GuShiio.com Conduct an in-depth analysis of how the introduction of dTAO will change the distribution distribution, incentive structure and economics of the network.
Author: @OnchainLu
Compiled by: Felix, PANews
If you are reading this, you are already familiar with the Bittensor ecosystem and are aware of the Dynamic TAO upgrade that takes place on February 13. If not, it is recommended to read “Dynamic TAO for Dummies”, which describes the high-level changes and impact of dTAO on the Bittensor ecosystem. The purpose of this paper is to conduct an in-depth analysis of how the introduction of dTAO will change the distribution distribution, incentive structure and economics of the network.
issuance mechanism
dTAO brought a fundamental shift to Bittensor’s economic model by implementing subnet-specific Alpha tokens to trade with TAO on constant product automated market makers (AMM)-here is an explanation of how AMM works with dTAO. Through this new mechanism, the relative price of subnet Alpha tokens directly affects the amount of TAO issues it receives, rather than having a small group of validators control the issuance allocation.
issuance component
The new release will consist of three components:
- TAO allocation based on subnet Alpha token price (Part 1)
- Injecting Alpha into the Subnetwork Liquidity Pool (Part 2)
- Additional Alpha distribution distributed among subnet owners, validators, and miners (Part 3)
These releases are calculated per block (approximately 12 seconds).
TAO issuance formula
The formula for the core TAO release (Part 1) is as follows:
Subnet TAO issuance =(Subnet Alpha price/sum of all Subnet Alpha prices) × (Total TAO issuance per block)
Among them:
- Subnetwork TAO issuance → Number of TAOs issued to specific subnets
- Subnet Alpha Price → Subnet Alpha Token Price
- Total Alpha prices for all subnets → Total Alpha token prices for all subnets
- Total amount of TAO issued per block → total amount of TAO issued per block (1 TAO)
This formula allocates TAO issuance based on the relative market value of Alpha tokens for each subnet. Subnetworks with higher demand and mobility will receive a larger share of TAO circulation, thereby inciting valuable services and user appeal.
Alpha Token Injection (Part 2)
Alpha injection follows a similar but modified formula:
Alpha injection = min( [Total TAO circulation per block/sum of Alpha prices for all subnets] , [Subnet Alpha issuance limit] )
Key points:
- The total TAO circulation per block was initially 1 TAO, but followed a halving plan.
- Subnet Alpha Release Limit → The maximum Alpha that can be injected into the subnet liquidity pool per block (initially 1 Alpha per block, and the halving plan is also followed).
- Alpha injection is proportional to the injected TAO, divided by the sum of all subnet prices (with the upper limit of [Subnet Alpha Release Limit]] as the upper limit)
This mechanism provides liquidity to the subnet AMM while preventing excessive inflation.
Additional Alpha release (Part 3)
In addition to the Alpha injected into the liquidity pool, there are additional Alpha releases distributed to subnet owners, validators, and miners. A maximum of 1 Alpha can be issued per subnet per block, and the TAO halving plan is followed.
Allocation details:
- 18%: Subnet owner
- 41%: Verifier
- 41%: Miners
This reward mechanism encourages subnet owners, verifiers, and miners to contribute to subnet operations, security, and growth.
Total Alpha circulation per block (before halving):
- Up to 1 Alpha Injection Subnetwork Liquidity Pool (Part 2)
- Up to 1 Alpha distributed to subnet owners, validators, and miners (Part 3)
It should be noted that both forms of Alpha distribution-Alpha injected into the liquidity pool (Alpha-in) and Alpha distributed to subnet participants (Alpha-out)-follow the same halving plan as TAO.
To be clear, each subnet follows its own halving plan. Subnets that are started earlier will experience periods of higher circulation rates because they have been started since the beginning of the halving program. Later subnets must accept their current (lower) release rate at the time they were launched, because all subnets follow the same halving threshold based on predetermined supply milestones.
Simultaneous halving of all issues helps maintain predictable token supply growth and control inflation across the system.
example computing
Suppose there are three subnets, and the Alpha price is 2 TAO, 1 TAO, and 1 TAO (total 4 TAO).
For TAO issuance of blocks (Part 1):
- First subnet → 0.5 TAO (2/4 × 1 TAO)
- Two other subnets → 0.25 TAO each (1/4 × 1 TAO)
Now focus on the corresponding Alpha injection (Part 2):
The maximum number of Alpha releases per subnet is 1 per block (assuming they are all in the early stages of a halving plan), so they receive min{0.25, 1}, min{0.25, 1}, and min{0.25, 1} Alpha respectively.
In addition to these pool injections, each subnet also receives an additional Alpha (Part 3), which is allocated to owners, validators, and miners on an 18/41/41 ratio.
This creates a powerful dynamic that higher-value subnets will naturally attract more TAO issues, while the combination of injection caps and fixed rewards keeps the economy stable. Subnetworks that account for 50% of Alpha’s total market value will receive 50% of TAO issuance, establishing a direct link between market value and resource allocation.
Alpha price manipulation?
You may be worried that Alpha prices will be manipulated. As transaction sizes grow relative to the liquidity of the subnet pool, slip point costs increase, and constant product AMM can create a defense mechanism against Alpha price manipulation.
Example:
Suppose the subnet’s Alpha/TAO pool has 100,000 Alpha and 50,000 TAOs → Alpha Price = 0.5 TAO.
Buying 10,000 Alphas would cost 5,556 TAOs, giving the effective price per Alpha to 0.5556 TAO (11% price impact).
In short, transactions that account for 1% of pool liquidity will have approximately 1% price impact, but transactions that account for 10% of pool liquidity will have approximately 11% price impact.
This makes large-scale manipulation extremely expensive while maintaining the efficiency of normal market operations.
Order ordering is determined randomly
One more thing to note for potential subnet investors: Bittensor uses a Random Order Finalization mechanism, which means that the order of transactions executed for each block is not a first-come, first-served basis.
For example, if many investors try to enter the same subnet liquidity pool within the same block (possibly due to coordination efforts or a team of follow traders), their order will be randomized, which means:
The risk of price manipulation is reduced because attackers cannot effectively execute orders in advance.
The price impact and slippage experienced by each investor will vary, depending on the random order in which they trade within the block. Due to randomization, some people may receive better prices than others.
Although this mechanism can effectively prevent manipulation, it brings unpredictability to large-scale collaborative investments. Therefore, investors who want to make collaborative investments in specific subnets should be prepared that some members may face higher slip point costs than others. By reducing the predictability of same-block transaction results, it will ultimately encourage more organic and decentralized market dynamics.
Related reading: A comprehensive analysis of the Bittensor ecosystem: The power game for the Iron Throne of AI
