The analysis of Value-Capturing structure of TAO, the Bittensor’s Native Token

Our first token analysis report is focused on the value-capturing analysis of TAO, the Bittensor network token. In this article we will dive deep into the Origins of Value and the Value Capture Mechanisms that are behind the TAO value accrual. In case you are not familiar with Bittensor and/or want to have a closer look on the research developed so far, read our original research document.

a) Origins of Value (OoVs)

Firstly, we identified Bittensor(TAO) origins of value.

Value Transfer [1]: The value transfer OoV stems from the TAO's role as a native value transfer unit within the network, facilitating transactions and access to AI services. This transactional utility translates directly into value capture through the volume of settlements that occur with token usage, thereby creating demand for a token.

Future Cashflow [2]: The future cash flow is realized through staking and mining rewards that incentivize participation in network validation and the contribution of computing resources. The value to a token holder comes from receiving cashflow.

Governance [3]: Governance OoV empowers TAO holders to participate in decision making regarding the network's proposals. In the case of governance, the value to the holder comes from the ability to manage the allocation of network resources.

Risk Exposure [7]: Risk Exposure is incurred through staking, where the possibility of slashing for malicious behavior acts as a security mechanism - like double-signing a transaction or being offline for an extended period - for necessary coordination measures to ensure robust operation of the network. There’s often a cooldown period where the staked tokens cannot be moved immediately. In general, it is a negative OoV for a token holder while also increasing network security. Additionally, it makes the token more scarce by decreasing the number of tokens in free circulation.

Conditional Action [8]: Conditional Action OoV reflects actions that need to be done by token users to activate its utility, specifically:

  • the need to vote to get value from governance participation;

  • the need to provide computing power to earn cashflow from mining;

  • the need to validate blocks and participate in consensus to earn cashflows from validating the network.

    Finally, it encourages specific actions that are needed for network operation powered by the community-run nodes and actions. As a result of successful work delivered, it further drives the utility and demand for TAO.

b) Value Capturing Mechanisms (VCMs)

Firstly, we identified value-capturing mechanisms powering economic functions of Bittensor (TAO).

  1. Value transfer [1]: This trivial mechanism of Value Transfer [1] reflects TAO's unique function as a native currency for transactions within the Bittensor ecosystem, including the purchase of blockspace, computational resources, and paying requests to AI models. This transactional utility creates consistent demand for the token, as users need TAO to use the network and consume AI services.

  2. Work token [2] [7] [8]: The TAO ecosystem needs miners to provide computational power to train and run AI models. It requires the application of a mechanism that protects the network from malicious behavior of miners and at the same time motivates them to work correctly by means of rewards.

    The protection measures require the application of cryptoeconomic security primitives as a necessary condition for successful miner coordination. It is done via token staking (as skin-in-the-game) and slashing, which is Risk Exposure[7]. The Conditional Action[8], which is the provision of computational resources in the case of Work Token VCM, is rewarded by Future Cashflow[2], which comes from network emissions and user payments for AI access.

    A portion of the TAO emission (41%) is attained by subnet miners as a reward for producing intelligence and providing computational power. These agents earn the TAO token according to their efforts on data validation, model training and inference tasks. On the other hand, another portion of the TAO emission (41%) is attained by subnet validators as a reward for producing miner-value evaluations that are in agreement with the subjective evaluations produced by other subnet validators, weighted by their combined stake.

  3. Consensus token [2] [7] [8]: To establish consensus in the underlying blockchain network, Bittensor uses a mechanism called Yuma Consensus. The Yuma Consensus algorithm is a mechanism that uses a stake-weighted matrix to determine how incentives should be distributed among the Subnet Miners. It also calculates dividends for the Subnet Validators. Essentially, this algorithm translates the performance assessments into tangible rewards, incentivizing Miners to perform well and Validators to accurately assess performance through cashflows [2].

    The mechanism operates by reducing the rewards for those whose scores deviate from the majority's consensus. As a result, these individuals or groups have less influence in subsequent scoring rounds, while the majority's influence is strengthened. Over time, this ensures that the majority's fair and honest assessments prevail, mitigating potential exploits [7].

    Yuma Consensus, is "agnostic," which means that the algorithm is designed to operate independently of any specific Subnet, or type of content. Focusing on the integrity of the process rather than on external factors that could introduce bias. It ensures that rewards and Validations are based solely on the merit of the work performed, as measured against the algorithm's predefined criteria [8].

  4. Generalized governance [3] [8]: The network requires governance that should be done by the community of TAO holders. For this purpose, the Generalized Governance[3][8] VCM is used with a specific two-tiered implementation including Triumvirate and Senate.

The Triumvirate is a group of three Opentensor Foundation employees responsible for creating proposals, while the Senate is a group of delegates who have been elected to participate in proposals and who control a significant portion of total TAO’s stake. Any delegate participating in the Senate can vote on active proposals within the time bound from their creation to their conclusion. If a delegate does not vote, their absence is considered a disapproval.

The OoV-VCM diagram for Bittensor(TAO) is presented below:

The OoV-VCM-VCIP map for Bittensor(TAO) token
The OoV-VCM-VCIP map for Bittensor(TAO) token

In this token analysis we applied a novel, hierarchical, demand-side classification of tokens according to their origins of value, the value-capturing mechanisms that manifest them to Bittensor(TAO) token.

Our goal is to continue scaling the framework by finding new VCMs and VCIPs existing in tokens as well as building novel valuation models of tokens of such nature. Stay tuned!

About Valueverse ResearchValueverse is a research lab focused on economic research in web3, with particular emphasis on mechanism design and economic foundations of token utility.

The lab develops and maintains a classification framework for token analysis and design that considers the origins of value and the value-capturing mechanisms that manifest them.

More updates at Valueverse X account.

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