Detailed explanation of Dynamic TAO: Bittensor's new economic model

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 on February 13. If not, it is recommended to read Dynamic TAO for Dummies , which describes the advanced changes and impacts of dTAO on the Bittensor ecosystem. The purpose of this article is to deeply analyze how the introduction of dTAO will change the issuance allocation, incentive structure and economics of the network.

Issuing mechanism

dTAO trades with TAO on a constant product automatic market maker (AMM) by implementing subnet-specific alpha tokens, thus bringing a fundamental change in Bittensor's economic model – Here is an explanation of how AMM works with dTAO . Through this new mechanism, the relative price of subnet Alpha tokens directly affects the TAO circulation it receives, rather than being controlled by a small number of validators.

Release Components

The new release will consist of three parts:

• TAO allocation based on subnet Alpha token price (Part 1)
• Inject Alpha into the subnet liquidity pool (Part 2)
• Additional Alpha Issues allocated between subnet owners, validators and miners (Part 3)

These issuances are calculated on each block (approximately 12 seconds).

TAO Issuance Formula

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

Subnet TAO Issuance = (Subnet Alpha Price/Sum of All Subnet Alpha Prices) × (Total TAO Issuance of Each Block)

in:

• Subnet TAO Issuance → Number of TAOs issued to a specific subnet
• Subnet Alpha Price → Subnet Alpha Token Price
• All subnets Alpha prices sum → All subnets Alpha token prices sum
• Total TAO issuance per block → Total TAO issuance 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, which incentivizes valuable services and user attractiveness.

Alpha Token Injection (Part 2)

Alpha injection follows a similar but modified formula:

Alpha injection = min([Total TAO circulation per block/sum of all subnet Alpha prices], [Upper subnet Alpha issuance limit])

Key points:

• The total TAO issuance per block is initially 1 TAO, but the halving plan is followed.
• Subnet Alpha Issuance Cap → Each block can inject the maximum alpha of the subnet liquidity pool (initially 1 alpha per block, also following the halving plan).
• Alpha injection is proportional to the injected TAO, divided by the sum of all subnet prices (at the upper limit of [subnet Alpha issuance])

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

Additional Alpha Release (Part 3)

In addition to the alpha injected into the liquidity pool, there are additional Alpha distributions distributed to subnet owners, validators and miners. Each subnet can issue up to 1 alpha per block and follow the TAO halving plan.

Allocation details:

• 18%: Subnet owner
• 41%: Verifier
• 41%: Miners

This reward mechanism incentivizes subnet owners, validators and miners to contribute to subnet operations, security and growth.

Total Alpha circulation per block (before halving):

• Up to 1 Alpha Injection Subnet Liquidity Pool (Part 2)
• Up to 1 Alpha is distributed to subnet owners, validators and miners (Part 3)

It should be noted that both forms of Alpha issue—alpha (Alpha-in) injected into liquidity pools andalpha (Alpha-out) distributed to subnet participants—all follow the same halving plan as TAO.

It should be clear that each subnet follows its own halving plan. The earlier launched subnets will experience higher issuance periods as they start from the beginning of the halving program. Late subnets must accept the current (lower) issuance rate at which they are started, because all subnets follow the same halving threshold based on predetermined supply milestones.

Synchronous halving of all issues helps to maintain predictable token supply growth and control inflation across the system.

Example calculation

Suppose there are three subnets, and the Alpha prices are 2 TAO, 1 TAO and 1 TAO (4 TAO in total).

For TAO Issuance of Blocks (Part 1):

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

Now focus on the corresponding Alpha injection (part 2):

The upper limit of Alpha issuance for each subnet is 1 per block (assuming they are all in the initial stage of the halving plan), so they obtain min{0.25, 1}, min{0.25, 1}, and min{0.25, 1}, respectively. .

In addition to these pool injections, each subnet receives an additional 1 alpha (part 3) assigned to owners, validators and miners at a ratio of 18/41/41.

This creates a powerful dynamic that a higher value subnet will naturally attract more TAO issuances, while the combination of injection caps and fixed rewards keeps economic stability. Subnets that account for 50% of the total Alpha market value will receive 50% of the TAO issuance, creating a direct link between market value and resource allocation.

Alpha price manipulation?

You may be worried about the price of Alpha being manipulated. As the transaction size increases relative to the liquidity of the subnet pool, slippage costs will increase, and the constant product AMM can create a defense mechanism for the Alpha price to be manipulated.

Example:

Suppose the Alpha/TAO pool of the subnet has 100,000 Alpha and 50,000 TAO → Alpha price = 0.5 TAO.

Purchasing 10,000 Alpha will cost 5,556 TAO, making each Alpha effective price of 0.5556 TAO (11% price impact).

In short, transactions that account for 1% of pool liquidity will have a price impact of about 1%, but transactions that account for 10% of pool liquidity will have a price impact of about 11%.

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

Order sorting randomly

For potential subnet investors, there is another thing to note: Bittensor adopts a random order order sorting mechanism, which means that the order of transactions executed by each block is not first come first served.

For example, if many investors try to enter the same subnet liquidity pool within the same block (probably due to coordinated efforts or the team of order traders), their order orders will be randomized, which means:

The risk of price manipulation is reduced because the attacker 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 that block. Due to randomization, some people may get a better price than others.

While this mechanism can effectively prevent manipulation, it brings unpredictability to large collaborative investments. Therefore, investors who want to invest in collaboratively in a specific subnet should be prepared that some members may face higher slippage costs than others. By reducing the predictability of transaction results in the same block, it will ultimately encourage more organic and decentralized market dynamics.

Related Reading: A comprehensive analysis of Bittensor Ecology: Game of Thrones for the Iron Throne of AI