Editor's Note: The article points out that the launch of dTAO has solved the unfairness and centralization issues in the early reward distribution of Bittensor. Through a market-driven mechanism, the TAO rewards of the subnets are linked to demand, with more rewards flowing to the subnets with higher demand. This change has shifted the reward distribution from being validator-driven to being determined by the Alpha token market, ensuring that well-performing subnets receive more rewards and incentivizing the entire network to be active and innovative. Although manipulation and liquidity issues still remain, dTAO has taken an important step towards decentralization and market-driven direction.

The following is the original content (edited for easier reading):

A year ago, I wrote about the economic challenges of Bittensor. Now, with the launch of dTAO, the network has finally begun to address these issues.

This change was long overdue. Bittensor's growth rate had outpaced the ability of the root validators to fairly evaluate new subnets. Influence was concentrated at the top, and this influence was not always entirely neutral. dTAO solves this problem by letting demand, rather than gatekeepers, decide which subnets can thrive.

To be honest, it wasn't easy to figure out dTAO at first. It took a lot of time to piece together all the details.

That's why I'm writing this article: to break it down in plain language, so you don't feel the same confusion I did. And to summarize my key takeaways.

Why dTAO?

First, it's worth asking: what problem was dTAO designed to fix?

Validator Bottleneck

In the old system, freshly minted TAO was allocated based on validator voting. In theory, this "validator democracy" made sense, but in practice, it had issues.

As more and more subnets came online, the top validators simply couldn't keep up. There were too many subnets, too much noise, and not enough bandwidth to fairly evaluate them all.

Over time, the system fell into a state of apathy - a few well-connected subnets received the bulk of the rewards, while new subnets struggled to gain support.

Conflicts of Interest

Many top validators happened to also be subnet owners. By controlling the reward distribution, some were able to allocate higher weights to their own subnets, effectively increasing their own rewards.

Some even called the previous system more like "giving TAO to their friends".

In extreme cases, validators and subnet owners formed private deals or revenue-sharing agreements, creating centralized risks, distorting reward distribution, and undermining trust in the system.

Poor Coordination

Validators had their own methods of weight allocation to determine rewards, but these methods didn't always align with the overall goals of the network.

Worse, the economic weight-providing stakers couldn't directly decide which subnets would receive rewards. Most staked TAO was concentrated in the hands of a few validators, who effectively controlled the entire reward distribution landscape.

dTAO - The Key Changes

Before the launch of dTAO, reward distribution was quite straightforward. Each block produced 1 TAO (7,200 TAO per day), and these TAO were allocated to subnets based on the weights assigned by the root validators. Each subnet would then distribute the TAO to its contributors: 18% to subnet owners, 41% to miners, and 41% to validators.

For stakers, everything revolved around the Root (Subnet 0). TAO holders would stake behind validators, and in return, they would receive newly minted TAO.

This is all over now.

Under dTAO, rewards are no longer distributed through the validator weight system. Instead, TAO rewards flow through a market-driven system, using subnet tokens, also known as Alpha tokens.

The price of these Alpha tokens reflects the market's demand for a particular subnet. The higher the demand, the higher the price, meaning that subnet is more valuable.

The subnet tokens use a constant product automated market maker (AMM) - the same pricing mechanism as Uniswap. The price at any given moment is determined by the ratio of TAO reserves to Alpha token reserves in the subnet liquidity pool.

So, the rewards are no longer arbitrarily allocated; a subnet's TAO reward share is now determined by how the market values its worth.

· Higher Alpha token price → Reflects strong market demand → More TAO rewards

· Lower Alpha token price → Reflects weak market demand → Fewer TAO rewards

Imagine two subnets competing for rewards:

· Subnet A's token price = $100

· Subnet B's token price = $50

Since Subnet A's token price is higher, it will receive a larger share of the TAO rewards per block than Subnet B.

This mechanism creates a self-regulating system, where the market-determined subnets that create more value (perform better) will receive more TAO rewards, while underperforming subnets will naturally see lower rewards.

This ensures that capital flows to the most productive subnets.

Reward Distribution

It took me a while to piece together the actual mechanics of the reward distribution, so let me summarize it as concisely as possible. The chart below is worth referencing multiple times in the upcoming sections. I found it to be one of the most informative visualizations, showing how the proportion of TAO rewards allocated to the Root and subnets changes over time.

What's Happening to the Root Network?

In the early stages of dTAO (like now), stakers on the Root (Subnet 0) will still receive the majority of the TAO rewards. The reason is simple: Alpha tokens are still scarce at the moment.

The staking weight of validators on each subnet depends not only on their Alpha token holdings in that subnet, but also on the amount of TAO they have staked on the Root.

Because Alpha tokens are still limited in the early days, Root validators hold a disproportionate influence across the entire network.

This means that most of the newly minted Alpha tokens are automatically "sold back" to TAO, and distributed to the TAO stakers on the Root.

Currently, this is highly beneficial for Root stakers. Since the majority of the rewards still flow into the Root, the yields are very generous, with recent APRs as high as 60-70%.

But this won't last forever.

As more Alpha tokens enter circulation, their weight in the network will increase, and the influence will gradually shift away from the Root validators. Over time, dTAO ensures that rewards are no longer concentrated in the Root, but are more evenly distributed across the entire network.

Around 100 days from now, the TAO rewards received by Root stakers are expected to reach a balance with the subnet Alpha tokens.

What's Happening to the Subnets?

Subnets no longer directly allocate the newly minted TAO to miners and validators. Instead, they use their own local currency, the Alpha tokens, to reward participants.

How Alpha Tokens Work

Each block, each subnet will mint Alpha tokens, starting at 2 Alpha per block (twice the TAO minting rate). The minting rate is dynamic - the higher the Alpha token price, the lower the minting rate.

Like TAO, the Alpha tokens have a hard cap on total supply of 21 million, and follow the same halving schedule, with the first halving occurring when the total supply reaches 10.5 million - expected to happen in less than two years.

Each subnet operates an AMM pool, pairing TAO and Alpha tokens. The price of Alpha is dynamically determined by the ratio of TAO to Alpha tokens in the pool.

When you stake TAO into the subnet pool, you receive an equivalent amount of Alpha tokens at the current market price. Later, if you unstake, you can swap the Alpha tokens back to TAO at the market price.

When people say they are "buying" or "selling" subnet tokens, they are actually just staking or unstaking TAO into the subnet pools. There is still no independent mechanism to directly purchase Alpha tokens.

Reward Distribution Mechanism

Every block, the protocol will scan the Alpha token prices of all subnets and dynamically decide how much newly minted TAO to inject into the pool of each subnet.

· Subnets with higher prices (indicating stronger demand and utility) will receive more TAO rewards.

· Subnets with lower prices will receive fewer TAO rewards.

Subnets now have to earn TAO rewards by generating actual demand for their Alpha tokens. This creates a competitive, market-driven environment where success must be earned through effort, and only the most adaptable subnets will survive.

Subnets can no longer just go through the motions to receive rewards; they must prove their worth.

Those subnets that demonstrate real utility and maintain a higher Alpha token price will receive more TAO rewards, while underperforming subnets will naturally decline as their rewards gradually dry up.

To prevent short-term price fluctuations from distorting the reward distribution, the system uses an exponentially weighted moving average (EMA), which smooths out volatility and ensures that even sudden price swings do not significantly disrupt the TAO reward allocation. As a result, changes in Alpha prices will be reflected in TAO rewards with a lag - typically taking days rather than hours.

Timeline

Here is a breakdown of the key stages to help you anticipate future developments. Please note that these are rough timelines and conceptual milestones, not set in stone.

Launch Phase (Day 0 - Day 1)

· Each subnet mints 2 Alpha per block (starting new minting).

· Since Alpha tokens are not yet in circulation, Root will receive around 100% of the TAO rewards.

· Validator staking weight is entirely based on TAO.

· TAO stakers on Root receive the highest rewards.Early Adoption Phase (Day 2 - Day 30): We are currently in this stage

· As subnets start minting Alpha, more Alpha tokens enter circulation.

· Validators in the subnets start accumulating Alpha, and staking weight gradually shifts towards the subnets.

· Root still receives the majority of TAO rewards, but its dominance begins to decline.Transition Phase (Day 30 - Day 100)

· The Alpha supply in subnets grows rapidly due to high minting rates.

· Subnet validators with more Alpha start to overtake the TAO-based Root validators in staking weight.

· Root's share of TAO rewards drops significantly.

· By Day 100, the staking weight between TAO and Alpha will reach parity, meaning TAO staking no longer dominates the validator weight calculation.Post-Transition Phase (Day 100 - Year 1)

· Subnet validators dominate the reward distribution.

· Root continues to receive TAO rewards, but at a greatly reduced pace.

· Validators who have adapted to staking Alpha tokens in the subnets receive the highest rewards.Long-Term (Year 1 and beyond)

· TAO rewards are almost entirely determined by market-driven subnet staking.

· Root still allows TAO staking, but rewards are minimal, and the TAO weight approaches 0.

· The network is fully decentralized in terms of reward distribution.

What Has Happened So Far

All subnet token pools initially had only 1 Alpha/1 TAO, which can be considered a fair launch paradigm.

Shortly after the dTAO launch, the Alpha prices experienced violent fluctuations. Some subnets spiked to 5-10 TAO/Alpha within the first few hours, driven primarily by speculators hoping to profit from the high rewards. Other subnets remained in the 0.1-0.2 TAO range, possibly due to the influence of larger brands or lack of early marketing.

However, the early price spikes may not be sustainable for the following reasons:

· Automatic selling of Root rewards: Many of the newly minted Alpha tokens will automatically sell back into these subnet pools to pay the rewards to TAO stakers on Root, exerting downward pressure on prices.

· Selling pressure: Miners, validators, and subnet owners will earn Alpha tokens (which mint faster than TAO) and then convert them back to TAO to cover operating costs.

Warning: In the early stages, the relative inflation of subnet Alpha tokens is very high. Low liquidity, high volatility prices.

The best place I've found to track subnet Alpha prices is @BackpropFinance.

As of now, the circulating supply of Alpha for each subnet is less than 0.4%, so you'll often see low market values but extremely high fully diluted valuations (FDVs), typically in the billions of dollars.

For example, the recent hot one is Chutes, a serverless GPU resource provider by @rayon_labs (Subnet 64). It shows a market value of around $9.2 million, but a fully diluted valuation of $2.6 billion, which is quite remarkable compared to TAO's ~$4 billion market cap.

Given the severe inflation and ongoing selling pressure, I expect these FDVs to eventually revert to more realistic levels.

One metric to watch is the total FDV of all subnet tokens relative to the TAO market value (see the leftmost chart above). Currently, it's around 2-3x, but this is clearly unsustainable in the long run.

However, this is still a low-liquidity environment, meaning even small-scale "blind" buying or selling by traders can quickly drive price swings. We've seen subnet token prices spike 100-200% in just the past day, only to cool off rapidly.

How to Acquire Subnet Alpha Tokens

Choosing the right subnet is the first step.

Not all subnets are created equal, so you'll want to look for ones with real utility, an active community, and strong miner participation - tools like Discord, X, and GitHub can help you discover genuine market momentum.

Once you've found a subnet you like, you'll need a Bittensor wallet. A good option is the official Chrome extension from the @OpenTensor Foundation. You can only use TAO staking to acquire subnet tokens, so there's currently no direct exchange mechanism with ETH, USDC, or SOL.

While you can stake directly in the wallet, I prefer using platforms like Taostats.io or Backprop Finance, which provide a more familiar trading-style interface. Just be wary of slippage: most subnets still have low liquidity, so larger trades can cause dramatic price swings.

One upside? Holding Alpha tokens allows you to earn more tokens, as newly minted Alpha tokens will automatically accrue to your balance. When you want to exit, you can unstake and exchange back for TAO at the pool's current rate, which may differ from when you staked, so you may actually lose some TAO.

My Thoughts on dTAO

The best thing about dTAO and Bittensor subnet tokens is that it truly makes everyone focus on building each subnet. There is real Alpha here - you can actually gain upside by doing research and getting involved - whereas before, you just had to buy TAO.

And that's the whole point.

I'm taking the time to dive deep into what these subnets are doing, understanding their product visions and business models.

And this is actually very interesting. Many subnets are led by technical teams with deep AI expertise, dealing with scientific research from AI model development to protein folding and advanced vision models.

These subnets are at different stages of development. Some subnets are still in the early stages, focusing on building a miner community, while others have already started to generate valuable output and have secured business partnerships.

If I were to give some advice on subnet tokens, it would be: patience may be your best strategy.

dTAO is a system designed for the long term, with a gradual transition and rewards for those who take the time to deeply understand it. If you like a particular subnet, gradually getting involved through small, regular purchases (rather than a one-time large investment) can help you weather the volatility while allowing liquidity to grow gradually.

For those who don't like the subnet frenzy, you may be able to continue staking your TAO on the Root over the next few months. The APR there will gradually decline, but it is still respectable.

Of course, there will be those who want to play the volatility "lottery", and if they can time their entries and exits accurately, they may be able to significantly increase their TAO holdings. However, this is a very risky game.

Some Thoughts

dTAO is an important step in the right direction. But it is not a perfect system (is there really a perfect system?)

Manipulation is still possible

The switch to an Alpha-based staking model has introduced a new set of risks. In theory, it creates better market-driven incentive mechanisms, but in practice, it still leaves room for exploitation. If the token price of a subnet crashes, malicious actors may be able to buy Alpha tokens at low prices and use them to manipulate the rewards.

Currently, dTAO mitigates this by blending in Root staking weights, making it harder for any single entity to capture the rewards. However, as the Root weights gradually decline, subnets will need stronger security mechanisms to prevent hostile takeovers. Subnet owners can still strike private deals with large validators or miners - the medium is now Alpha, not TAO. While the system is more decentralized, it still cannot avoid the potential for game-theoretic coalitions.

1,000 Subnets?

Each time a new subnet is registered, the fee doubles. But over time, the price will decay, halving approximately every 38,880 blocks - about every five and a half days. This means that if demand remains stable, a new subnet could be launched every five days.

What happens when we have a thousand subnets?

At such a scale, no individual can reasonably track all the rewards, performance, and opportunities across the entire network. The data volume will be too large, the variables too many, and the noise too much. AI-based analytical tools will become a necessity, not a luxury, to help stakers navigate the overwhelming options.

For those launching new subnets, initial liquidity will be key. They will need to create an initial wave of demand for their Alpha tokens, or their reward share will remain negligible.

Over time, the real winners will be the subnets that demonstrate genuine utility, establishing a strong correlation between usage and Alpha price. Those unable to attract usage may gradually fade away, with their tokens drifting towards zero.

DeFi on Bittensor

I'm excited to see that future upgrades may bring DeFi-like mechanisms into the ecosystem, further improving capital efficiency.

One possibility is the adoption of Uniswap V3-style liquidity pools, allowing for concentrated liquidity rather than the constant product AMM model. Another possibility is permissionless liquidity provision, where external LPs can deposit funds into Alpha-TAO pairs and earn trading fees.

These don't exist yet - but if implemented, they could fundamentally change the game, making subnet tokens more attractive for trading and staking.

More capital → more liquidity → more capital.

dTAO is still in its early stages, but with the introduction of new mechanisms, the financial layer of Bittensor may evolve into something more complex than what we see today.

The Bittensor Renaissance

Last month, in my personal predictions for 2025, I wrote that Bittensor may be poised for a renaissance:

Bittensor spent much of last year in the doldrums - as the "elder" of crypto AI, it was overshadowed by the emerging narratives. Despite the hype around AI tokens and AI agents, TAO struggled to keep up.

Now, with the launch of dTAO, this is changing. Interest is surging, and the network is forcing everyone to pay attention - not just to TAO, but to what each subnet is actually building.

Congratulations to the const and Opentensor teams, and to all who have put in the effort to make this happen. I admit, I had my doubts.

This is not just an upgrade. This is the beginning of a Bittensor renaissance, a process that will unfold over the years to come.

Related Resources

· Dynamic TAO Whitepaper (Warning: lots of math)

· Opentensor's Dynamic TAO FAQ

· Taostats (great resource for tracking network and subnet data)

· Taopill (overviews of each subnet's functionality and key achievements)

· Backprop finance for monitoring subnet token prices

· Wombo's automated subnet evaluation paper

· Many great tweets from @bloomberg_seth, @Old_Samster (@CrucibleLabs), and @xavi3rlu (Latent Holdings)

· @taotimesdotai / @brodydotai: Best Bittensor newsletters

· @TAOTalkPod: Excellent Bittensor podcast

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