Detailed Explanation of Dynamic TAO: Bittensor's New Economic Model

Compiled by: Felix, PANews

If you are reading this article, you are likely familiar with the Bittensor ecosystem and aware of the Dynamic TAO upgrade on February 13. If not, it is recommended to read “Dynamic TAO for Dummies,” which describes the high-level changes and impacts of dTAO on the Bittensor ecosystem. The purpose of this article is to analyze in depth how the introduction of dTAO will change the network's issuance distribution, incentive structure, and economics.

Issuance Mechanism

dTAO brings a fundamental shift to Bittensor's economic model by implementing subnet-specific Alpha tokens that trade with TAO on a constant product automated market maker (AMM)—the following explains how AMM works with dTAO. Through this new mechanism, the relative price of subnet Alpha tokens directly affects the amount of TAO issuance they receive, rather than being controlled by a small number of validators.

Issuance Components

The new issuance will consist of three parts:

TAO distribution based on subnet Alpha token prices (Part 1)
Injection of Alpha into subnet liquidity pools (Part 2)
Additional Alpha issuance distributed among subnet owners, validators, and miners (Part 3)

These issuances are calculated per block (approximately every 12 seconds).

TAO Issuance Formula

The core TAO issuance (Part 1) formula is as follows:

Subnet TAO Issuance = (Subnet Alpha Price / Total Price of All Subnet Alpha) × (Total TAO Issuance per Block)

Where:

Subnet TAO Issuance → Amount of TAO issued to a specific subnet
Subnet Alpha Price → Price of the subnet Alpha token
Total Price of All Subnet Alpha → Sum of prices of all subnet Alpha tokens
Total TAO Issuance per Block → Total amount of TAO issued per block (1 TAO)

This formula allocates TAO issuance based on the relative market value of each subnet Alpha token. Subnets with higher demand and liquidity will receive a larger share of TAO issuance, thereby incentivizing valuable services and user attraction.

Alpha Token Injection (Part 2)

Alpha injection follows a similar but modified formula:

Alpha Injection = min( [Total TAO Issuance per Block / Total Price of All Subnet Alpha], [Subnet Alpha Issuance Cap] )

Key Points:

Total TAO Issuance per Block initially is 1 TAO but follows a halving schedule.
Subnet Alpha Issuance Cap → Maximum Alpha that can be injected into the subnet liquidity pool per block (initially 1 Alpha per block, also following a halving schedule).
Alpha injection is proportional to the injected TAO, divided by the total price of all subnets (while capped by [Subnet Alpha Issuance Cap]).

This mechanism provides liquidity for subnet AMMs while preventing excessive inflation.

Additional Alpha Issuance (Part 3)

In addition to the Alpha injected into liquidity pools, there is additional Alpha issuance distributed to subnet owners, validators, and miners. Each subnet can issue up to 1 Alpha per block, following the TAO halving schedule.

Distribution Details:

18%: Subnet Owners
41%: Validators
41%: Miners

This reward mechanism incentivizes subnet owners, validators, and miners to contribute to the operation, security, and growth of the subnet.

Total Alpha issuance per block (before halving):

Up to 1 Alpha injected into subnet liquidity pools (Part 2)
Up to 1 Alpha distributed to subnet owners, validators, and miners (Part 3)

It is important to note that both forms of Alpha issuance—the Alpha injected into liquidity pools (Alpha-in) and the Alpha distributed to subnet participants (Alpha-out)—follow the same halving schedule as TAO.

It should be clarified that each subnet follows its own halving schedule. Earlier launched subnets will experience higher issuance rates because they started from the beginning of the halving schedule. Later subnets must accept their current (lower) issuance rates at the time of launch, as all subnets follow the same halving threshold based on predetermined supply milestones.

The synchronized halving of all issuances helps maintain predictable token supply growth and control inflation across the entire system.

Example Calculation

Assuming there are three subnets with Alpha prices of 2 TAO, 1 TAO, and 1 TAO (totaling 4 TAO).

For the TAO issuance of the block (Part 1):

First subnet → 0.5 TAO (2/4 × 1 TAO)
Other two subnets → 0.25 TAO each (1/4 × 1 TAO)

Now focusing on the corresponding Alpha injection (Part 2):

The Alpha issuance cap for each subnet is 1 Alpha per block (assuming they are all in the initial phase of the halving schedule), so they each receive min{0.25, 1}, min{0.25, 1}, and min{0.25, 1} Alpha.

In addition to these pool injections, each subnet will also receive an extra 1 Alpha (Part 3), distributed in a ratio of 18/41/41 to owners, validators, and miners.

This creates a powerful dynamic where higher-value subnets naturally attract more TAO issuance, while the combination of injection caps and fixed rewards maintains economic stability. A subnet that accounts for 50% of the total market value of Alpha will receive 50% of the TAO issuance, thereby establishing a direct link between market value and resource allocation.

Alpha Price Manipulation?

You may be concerned about the manipulation of Alpha prices. As the trading volume grows relative to the liquidity of the subnet pool, the slippage cost increases, and the constant product AMM creates a defense mechanism against Alpha price manipulation.

Example:

Assuming a subnet's Alpha/TAO pool has 100,000 Alpha and 50,000 TAO → Alpha price = 0.5 TAO.

Buying 10,000 Alpha will cost 5,556 TAO, making the effective price per Alpha 0.5556 TAO (11% price impact).

In short, a trade that occupies 1% of the pool's liquidity will have about a 1% price impact, but a trade that occupies 10% of the pool's liquidity will have about an 11% price impact.

This makes large-scale manipulation trades extremely costly while maintaining the efficiency of normal market operations.

Random Order Finalization

For potential subnet investors, there is one more point to note: Bittensor employs a Random Order Finalization mechanism, which means that the order of transactions executed in each block is not first-come, first-served.

For example, if many investors attempt to enter the same subnet liquidity pool within the same block (possibly due to coordinated efforts or follow-on trading teams), their order will be randomized, meaning:

The risk of price manipulation is reduced because attackers cannot effectively front-run orders.

The price impact and slippage experienced by each investor will vary depending on the random order of their trades within that block. Due to the randomization, some may receive better prices than others.

While this mechanism effectively prevents manipulation, it introduces unpredictability for large collaborative investments. Therefore, investors hoping to collaborate in a specific subnet should be prepared for some members to face higher slippage costs than others. By reducing the predictability of trading outcomes within the same block, it ultimately encourages more organic and decentralized market dynamics.

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