Before Dynamic TAO, Bittensor implemented its governance mechanism through a centralized protocol known as the Root Network. The Root Network placed governance powers in the hands of the top 64 validators — those holding the greatest amount of delegated TAO — to decide how TAO emissions should be distributed across all the subnets in the network. These validators decided on the subnets receiving the TAO emissions and, hence, which digital commodities will be produced and developed across the whole ecosystem. There were, however, obvious weaknesses in this governance model. The degree of power vested in these very few validators provided a very conducive ground for misappropriation, corruption, and oligarchic control, conditions that would weaken the network’s integrity.
The Root Network's nature is centralized, so decisions on TAO distribution often represent the subjective preferences of these validators rather than objective judgments of subnet performance or potential. This creates a scenario where the growth and development of Bittensor subnets are largely driven by a few interests instead of those belonging to the wider community of TAO holders.
As Bittensor was developed further, it became all too obvious that the time had come to pivot away from this centralized governance scheme to a new model that would better ensure survival and success for the future. The limitations of the Root Network, especially its vulnerability to central control, led to the determination that critical advancements should be made towards a more decentralized and market-driven system of governance. This was not just a change in power redistribution over the network; it allowed subnets to become measured and rewarded by performance and contribution within the ecosystem.
The evolution toward decentralized governance reflected the understanding that growth for Bittensor ultimately came from broad, active participation and input from most, if not all, of TAO holders. OpenTensor's intent was to democratize the decision-making process by letting everybody's collective wisdom guide how TAO emissions should be allocated. Not only does this strategy avert the risks that come with centralized control, but it also sees to it that the network's resources are put to better use in driving innovation and creating valuable digital commodities.
Dynamic TAO, applying a dual-token mechanism, significantly changes the Bittensor ecosystem. This mechanism differentiates the conventional TAO token, held in a wallet’s balance (coldkey), from the newly introduced Subnet Dynamic Tokens (e.g., ALPHA, BETA), now held in the wallet’s staking account (hotkey). This bifurcation of coldkey-held TAO and hotkey-held Dynamic TAO allows users to perform more flexible staking or unstaking operations based on the prevailing exchange rate in the Dynamic TAO pools.
The process of staking and unstaking, therefore, becomes a dynamic one, whereby the amount of staked TAO gets converted to Dynamic TAO while the reversion takes place, depending upon the instantaneous exchange rate as determined by the pool. This exchange rate will be affected by the reserves of TAO and Dynamic Tokens inside the pool, hence effectively establishing a free-market mechanism indicating current interest in staking from a subnet. With an operation that is this flexible in regard to staking, it can quickly adjust to reallocation in such an efficient way that is so pivotal to the whole idea of Dynamic TAO.
One of the most revolutionary aspects of Dynamic TAO is the shift from a validator-driven TAO distribution model to a price-driven model. Before, TAO distribution depended on the Root Network, in which a minor set of top validators had the privilege to distribute emissions. Dynamic TAO will replace this top-down system with one that is market-driven, not under the control of the Foundation or cabal, but in which the distribution of TAO to subnets is determined by the demand for each subnet's Dynamic Tokens as reflected in the pool prices.
As a result, every subnet within the Bittensor ecosystem will have its own Dynamic Token, the price of which fluctuates based on the demand for staking within that subnet. The price of Dynamic Token within a subnet increases whenever there is high demand for services in some particular subnet, leading to more TAO emissions provided for that particular subnet. It is the market mechanism that self-assures the TAO emissions are allocated toward the most valuable and demanded subnets, making the ecosystem more efficient and competitive.
Each subnet pool involves three types of tokens:
ALPHA_IN, BETA_IN): Used primarily for accounting within the pool.ALPHA_OUT, BETA_OUT): The tokens held by users in their wallets after staking TAO.