Exploring Bittensor Again: A Meme-Filled Subnet with a Fragmented Tokenomics

Author: donn

Compiled by: Shenchao TechFlow

I have always been fascinated by novel tokenomics. Observing how crypto protocols adjust their incentive mechanisms is always captivating, and sometimes they appear very enticing—until they inevitably crash. 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, the problems became apparent. It turned out that the seemingly perfect design does not always operate as intended in a free market.

The operating mechanism of dTAO

The following is a simplified review of how dTAO works:

Each subnet has its own subnet token ($SN), which exists in the form of a native TAO-SN UniV2 type pool. Confusingly, although users "stake" TAO to receive SN, this functionally makes no difference from "exchanging" TAO for SN. The only difference is that users cannot add liquidity to the liquidity pool, nor can they trade directly between subnet tokens (e.g., SN1 → SN2), but they can use TAO as an intermediary (SN1 → TAO → SN2).

The issuance of TAO is distributed proportionally based on the price of the subnet SN tokens. To smooth out 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 limit of 21 million, similar to TAO and BTC. A portion of the SN is allocated to the TAO-SN liquidity pool, while the rest is distributed to the stakeholders of the subnet (miners, validators, subnet owners). The amount of SN allocated to the TAO-SN pool is designed to balance the issuance of TAO in the pool, thereby keeping the price of SN (in terms of TAO) stable while increasing liquidity.

However, if the above calculation shows that the number of SNs required by the subnet exceeds the maximum issuance of SNs (based on the issuance curve of SNs), then the issuance of SNs will be capped at the maximum value, and at this point, the price of SN (in TAO) will rise.

The core assumption of this mechanism is that subnetworks with higher market capitalization create more value for the Bittensor network, and therefore they should receive a greater issuance of TAO.

However, the reality is that the highest-priced tokens in the crypto market are often those that have 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 those subnets that create value through generating income will use part of the income to buy back SN tokens, thereby driving up the price and obtaining more TAO issuance, this line of thinking is somewhat naive.

The subnet filled with Meme coins and uncontrolled token economics

Before the launch of dTAO, I discussed the obvious flaws in the dTAO token economics with some crypto analysts—namely that a higher market value does not equal higher income or greater value creation.

But I didn't expect that this theory would soon be validated in practice. The free market operated in a "wonderful" way.

Just before the upgrade, an anonymous individual took over subnet 281 and transformed it into a meme coin subnet called "TAO Accumulation Corporation" (abbreviated as "LOL subnet"). This is clearly unrelated to AI.

It was stated on the now-deleted GitHub page:

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.

The actual situation is: Speculators buy SN28 tokens → SN28 price rises → SN28 gains more TAO issuance → If it exceeds the issuance limit of subnet tokens, SN28 price continues to rise → The issuance of SN tokens is proportionally allocated to "miners" holding SN → People buy more SN to gain more TAO → Price rises further → The Ponzi cycle continues.

As a result, the issuance of TAO officially began to fund... memes! At one point, the SN28 subnet even became the seventh-ranked subnet by market capitalization.

But why couldn't SN28 take over Bittensor? Centralization saved the situation.

In just a few days, the Opentensor Foundation used its root stake to run customized validator code, incentivizing people to sell off SN28 tokens, causing its price to plummet by 98% within a few hours.

Source: Bittensor discord

The SN28 subnet token plummeted by 98% after the actions of the Opentensor Foundation.

Essentially, the Opentensor Foundation plays the role of a centralized entity, preventing the free market from exploiting the dTAO mechanism. This centralized intervention is currently feasible because we are in a slow transitional period from the old TAO issuance mechanism to the new dTAO mechanism.

Transition from the old mechanism of TAO to dTAO

The old mechanism of TAO allowed a maximum of 64 validators to vote on SN0 ("root subnet") to decide who could receive the issuance of TAO.

This mechanism itself has triggered a series of incentive issues arising from the power controlled by large validators (such as Opentensor Foundation, DCG Yuma, Dao5, Polychain, etc.). For example, theoretically, they could direct the issuance of TAO towards the subnets they invest in or incubate, or towards the subnets where they run validator nodes and earn TAO rewards.

Top validators shown on taostats.io/validators

Therefore, breaking away from this mechanism is a good step towards decentralization. I appreciate the team's choice of a more decentralized reward mechanism, even if it means they may lose part of the issuance.

When the SN28 event occurred, dTAO had just been launched for about a week, so SN0 (the blue line in the image below) still controlled about 95% of the supply, allowing the Opentensor Foundation to intervene.

However, about a year later, SN0's control over the issuance will drop to about 20%. This means that if an event similar 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 meme coin incentive network.

During this transition period, the power to control emissions will shift from the old mechanism (SN0 or "root attribute") to the new dTAO mechanism ("alpha attribute").

Admit it, this is not just a meme.

Even if we assume that people are rational enough during a bear market not to dive headfirst into meme coin speculation, Bittensor could still evolve into a completely AI-independent general incentive network.

Imagine a thought experiment: someone has launched a subnet specifically for decentralized Bitcoin mining (although this is not a new 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 the subnet token SN, in order to obtain more TAO issuance.

As a result, TAO has transformed from a decentralized AI project into a general incentive project, where the issuance of TAO is merely used to subsidize various random operating costs (OpEx) of enterprises, rather than moving towards a specific goal.

Technically speaking, this can be said to align with the original intention of the Yuma consensus mechanism, as Yuma consensus aims to reach consensus around any "subjectivity" work, not necessarily limited to AI. However, this lack of a clear objective makes the entire system seem... meaningless.

Final Thoughts

The dTAO model was launched only a month ago, and cracks have already begun to show.

The incentive mechanism of the free market indicates that without any centralized force, Bittensor may no longer be an AI project, but rather an "attention network" dominated by meme coin subnetworks, or a "general incentive network" led by revenue-generating enterprises that use TAO issuance to subsidize operational costs without substantially improving the Bittensor network.

I believe that the network needs a true "objective function" to unify the goals of all subnets. However, it is clearly very difficult to find a clear objective in the field of AI (especially General Artificial Intelligence, AGI) — as we have encountered various challenges when running a fair evaluation framework for large language models (LLMs)... This is also the reason why the Yuma consensus was created to work on "subjectivity."

As the famous saying goes: "Tell me the incentive mechanism, and I will tell you the result."

Best wishes!

Note

In previous versions, I mentioned that the issuance of TAO is proportional to its market value, when in fact it is proportional to its price. This error has now been corrected, thanks to @nick_hotz for pointing it out.

Disclaimer

This article is for general information 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 also not be construed as 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.