Introduction of $dTAO and Its Role in Bittensor
Grayscale’s research department, Grayscale Research, has released a new list highlighting the top 20 tokens with the most potential for the last quarter of this year. The list is based on various factors, including potential catalysts, network adoption, and risk assessments. Six new digital assets were added, including Sui (SUI), Optimism (OP), Helium (HNT), Bittensor (TAO), UMA Protocol (UMA), and Celo (CELO). Among them, Bittensor is considered a standout AI project, aiming to decentralize artificial intelligence through blockchain technology.
On September 28th, the Bittensor Foundation announced the upcoming launch of a new subnet, GPU leasing platform Fish, which will provide scalable computing resources for validators and users, with payments supported in TAO tokens. As of the time of writing, the price of $TAO remains stable around the $500 mark.
Beyond Grayscale Research’s token potential list and the TAO Foundation’s announcement and market performance, what other developments can we look forward to from Bittensor? Next, we will explore how the upcoming subnet token dTAO operates and analyze its potential impact on the price of $TAO.
dTAO refers to subnet-specific tokens, with each subnet having its own dTAO emitted similarly to TAO. These dTAO tokens will pair with TAO to form liquidity pools across the Bittensor network. With the implementation of dTAO, Bittensor is set to gradually remove the subnet cap, allowing for greater flexibility within the network.
TAO holders will now earn dTAO tokens by staking TAO in different pools. Although this process is referred to as “staking,” it is essentially a token swap mechanism. The subnet tokens, or dTAO, work similarly to TAO in terms of consensus mechanisms, tokenomics, and emission rates. Each subnet has its own dTAO supply, with subnet validators purchasing dTAO to participate in consensus and earn rewards.
The more a subnet gains traction, the more TAO is likely to be staked in its pool, increasing its share of daily TAO emissions. This dynamic impacts the liquidity and price of each subnet’s dTAO. The price of each pool is determined by the TAO-to-dTAO ratio, which reflects the demand for that particular subnet. Bittensor distributes daily TAO emissions based on the price of each subnet’s dTAO.
Why Introduce dTAO?
The current TAO system faces several challenges, particularly with the root validator structure. Root validators have not met the expectations of the Bittensor Foundation. Despite the existence of only 32 subnets, competition has not intensified as expected. Subnets should be providing high-quality outputs, guiding miners, and developing robust AI models. However, many subnets are not delivering the desired outcomes.
Key issues with the current system include:
- Resource Overlap and Redundancy: Multiple subnets focus on similar tasks, such as text-to-image generation, text prompts, and price predictions, leading to redundancy.
- Subnets Lacking Practical Use Cases: Certain subnets, such as those focusing on price prediction, have yet to prove their reliability for real-world applications.
- “Bad Money Drives Out Good”: High-quality subnets may struggle to gain traction if they lack sufficient financial support. With only a seven-day protection period, subnets failing to accumulate sufficient issuance may be delisted prematurely.
Additional concerns include subjectivity in root validator evaluations, favoritism in staking decisions, and the overall power imbalance caused by the small group of root validators controlling the majority of TAO emissions.
The Impact of dTAO on Bittensor
The introduction of dTAO aims to address these systemic issues by decentralizing subnet evaluations and incentivizing competition. By shifting the power from root validators to the broader TAO-holding community, Bittensor enables a market-driven pricing system where TAO holders can “vote” on subnets by staking their tokens.
Key benefits of the dTAO system include:
- Decentralized Subnet Evaluation: Instead of relying on a small group of validators, the dynamic pricing of dTAO pools will determine how TAO emissions are distributed. TAO holders can support subnets they believe in by staking their TAO in those specific pools.
- Increased Subnet Capacity: Removing the subnet cap allows for the potential expansion to over 1,000 subnets, fostering competition and innovation within the ecosystem.
- Encouraging Early Engagement: Users are incentivized to evaluate and invest in new subnets, with the potential for greater rewards by getting in early when dTAO prices are lower.
- Driving Miner and Validator Focus on High-Quality Subnets: As validators must now purchase dTAO to participate in consensus, only subnets with real revenue-generating use cases will attract long-term validator interest. This could drive validators to prioritize subnets that demonstrate true value creation.
Promoting Sustainable Use Cases
One of the key goals of dTAO is to promote subnets with real-world, revenue-generating applications. Validators play a crucial role in this process by driving up the price of dTAO for subnets with sustainable business models. If a subnet fails to generate revenue, validators are unlikely to invest in its dTAO, leading to a decline in both miner activity and token liquidity. Ultimately, this could result in the subnet receiving zero TAO emissions and being phased out.
Tokenomics and Emission Changes with dTAO
The dTAO proposal introduces significant changes to Bittensor’s emission structure:
- Previous Structure: Subnet rewards were distributed based on a fixed ratio — 41% to validators, 41% to miners, and 18% to subnet owners.
- Post-dTAO Structure: Now, 50% of newly issued dTAO tokens will be added to liquidity pools, with the remaining 50% distributed among validators, miners, and subnet owners based on the decisions of subnet participants.
By decentralizing TAO emissions, dTAO introduces more volatility into the system. The price of dTAO pools will fluctuate based on market demand, which could lead to increased rewards but also higher risks for stakers.
Long-term Outlook
dTAO represents the best integration of AI infrastructure and applications within the Web3 industry. Over the past six months, market performance and discussions suggest that infrastructure has reached full saturation. Currently, the leading AI platforms by market capitalization are all infrastructure-focused, and this homogeneity may make it difficult to maintain market attention over the next six months.
On the other hand, AI applications face a conflict between generating revenue and increasing market capitalization. If an application issues its own token independently, it is challenging to ensure long-term stable growth. Due to the inherent characteristics of blockchain, AI applications in Web3 cannot achieve the performance levels of mature applications in Web2. As a result, most such applications lack differentiation, have no defensible competitive advantages, and suffer from low user conversion and retention rates, which prevents them from achieving sustainable high returns. This also makes it difficult for their token prices to reach the valuation levels of comparable infrastructure platforms, leading to a vicious cycle.
dTAO offers a solution to this problem. Bittensor’s platform already has a proven, mature system where miners, validators, and the consensus mechanism are all developing in the right direction. It is the most decentralized and mature AI infrastructure within Web3, with the potential to support the large-scale emergence of applications. When applications choose to operate as subnets on Bittensor, they benefit from the support of its established network, helping them navigate the early stages and focus on product innovation. The release mechanism of dTAO ensures that subnets must continuously evolve and attract users in order to gain more weight, while also mitigating risks such as rug pulls and excessive token concentration by the team.
The early stages of dTAO are expected to be relatively stable, with minimal risk for early investors due to the daily release mechanism. The long-term success of dTAO will depend on the ability of subnets to generate real value and revenue within the Bittensor ecosystem.
After the introduction of dTAO, subnets can generate revenue in two ways: 1) by attracting users to pay for their products, and 2) by increasing their market capitalization, which in turn raises the token price. Both avenues contribute positively to the overall market value of Bittensor. The release mechanism also ensures that, if a team wishes to profit from selling tokens, they must buy them from the pool just like regular users, making it the fairest launch mechanism in the current landscape.
This design eliminates many of the risks faced by most Web3 application projects, such as market-driven price volatility and systemic instability, as well as the possibility that large stakeholders, or “whales,” could significantly impact prices through sudden moves, potentially destabilizing the ecosystem.
Moreover, this release model reduces the risk of short-term sell-offs, as liquidity injection happens gradually. Subnets must accumulate liquidity over time and maintain a stable price, which is inherently tied to the quality of the product offered by the subnet. Therefore, it can be said that dTAO is the best realization of the integration between AI infrastructure and applications in the Web3 space.
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