(Disclaimer: The following content is based on information gathered from Dynamic TAO: Bittensor Improvement Template 1. Given that this proposal is still under discussion, there is a possibility of changes occurring.)
What is Dynamic TAO?
Dynamic TAO is a significant enhancement to the Bittensor token system framework. It represents a strategic refinement in how tokens are allocated within the Bittensor network.
The primary goal of Dynamic TAO is to improve the accuracy of rewarding value-added subnets by introducing an innovative, open market, decentralized approach. This approach is crucial for addressing and mitigating potential issues such as cronyism, apathy, and monopolistic tendencies among Root Network $TAO Validators who currently have significant influence over network emissions.
Ultimately, Dynamic TAO aims to achieve a deeper level of decentralization within the blockchain ecosystem, empowering all $TAO holders to engage in informed speculation on subnets and actively participate in the fair allocation of Bittensor resources. This methodology promises a more dynamic, fair, and efficient progression of the network, aligning with the vision of a decentralized future.
What mechanisms will Dynamic TAO change?
1. Staking Mechanism.
Currently, Validators stake $TAO in a Subnet and complete validation tasks to earn a certain amount of newly issued $TAO as incentives.
The amount of $TAO staked by Validators will never decrease. In such a mechanism, staking is a guaranteed profitable business, resulting in a high circulation-to-stake ratio for $TAO: out of a total circulation of approximately 6.25 million $TAO, around 4.75 million $TAO is staked, with a staking ratio of about 75.94%. Validators earn an average annualized return of about 19.38% through staking.
However, this status may change. The Dynamic TAO proposal allows each Subnet to issue its own “Token,” collectively referred to as “Dynamic TAO” ($dTAO), distinguished by different Greek alphabet.
These “Subnet Tokens” cannot be directly traded but can be exchanged (unstaked/swapped) for $TAO through a unique liquidity pool.
Each Subnet has its own liquidity pool, which contains a certain amount of $TAO and the corresponding $dTAO. The pricing mechanism for exchanging $TAO and $dTAO follows the constant product formula, similar to Uniswap V2:
Where τ represents the amount of $TAO, and α represents the amount of $dTAO. Without additional liquidity injection, the value of K remains constant regardless of the amount of $TAO exchanged for $dTAO or vice versa.
When $TAO holders stake, they effectively purchase a corresponding amount of $d$TAO, calculated by the formula:
Conversely, when $dTAO holders unstake, they effectively purchase $TAO, calculated by the formula:
Unlike Uniswap V2, however, liquidity cannot be directly added to the $dTAO liquidity pool.
Except for when a Subnet Owner creates a Subnet, all newly injected liquidity comes entirely from allocated $TAO and 50% of the total newly issued $dTAO.
In other words, newly issued $TAO allocated to each Subnet is not directly distributed to the Subnet’s Validator/Miner/Owner but is all injected into the liquidity pool for backing. Similarly, 50% of the newly issued $dTAO is injected into the liquidity pool, with the remaining 50% distributed to Validator/Miner/Owner according to the Subnet’s designated incentive mechanism.
2. Emissions.
Currently, the allocation of newly issued $TAO to each Subnet is determined by the Validators in the Root Network. This approach has exposed some potential issues.
For example, due to the concentration of power in the hands of a few Validators in the Root Network, even if Validators collude to allocate newly issued $TAO to low-value subnets, they will not face any penalties.
Dynamic TAO proposal suspends the privileges of the Root Network and transfers the power to determine how newly issued $TAO should be allocated to all $TAO holders.
The specific approach is to:
Adopt Yuma Consensus V2, which applies a softmax operation to the prices of each Subnet Token to obtain the corresponding release ratios, namely:
Where P represents the price of $dTAO relative to $TAO, calculated by dividing the quantity of $TAO in the liquidity pool by the quantity of $dTAO.
According to the formula, when the price of a Subnet Token relative to $TAO is higher, the release ratio of newly issued $TAO it can receive is also higher.
3. Delegation of power.
Currently, the $TAO incentives received by the Subnets are distributed in fixed proportions of 41% to Validators, 41% to Miners, and 18% to Owners.
Dynamic TAO proposal empowers each Subnet to issue its own “Subnet Token” and stipulates that, aside from 50% of the issuance amount being required to be injected into the liquidity pool, the distribution mechanism for the remaining 50% among Validators, Miners, and Owners is determined by the participants of the Subnet themselves.
Examples.
According to the proposal, upon the formal submission of Dynamic TAO in the network upgrade, all existing Subnets will mint corresponding $dTAO tokens.
The genesis quantity of $dTAO equals the amount of $TAO locked by the Subnet Owner when creating the Subnet. Specifically, 50% of the $dTAO is injected into the Subnet’s liquidity pool, while the remaining 50% is allocated to the Subnet Owner.
For instance, if the Owner of Subnet #1 previously locked 1000 $TAO, then the genesis quantity of $dTAO would also be 1000 tokens. Out of these, 500 $dTAO, along with the initial 1000 $TAO, are added to the liquidity pool, while the remaining 500 $dTAO are allocated to the Owner.
Next, when a Validator registers in Subnet #1 and stakes 1000 $TAO, the Validator will receive 250 $dTAO. At this point, the liquidity pool will contain 2000 $TAO and 250 $dTAO.
Assuming Subnet #1 receives a block reward of 720 $TAO per day, the liquidity pool will automatically receive 720 $TAO daily. As for the daily injection of $dTAO, it depends on the issuance rate set by the Subnet itself.
What new features will Dynamic TAO bring?
- The allocation of newly issued $TAO is no longer determined by a few Validators but indirectly and collectively decided by all $TAO holders.
- Staking $TAO is no longer risk-free. Choosing to stake in an unpromising Subnet and lagging behind other stakers may result in significant capital loss.
- Instead of considering it as Stake, it is more like a Swap. Staking $TAO in a Subnet is essentially equivalent to buying tokens of that Subnet.
- In the short term, the impact of staking and unstaking on the price of $dTAO will be far greater than the actual amount of $TAO received by the Subnet.
What are the pros and cons?
Pros:
- Top Validators’ total control over Bittensor block rewards will vanish. The cost for potential attackers to attack Bittensor by controlling staking volume will be significantly increased.
- The opportunity for emerging Subnets to stand out will be greatly enhanced. Viewing Stake as Swap, the returns for early Validators of a high-quality Subnet will be substantial. In the current scheme, supporting early Subnets as a Validator does not significantly increase the staked annualized return; whereas after Dynamic TAO, supporting early Subnets as a Validator is expected to yield returns tenfold or even greater.
- Subnet competition will intensify, fostering a more thriving Bittensor ecosystem. With Subnets having some autonomy in determining how newly issued $dTAO is distributed, Subnet Owners and Validators are expected to make every effort to attract higher staking volumes.
- Delegators will be significantly more eager to engage in Subnet development and governance. Delegators can no longer expect to receive an average annualized return; instead, each stake will become an investment decision. Rational Delegators will invest more effort in due diligence until they find the highest quality and most promising Subnet.
Cons:
- Short-term speculation may increase, leading to the possibility of inferior assets driving out superior ones. Subnets may not necessarily have real performance metrics but could attract significant staking in the short term, rapidly driving up the price of the corresponding $dTAO, allowing early buyers (stakers) to exit with liquidity. Subnets that manipulate narratives and prices may squeeze out genuinely high-quality but relatively weakly speculative Subnets.
- The “no-loss” staking mechanism will be eliminated, possibly resulting in a lower staking ratio for Bittensor. Not all stakers are willing to “buy” Subnet Tokens; they may simply want to hold $TAO. Dynamic TAO will make the profitability of staking $TAO uncertain, leading to a certain proportion of stakers exiting their stakes.
