Why dTAO is broken

The dTAO mechanism of Bittensor was originally designed to distribute the release of TAO more fairly, but issues emerged just a month after its launch.

Original Title: Why dTAO is broken

Original Author: @tzedonn, crypto writer

Original Compiler: zhouzhou, BlockBeats

Editor's Note: Bittensor's dTAO mechanism was designed to distribute the release of TAO more fairly, but issues emerged just a month after its launch. SN28 subnet exploited a mechanism flaw, pushing the release of TAO into meme coin speculation, ultimately leading to centralized intervention by the foundation. As decentralization progresses, similar incidents may be unavoidable, and Bittensor could transform into a generalized incentive network rather than an AI project, with the core issue being a lack of unified goals.

I am someone who is irresistibly drawn to novel token economics, watching as crypto protocols continuously adjust their incentive mechanisms, sometimes appearing quite clever—until they inevitably run into problems. This process itself is fascinating. So when Bittensor launched the dynamic $TAO (dTAO) system on Valentine's Day (was this a Valentine's gift from @const_reborn?), I was immediately intrigued.

The idea is simple: to provide a new, more "fair" way to distribute the release of TAO, allowing various subnets to obtain TAO more reasonably.

However, less than a month later, problems began to surface. It turns out that a design that seems reasonable does not necessarily survive in a free market.

How dTAO Works

A brief recap of how dTAO works:

Each subnet has its own subnet token ($SN), existing as a TAO-SN based UniV2 type native liquidity pool (LP). However, "staking" TAO for SN is essentially the same as "exchanging" TAO for SN. The only difference is that you cannot add additional liquidity to the liquidity pool, nor can you trade directly between different SN tokens (e.g., SN1 → SN2), but you can exchange indirectly through TAO (SN1 → TAO → SN2).

The release of TAO is allocated based on the price of each subnet's SN token. They use a moving average price to smooth out price fluctuations and prevent price manipulation.

The release amount of SN tokens is also quite high, with a supply cap of 21 million, similar to TAO and BTC. A portion of this enters the TAO-SN trading pool, while the remainder is allocated to subnet stakeholders (miners, validators, subnet owners).

The number of SN tokens entering the TAO-SN trading pool depends on how many SN are needed to "balance" the TAO entering the pool, ensuring that the price of SN remains stable under TAO valuation while increasing liquidity.

However, if the calculated number of SN tokens obtained by the subnet exceeds its maximum release amount (determined by the SN release curve), then the SN release amount will be capped, leading to an increase in the price of SN under TAO valuation.

Core Assumptions of the dTAO Mechanism

Point (2) in the dTAO mechanism is based on a core assumption: that subnets with higher market capitalization create more value for the Bittensor network and therefore should receive more TAO release.

But the reality is that in the crypto market, the tokens with the highest prices are often those that are most hyped, most marketed, and even exhibit characteristics of Ponzi schemes. This is why the valuations of L1 public chains and meme coins are always relatively high.

The original intention of the mechanism design was good, as it assumed that subnets that truly create value would repurchase SN tokens through generated revenue, driving up the price of SN, thereby obtaining more TAO release. However, I find this logic somewhat naive.

Meme Coin Subnets & Broken Token Economics

Before the launch of dTAO, I discussed the obvious flaws in the dTAO token economic model with several crypto analysts—high market capitalization does not equal high revenue, nor does it mean that more value is truly created.

But I did not expect this theory to be validated by the market so quickly. The workings of the free market are always surprising.

Just before the dTAO upgrade, an anonymous user took over subnet 281 and directly transformed it into a meme coin subnet, naming it "TAO Accumulation Corporation," abbreviated as "LOL-subnet." This was clearly unrelated to AI.

On the (now deleted) GitHub page, it stated… no mining required, just hold the tokens—completely turned into a Ponzi scheme.

In the LOL-subnet (subnet 281), miners do not need to run any code, and the validator scoring mechanism is entirely based on the number of subnet tokens held by miners. The more SN28 tokens held, the more TAO release they receive.

What actually happened was: speculators bought SN28 tokens → SN28 price rose, SN28 price rose → received more TAO release, if TAO release exceeded the subnet'