Depth analysis: How will the subnet token dTAO affect the price of Bittensor?

Author: Kevin, Caiya researcher from BlockBooster

Grayscale Research, the research department of Grayscale, recently released a new list of the top 20 tokens with the most potential for the fourth quarter of this year. The list takes into consideration various factors such as potential catalysts, network adoption, and risk factors. There are a total of six new digital assets added to the list: Sui (SUI), Optimism (OP), Helium (HNT), Bittensor (TAO), UMA Protocol (UMA), and Celo (CELO). Bittensor is considered an outstanding AI project that aims to combine AI with blockchain to enhance the decentralization of artificial intelligence.

(Source: Grayscale)

On September 28th, the TAO Foundation announced that a new subnet is about to be launched, providing a scalable computing resource for GPU rental platform Fish, for validators and users, and can be paid with TAO Token. As of press time, the price of $TAO is stable at around $500.

(Source: Twitter)

(Source: CoinMarketCap)

In addition to Grayscale Research's Token Potential List and the announcements and market performance of the TAO Foundation, what other developments can we expect from Bittensor in the future? Next, we will delve into the operating mechanism of the upcoming subnetToken dTAO and analyze its potential impact on the price of $TAO.

dTAO refers to subnetToken, and each subnet has its own dTAO, with Token release aligned with BTC and TAO. After dTAO goes online, Token will be paired with TAO to form a liquidity pool in the Bittensor network. With the implementation of dTAO, Bittensor will gradually remove the upper limit on subnets, giving the network greater flexibility.

TAOholder can now stake TAO in different pools to earn dTAO Tokens. Although this process is called “stake”, it is actually more like Swap. The Consensus Mechanism, Tokenomics, and release speed of dTAO are similar to TAO. Each subnet has its own dTAO release, and subnet validators need to purchase/stake TAO to participate in Consensus and receive rewards.

As the market attention of a subnet increases, more TAO may stake in the pool of the subnet, thereby increasing the weight of daily TAO release in the pool. This dynamic release mechanism affects the Liquidity and dTAO price of each subnet. The weight is determined by the ratio of TAO to dTAO, reflecting the demand for the subnet by users. Bittensor dynamically adjusts the weight of daily TAO release based on the price of dTAO.

Why Introduce dTAO?

The current TAOsubnet faces several challenges, especially in the design of the root validator architecture. The performance of the root validators did not meet the expectations of the Bittensor Foundation. Despite the existence of 32 subnets, the competition between them did not intensify as expected. Subnets were supposed to provide high-quality output to guide Miners and develop AI models with practical use cases, but many subnets did not meet the expected goals.

The main problems with the current subnet include:

1. Resource Overlap and Redundancy: Multiple subnets focus on similar tasks, such as text-to-image generation, text prompts, and price prediction, leading to resource redundancy.
2. Subnets with lack of practical use cases: Some subnets (such as price prediction, sports outcome prediction subnets) have not yet demonstrated their practicality in real-life scenarios.
3. "Gresham's Law": High-quality subnet may struggle to gain development space without sufficient financial support. Due to the protection period of only seven days, subnets that fail to accumulate enough support from root validators may be eliminated prematurely.

Other issues include the subjectivity of root validator evaluation, bias in stake decision-making, and power imbalance caused by a small number of root validators controlling most of the daily released weight of TAO.

The Impact of dTAO on Bittensor

The introduction of dTAO aims to address these systemic issues through decentralized subnet evaluation and incentive competition. By transferring power from root validators to a broader TAO holder community, Bittensor introduces a market-driven pricing system where TAO holders can stake their Tokens to 'vote' for the subnets they support.

The main advantages of the dTAO system include:

• Evaluation of the subnet of Decentralization: No longer relying on a small number of validators, the dynamic pricing of the dTAO pool will determine the distribution of TAO issuance. TAO holders can support the subnet they believe in by staking TAO.
• Increase subnet capacity: Removing the subnet limit allows the network to expand to over 1000 subnets, promoting competition and innovation within the ecosystem.
• Encourage early participation: Can motivate users to follow new subnets and encourage the entire ecosystem to evaluate new subnets. Because validators who migrate to new subnets earlier may receive higher rewards. Early migration to a new subnet means purchasing the dynamic TAO of the subnet at a lower price, increasing the possibility of obtaining more TAO in the future.
• Promote Miners and validators to follow high-quality subnets: Further stimulate Miners and validators to seek out high-quality new subnets. The model of Miners is placed off-chain, and the validation of validators is also off-chain. The bittensor network only rewards Miners based on the evaluation of validators. Therefore, for different types of AI applications or all types, as long as they conform to the Miner-validators architecture, bittensor can evaluate them correctly. Bittensor has a high degree of inclusiveness for AI applications, allowing participants at every stage to receive incentives and thereby contribute to the value of bittensor.

Drive Sustainable Use Cases

One of the main goals of uTAO is to promote the development of subnets with potential for actual revenue, stimulate the emergence of real use case applications, and ensure that such applications are properly evaluated.

What is the application of real use case? An application that does not generate income through Ponzi. On the contrary, if the subnet does not generate income, then the subnet validators will decrease, because they will not buy subnet tokens that do not generate income in the new subnet phase (subnet validators need to buy dTAO instead of staketao to verify the subnet Miner). Validators play a crucial role in this process by driving the dTAO price of subnets with sustainable business models. Therefore, validators are the starting point of the positive spiral of the subnet coin price, and income is the cornerstone. If validators decrease, that is, no one buys subnet tokens, then the income obtained by the Miner will become one-way selling pressure, causing the subnet to fall into a death spiral. The less daily release the subnet gets, the fewer Miners and validators there will be, until it drops to zero. As for new subnets, Ponzi design has limited appeal to retail investors during cold start because the subnet token release mechanism makes it impossible for subnet project parties to complete asset mismatches or attract users in a dividend manner, and can only attract users to stake, validators, and Miners with products that have a moat.

dTAO brings changes to Tokenomics and issuance

The introduction of dTAO reshapes the rules for Bittensor's daily release:

• Previous Rule: Subnet rewards were distributed in a fixed ratio - 41% to validators, 41% to miners, and 18% to subnet owners.
• Rules after dTAO: Now, 50% of the newly issued dTAO tokens will be added to the Liquidity pool, and the remaining 50% will be distributed among validators, Miners, and subnet owners based on the decisions of subnet participants.

Through the Decentralization TAO issuance mechanism, dTAO introduces more Fluctuation into the system. The price of the dTAO pool will Fluctuate according to market demand, which may bring higher returns but also comes with greater risks.

Long-term Outlook

uTAO represents the best practice of combining AI infrastructure and applications in the Web3 industry. In the past six months, the market performance and discussions have indicated that the infrastructure has reached saturation. Currently, almost all the top AI platforms in terms of Market Cap are infrastructure-based, with serious homogenization. It may be difficult to continue to attract market attention in the next six months.

On the other hand, the AI application faces the contradiction between revenue and market capitalization. It's hard to achieve long-term stable rise if an application issues tokens independently. Due to the inherent characteristics of blockchain, AI applications in Web3 cannot reach the performance level of mature applications in Web2. As a result, most such applications lack differentiation, have no defensive competitive advantages, and have lower user conversion and retention rates, making it difficult to achieve sustainable high returns. This also makes it difficult for their token prices to reach the valuation level of similar infrastructure platforms, forming a vicious cycle.

dTAO offers a solution to this problem. The Bittensor platform has established a validated and mature system, with Miners, validators, and Consensus Mechanism all moving in the right direction. It is the most decentralized and mature AI infrastructure in Web3, with the potential to support the emergence of large-scale applications. When applications choose to run as a subnet on Bittensor, they can leverage the support of this mature network to navigate the early stages and focus on product innovation. The issuance mechanism of dTAO ensures that subnets must constantly update and attract users to gain more weight, while avoiding the risks of 'RUG' and overly concentrated team chips.

The early stage of dTAO is expected to be relatively stable, with less risk for early investors due to the daily issuance mechanism. The long-term success of dTAO will depend on the ability of subnets to generate real value and income in the Bittensor ecosystem.

After the introduction of uTAO, subnets can generate revenue in two ways: 1) attracting users to pay for the product; 2) increasing market capitalization and pushing up token prices. Regardless of the method, it will have a positive impact on Bittensor's overall market capitalization. The issuance mechanism also ensures that if the team wants to profit by selling coins, they must buy tokens from the pool like ordinary users, which is the fairest launch mechanism in the current environment.

This design eliminates many of the risks that most Web3 application projects face, such as market-driven price Fluctuation and systemic instability, as well as the possibility of large holder or "Whale" significantly impacting prices through sudden actions, thereby disrupting the ecosystem.

In addition, this issuance model reduces the risk of short-term dumping, as Liquidity injection is gradual. Subnet must accumulate Liquidity over a period of time and maintain a stable price, a process that essentially depends on the quality of products provided by the subnet.

Recently, the price of TAO has significantly pumped due to the stimulation of the upcoming launch of dTAO and the resurgence of AI narrative. On the one hand, market makers have fully accumulated in the past few months, and now it's time to start the coin price. On the other hand, it can also be seen that subnets or potential subnets are grabbing chips, and most of these chips will not be put into the market in the short term. The treasury of the subnet is used to enhance the value of TAO. Therefore, when dTAO goes online, there may be a distribution of chips from the team or VC, leading to price fluctuations.

However, until the objective barriers to the combination of AI and web3 are broken, dTAO remains the best implementation of the combination of AI infrastructure and applications.

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