAO is proportionally allocated based on the price of the subnet SN token. To smooth price fluctuations or prevent price manipulation, the system uses a moving average price.
The SN token itself also has a high issuance volume, with a supply cap of 21 million, similar to TAO and BTC. A portion of the SN is allocated to the TAO-SN liquidity pool, while the remainder is distributed to stakeholders in the subnet (miners, validators, subnet owners). The number of SN allocated to the TAO-SN pool is intended to balance the issuance of TAO in the pool, thereby keeping the price of SN (in TAO terms) stable while increasing liquidity.
However, if the above calculations indicate that the number of SN required by the subnet exceeds the maximum issuance of SN (based on the SN issuance curve), the issuance of SN will be capped at the maximum, at which point the price of SN (in TAO terms) will rise.
The core assumption of this mechanism is that higher market cap subnets create more value for the Bittensor network, and thus should receive more TAO issuance.
However, the reality is that the highest-priced tokens in the crypto market are often those with the most attention, hype, Ponzi characteristics, and marketing resources. This is why L1 public chains and memecoins always have relatively high valuations.
Although the starting point of the mechanism design is good, assuming that subnets generating value through revenue will use part of that revenue to buy back SN tokens, thereby driving up prices and obtaining more TAO issuance, this line of thinking is somewhat naive.
Subnets Filled with Memecoins and Out-of-Control Tokenomics
Before the launch of dTAO, I had discussed the obvious flaws in dTAO tokenomics with some crypto analysts—namely, that higher market cap does not equal higher revenue or greater value creation.
But I did not expect this theory to be quickly validated in practice. The free market operated in a "wonderful" way.
Just before the upgrade, an anonymous individual took over subnet 281 and turned it into a memecoin subnet called "TAO Accumulation Corporation" (abbreviated as "LOL subnet"). This was clearly unrelated to AI.
The now-deleted Github page stated:
Miners do not need to run any code; validators score them based on the number of subnet tokens held by the miners. The more tokens a miner holds, the higher the issuance they receive.
What actually happened was: Speculators bought SN28 tokens → SN28 price rose → SN28 received more TAO issuance → If it exceeded the issuance limit of subnet tokens, SN28 price continued to rise → SN token issuance was proportionally allocated to "miners" holding SN → People bought more SN to get more TAO → Price further increased → Ponzi cycle continued.
As a result, the issuance of TAO officially began to fund… memes! At one point, the SN28 subnet even became the seventh-largest subnet by market cap.
But why couldn't SN28 take over Bittensor? Centralization saved the day.
Within just a few days, the Opentensor Foundation used its root stake to run custom validator code, incentivizing people to sell off SN28 tokens, causing its price to plummet by 98% within hours.
Source: Bittensor discord
The SN28 subnet token plummeted by 98% after the actions of the Opentensor Foundation.
Essentially, the Opentensor Foundation acted as a centralized entity, preventing the free market from exploiting the dTAO mechanism. This centralized intervention is currently feasible because we are in a slow transition from the old TAO issuance mechanism to the new dTAO mechanism.
Transitioning from the Old TAO Mechanism to dTAO
The old TAO mechanism allowed up to 64 validators staking the most TAO on SN0 ("root subnet") to vote on who could receive TAO issuance.
This mechanism itself triggered a series of incentive issues due to the power held by large validators (such as the Opentensor Foundation, DCG Yuma, Dao5, Polychain, etc.). For example, theoretically, they could direct TAO issuance to the subnets they invest in or incubate, or to the subnets where they run validator nodes and earn TAO rewards.
Top validators as shown on taostats.io/validators
Therefore, breaking free from this mechanism is a good step towards decentralization. I appreciate that the team chose a more decentralized reward mechanism, even if it means they might lose some issuance.
When the SN28 incident occurred, dTAO had just launched about a week prior, so SN0 (the blue line in the chart below) still controlled about 95% of the issuance, allowing the Opentensor Foundation to intervene.
However, in about a year, SN0's control over issuance will drop to around 20%. This means that if a similar event to SN28 occurs again, it will be nearly impossible to intervene through SN0. In this case, Bittensor could transform from a "decentralized AI" project into a memecoin incentive network.
During this transition period, the power to control emissions will shift from the old mechanism (SN0 or "root stake") to the new dTAO mechanism ("alpha stake").
Admit it, this is not just a meme
Even if we assume that people are rational enough in a bear market not to dive headfirst into memecoin hype, Bittensor still has the potential to evolve into a general incentive network completely unrelated to AI.
Imagine a thought experiment: someone launches a subnet specifically for decentralized Bitcoin mining (though this is not a novel idea). The goal of this subnet is to incentivize Bitcoin mining in a resource-efficient manner while using the mined BTC as recurring income to buy back subnet tokens SN for more TAO issuance.
Thus, TAO transforms from a decentralized AI project into a general incentive project, where the issuance of TAO is merely used to subsidize various random operational costs (OpEx) of businesses, rather than moving towards a specific goal.
Technically, this could be argued to align with the original intent of the Yuma consensus mechanism, as Yuma consensus aims to reach consensus around any "subjective" work, not necessarily limited to AI. However, this lack of a clear goal makes the entire system seem… meaningless.
Final Thoughts
The dTAO model was launched just a month ago, and cracks are already showing.
The incentive mechanisms of the free market indicate that without any centralized power, Bittensor may no longer be an AI project, but rather an "attention network" dominated by memecoin subnets, or a "general incentive network" led by revenue-generating businesses that use TAO issuance to subsidize operational costs without making substantial improvements to the Bittensor network.
I believe the network needs a true "objective function" to unify the goals of all subnets. However, it is evident that finding a clear objective in the field of AI (especially general artificial intelligence, AGI) is very challenging—as we encounter various challenges when running a fair large language model (LLM) evaluation framework… which is also why the Yuma consensus was created for "subjective" work.
As the saying goes: "Tell me the incentive mechanism, and I will tell you the outcome."
Best wishes!
Note
In previous versions, I mentioned that the issuance of TAO is proportional to market cap, whereas it is actually proportional to price. This error has been corrected, thanks to @nick_hotz for pointing it out.
Disclaimer
This article is for general informational purposes only and does not constitute investment advice, nor is it a recommendation or invitation to buy or sell any investment, and should not be used as a basis for evaluating any investment decision. This article should not be considered accounting, legal, or tax advice or investment advice. The views expressed in this article reflect the author's current opinions and do not necessarily represent the views of the author's employer. The opinions in this article are subject to change without notice.
免责声明：本文章仅代表作者个人观点，不代表本平台的立场和观点。本文章仅供信息分享，不构成对任何人的任何投资建议。用户与作者之间的任何争议，与本平台无关。如网页中刊载的文章或图片涉及侵权，请提供相关的权利证明和身份证明发送邮件到support@aicoin.com，本平台相关工作人员将会进行核查。
