Author: Kevin, Caiya researcher from BlockBooster

Recently, Grayscale Research, the research arm of Grayscale, released a new list of the 20 most promising tokens in Q4 this year. The list takes into account various factors, such as potential catalysts, network adoption, and risk factors. A total of six new digital assets have been added to the list: Sui (SUI), Optimism (OP), Helium (HNT), Bittensor (TAO), UMA Protocol (UMA), and Celo (CELO). Among them, Bittensor is considered to be an outstanding AI project that aims to combine AI with blockchain to enhance the decentralization of artificial intelligence.

On September 28, the TAO Foundation issued a statement that a new subnet will be launched soon, providing scalable computing resources for GPU rental platform Fish to validators and users, which can be paid in TAO tokens. As of press time, the price of TAO is stable at around $500.

In addition to Grayscale Research's potential list of tokens and the announcement and market performance of the TAO Foundation, what other developments are worth looking forward to in the future of Bittensor? Next, we will take a deep dive into the operating mechanism of the upcoming subnet token dTAO and analyze its potential impact on the price of TAO.

dTAO refers to subnet tokens. Each subnet has its own dTAO, and the token release is consistent with Bitcoin and TAO. After dTAO goes online, the 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 subnet cap to give the network greater flexibility.

TAO holders can now obtain dTAO tokens by staking TAO in different pools. Although this process is called "staking", it is actually more like a swap. The consensus mechanism, token economics, and release speed of dTAO are similar to TAO. Each subnet has its own dTAO release, and subnet validators need to purchase/stake dTAO to participate in consensus and receive rewards.

As a subnet gains market attention, more TAO may be staked in the subnet's pool, increasing its daily TAO release weight 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 user demand for the subnet. Bittensor dynamically adjusts the daily TAO release weight based on the price of dTAO.

Why introduce dTAO?

The current TAO subnet faces several challenges, especially in the design of the root validator architecture. The performance of the root validator has not met the expectations of the Bittensor Foundation. Despite the 32 subnets, the competition between them has not intensified as expected. Subnets are supposed to provide high-quality outputs, guide miners, and develop AI models with real use cases, but many subnets have not met the expected goals.

The main problems of the current subnets include:

1. Resource overlap and redundancy: Multiple subnets focus on similar tasks, such as text-to-image generation, text prompts, and price prediction, resulting in resource redundancy.

2. Subnets lacking practical use cases: Some subnets (such as price prediction and sports win-loss prediction subnets) have not yet proven their practicality in real life.

3. "Bad money drives out good money": If high-quality subnets lack sufficient financial support, they may find it difficult to gain development space. Due to the seven-day protection period, subnets that fail to accumulate enough root validator support may be eliminated prematurely.

Other issues include the subjectivity of root validator evaluation, favoritism in staking decisions, and the power imbalance caused by a small number of root validators controlling most of the daily release weight of TAO.

The impact of dTAO on Bittensor

The introduction of dTAO aims to solve these systemic problems through decentralized subnet evaluation and incentive competition. By transferring power from root validators to the broader community of TAO holders, Bittensor introduces a market-driven pricing system where TAO holders can "vote" for the subnets they favor by staking their tokens.

The main advantages of the dTAO system include:

1. Decentralized subnet evaluation: No longer relying on a few validators, the dynamic pricing of the dTAO pool will determine the distribution of TAO issuance. TAO holders can support the subnets they believe in by staking TAO.

2. Increase subnet capacity: Removing the subnet cap makes it possible for the network to expand to more than 1,000 subnets, promoting competition and innovation in the ecosystem.

3. Encourage early participation: It can motivate users to pay attention to new subnets and motivate 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 buying the dynamic TAO of the subnet at a lower price, increasing the possibility of obtaining more TAO in the future.

4. Promote miners and validators to pay attention to high-quality subnets: further stimulate miners and validators to find high-quality new subnets. The miner's model is placed off-chain, and the validator's verification is also off-chain. The BitTensor network only rewards miners based on the validator's evaluation. Therefore, for different types or all types of AI applications, as long as the application conforms to the miner-validator architecture, BitTensor can correctly evaluate it. Bittensor is highly inclusive of AI applications, allowing participants at each stage to be incentivized and thereby feed back the value of Bittensor.

Promote sustainable use cases

One of the main goals of dTAO is to promote the development of subnets with real income potential, stimulate the birth of real use case applications, and allow such applications to be properly evaluated.

What are real use case applications? Applications that do not generate income through Ponzi. On the other hand, if the subnet does not generate income, there will be fewer and fewer subnet validators, because they will not buy subnet tokens that do not generate income in the new subnet stage (subnet validators need to buy dtao, not stake tao, to verify subnet miners). Validators play a vital role in this process by driving the dTAO price of subnets with sustainable business models. Therefore, validators are the starting point for the positive spiral of subnet coin prices, and income is the cornerstone. If there are fewer and fewer validators, that is, no one buys the subnet tokens, then the miners' income will become a one-way selling pressure, causing the subnet to fall into a death loop. The less the subnet gets released daily, the fewer miners and validators there will be, until it returns to zero. The ponzi design has limited appeal to retail investors for new subnets during cold start, because the subnet token release mechanism cannot complete asset mismatch or attract users by dividends. It can only use products with moats to attract users to pledge, validators and miners.

Token economics and issuance changes brought by dTAO

The introduction of dTAO reshapes the daily release rules of Bittensor:

1. Previous rules: Subnet rewards are distributed according to a fixed ratio - 41% to validators, 41% to miners, and 18% to subnet owners.

2. 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 according to the decisions of subnet participants.

Through the decentralized TAO issuance mechanism, dTAO introduces more volatility to 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

dTAO represents the best practice of combining AI infrastructure and applications in the Web3 industry. In the past six months, market performance and discussion have shown that infrastructure has reached saturation. Currently, almost all of the AI platforms ranked at the top of the market value are infrastructure-based, with serious homogeneity, and it may be difficult to continue to attract market attention in the next six months.

On the other hand, AI applications face a contradiction between revenue and market value. If an application issues tokens independently, long-term stable growth is difficult to achieve. 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 of these applications lack differentiation, have no defensive competitive advantages, have low user conversion and retention rates, and find 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 circle.

dTAO provides a solution to this problem. The Bittensor platform has established a proven and mature system, with miners, validators, and consensus mechanisms all developing 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 rely on the support of this mature network to get through the early stages and focus on product innovation. dTAO’s issuance mechanism ensures that subnets must constantly update and attract users to gain more weight, while avoiding the risk of “RUG” and excessive concentration of chips in the hands of the team.

The early stages of dTAO are expected to be relatively stable, and early investors are less risky due to the daily issuance mechanism. The long-term success of dTAO will depend on the ability of subnets to generate real value and revenue in the Bittensor ecosystem.

After the introduction of dTAO, subnets can generate revenue in two ways: 1) attract users to pay for the product; 2) increase the market value and thus push up the token price. Either way, it will have a positive impact on the overall market value of Bittensor. The issuance mechanism also ensures that if the team wants to make a 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 faced by most Web3 application projects, such as market-driven price volatility and systemic instability, as well as the possibility that large holders or "whales" can significantly affect prices through sudden actions and thus disrupt the ecosystem.

In addition, this issuance model reduces the risk of short-term sell-offs because liquidity injection is gradual. Subnets must accumulate liquidity and maintain stable prices over a period of time, and this process inherently relies on the quality of the products provided by the subnets.

Recently, TAO prices have risen significantly due to the upcoming launch of dTAO and the resurgence of AI narratives. On the one hand, the market makers have fully absorbed funds in the past few months, and now it is time to start the coin price. On the other hand, it can also be seen that subnets or potential subnets are scrambling for 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 increase the value of TAO. Therefore, when dTAO is launched, there may be chip distributions from the team or VC, resulting in price fluctuations.

But as long as the objective barriers that make it difficult to combine AI and web3 are not broken, dTAO is the best implementation of the combination of AI infrastructure and applications.

About BlockBooster

BlockBooster is an Asian Web3 venture studio supported by OKX Ventures and other top institutions, committed to becoming a trusted partner for outstanding entrepreneurs. Through strategic investment and in-depth incubation, we connect Web3 projects with the real world and help high-quality entrepreneurial projects grow.

This article comes from a contribution and does not represent the views of BlockBeats

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