Novelty Search July 10, 2025

This episode unpacks Bittensor's major upgrade to Uniswap V3, revealing how concentrated liquidity will reshape subnet economics, create new opportunities for yield, and introduce sophisticated market dynamics for TAO and alpha token holders.

Introduction to the Nucleus Team and Uniswap V3

The episode begins by introducing the Nucleus team, the core developers responsible for Bittensor's blockchain and Substrate framework. The main focus is the recent deployment of Uniswap V3, a significant evolution from the previous V2 model. Sam from the Nucleus team confirms a successful mainnet deployment to version 2.9.2 just before the discussion, setting the stage for a deep dive into the new mechanics.

From Uniswap V2 to V3: A New Liquidity Paradigm

• Uniswap V2 (The Old System): This model featured protocol-only liquidity. The price of a subnet's alpha token was determined by a simple liquidity pool containing TAO and alpha, with the price moving based on user staking and unstaking.
• Uniswap V3 (The New System): The V3 upgrade introduces the ability for users to provide their own liquidity. This is a critical change, as it allows anyone holding TAO and alpha tokens to become a liquidity provider (LP) and earn trading fees.
• Subnet Owner Control: Greg emphasizes that this feature is not enabled by default. Subnet owners must explicitly opt-in to allow user-provided liquidity on their subnet, giving them control over their market's structure.

The Motivation for V3: Why Investors and Miners Should Care

• Earning Trading Fees: For the first time, users can provide their TAO and alpha tokens to a liquidity pool and earn a share of the 0.3% trading fee on every swap. This creates a new yield-generating opportunity beyond staking dividends.
• Reducing Price Volatility: Cacti, an architect of DTAO and an expert on Automated Market Makers (AMMs), notes that deeper, user-provided liquidity makes the market more robust. Increased liquidity means larger trades cause smaller price swings (slippage), which benefits subnet owners by creating more stable token prices.
• Emulating Limit Orders: Uniswap V3 allows for concentrated liquidity, where users can provide liquidity within a very narrow price range. Greg explains this effectively functions as a limit order. For example, providing alpha tokens just above the current price acts as a sell order that executes if the price crosses that range.

Cacti adds, "It allows you to emulate DCAing out of a position or into a position at different price levels... overall it's just making the markets, god willing, more efficient."

Technical Changes: Fees and Limit Prices

• Simplified Fees: The old, complex fee structure—which considered factors like a hotkey's APY—is gone. It is replaced by a flat 0.3% fee on all staking, unstaking, and moving operations. Greg argues this is simpler, reduces transaction costs (gas), and is often lower than the previous variable fees.
• True Limit Prices: The limit_price parameter in a swap now functions as a true limit price. Previously, it represented the average price of a trade. Now, it defines the absolute price at which a trade will stop executing, providing more precise control for traders.

A New Class of Participant: The Sophisticated LP

• Bootstrapping Subnet Liquidity: Subnet owners can now use their own alpha earnings and external TAO to deepen their pools, attracting more traders and volume.
• Active LP Strategies: Cacti highlights advanced strategies like JIT (Just-in-Time) liquidity, where an LP provides massive liquidity in a tight range moments before a large swap to capture all the fees, then immediately withdraws it. This level of activity will significantly increase market efficiency.
• Order Book Dynamics: The ability to provide liquidity in specific ranges effectively creates an on-chain order book. This allows for deeper price discovery and more complex market structures than the V2 model.

The Future: Chain Decentralization and Funding

• Decentralizing Governance: Sam outlines the first step toward decentralizing the chain: opening up slots on the Triumvirate multisig (a group that controls key network parameters) to public election. This will gradually distribute control to the community.
• Funding Chain Validators: A key strategic question is how to fund the chain's validators in the long run. The fees collected by the protocol's own V2-style liquidity position (which now exists as a V3 position across an infinite price range) are currently accruing in an inaccessible "magical escrow."
• Potential Solutions: The team discusses several ideas for these accrued fees:
  • Giving them to the subnet owner.
  • Redistributing them to active user LPs to further incentivize liquidity.
  • Using them to fund chain validators, ensuring long-term network security.

Community Q&A: Staking, Yield, and Fee Distribution

• Yield Foregone: When a user provides liquidity, their alpha tokens stop earning staking dividends and instead earn trading fees. Cacti mentions that the math to allow staked LP positions exists but was too complex to include in this initial release.
• Fee Accrual: The 0.3% fee applies system-wide. Fees generated from swaps against the protocol's own liquidity are currently accumulating within the protocol's LP position. Cacti advocates for redistributing these fees to user LPs to boost incentives.

Cacti states, "I'm in favor of pushing this upgrade to have these fees go to actual users so that it's much more incentive... you're much more incentivized to actually provide liquidity."

Conclusion

This upgrade transforms Bittensor's subnets into active, user-driven markets. It introduces a new layer of financial sophistication, moving beyond passive staking to enable active liquidity provision. Investors and researchers must now analyze concentrated liquidity strategies to capitalize on new yield opportunities and anticipate more efficient, stable subnet economies.