TAOFU's Mikel & Mitch: Enabling Capital Formation for Subnets on Bittensors $10B+ Network

This episode of The Deli Podcast features TAOFU's founders, Mikuel and Mitch, who are pioneering new capital formation avenues for subnets on the Bittensor network, aiming to democratize access and foster innovation within the rapidly expanding Crypto AI ecosystem.

Introducing the Founders and Their Journey to Bittensor

• Mikuel's Background: Mikuel brings a strong foundation in Decentralized Finance (DeFi), particularly on EVM (Ethereum Virtual Machine) compatible chains.
  • He co-founded a regulated DeFi-native yield farming fund in Amsterdam over three and a half years ago.
  • His experience includes deploying a lending and borrowing market called Lendle on the Mantle Network.
• Mitch's Background: Mitch's expertise lies in the growth side of crypto, having assisted exchanges and platforms with large-scale growth campaigns.
  • His entry into crypto was driven by a desire to access high-quality deal flow, aligning with TAOFU's mission.
• The Bittensor "Red Pill" Moment: Mitch described his discovery of Bittensor (TAO) around the time of ChatGPT's emergence, recognizing AI as the next major technological wave.
  • He was intrigued by the Bittensor whitepaper and noticed significant interest from "ETH Maxis" (strong proponents of Ethereum), signaling its potential.
  • Mitch shared his conviction with Mikuel in late 2022, when TAO's market cap was around $180 million, a fraction of its current multi-billion dollar valuation. Mitch recalled, "I was like, 'Oh, wow. This actually might be the next big thing.' And that's like pre-subnets, pre-detail, pre-everything when everything was really premature and early."

The Genesis of TAOFU: Addressing a Capital Need

• Mikuel and Mitch initially identified a gap in the market: there was no straightforward way to purchase Bittensor's TAO token, especially for institutions.
  • Their first concept was a liquid staking protocol for TAO, designed to be institutionally friendly, providing a secure method for acquiring and holding TAO.
  • This was crucial as TAO had limited exchange listings and only one known custodian in the Netherlands offered services for it.
• Regulatory hurdles, specifically the announcement of MAR (Markets in Crypto-Assets) regulation, rendered their initial liquid staking protocol unfeasible as their custodial partner backed out.
  • This forced them to spend six months developing their own institutional-grade custodial setup.
• The announcement of DTAO (Dynamic TAO) then fundamentally altered the landscape, making their liquid staking model less viable.
  • DTAO represents a significant shift in Bittensor's incentive mechanism. It moves power from a vote-based system, where a few large validators decided incentive allocation, to an economic, market-based system where the price of a subnet's token dictates its share of TAO emissions. Mikuel explained, "it is now fully transformed to an economical and market-based system where price dictates how much incentives all of these subnet gets."

TAOFU's Mission: Capital Formation for Bittensor Subnets

• TAOFU aims to solve the critical challenge of capital formation for projects wanting to build subnets on Bittensor.
  • Subnets are specialized, decentralized machine learning networks within the broader Bittensor ecosystem, each focusing on a specific AI task or service. They compete for TAO emissions based on their perceived value.
• Bittensor's emission structure allocates 41% of rewards to miners, 41% to validators, and 18% to subnets. The amount of TAO a subnet receives depends on the Exponential Moving Average (EMA) of its token price.
• Before TAOFU, investing in subnets was opaque, often happening behind closed doors, with no clear exit strategies for early backers beyond selling subnet-specific tokens, which could negatively impact the subnet's emission-earning potential.
• The Challenge of Launching Subnets Pre-TAOFU:
  • Prior to DTAO, registering a subnet cost over $1 million in TAO, a significant barrier. This TAO was locked up but refundable upon deregistration.
  • Post-DTAO, registration costs are lower (around 150 TAO, which is now burned), making it more accessible but still requiring upfront capital.
  • Mikuel highlighted that some early funding deals for subnet slots were "quite predatory," forcing owners to give up large portions of their ownership.
• TAOFU's Solution: TAOFU democratizes the funding process for new and existing subnets.
  • It allows subnet owners to tokenize a portion of their future potential, selling these as SNS (Subnet Seeds) tokens on TAOFU's launchpad.
  • This provides upfront capital for operational costs, development, or network validation, without forcing the sale of the subnet's native "alpha" tokens, which directly influence TAO emissions.
  • Tommy, the host, summarized, "Would it be simplifying too much to say that TAOFU is a launchpad for future subnets where the owners can sell a percentage of their future emissions upfront so that they don't have to sell their subnet tokens which impacts the price negatively?" Mikuel confirmed this as a "perfect description."

How TAOFU Works: The Tokenization and Sale Process

• Technical Foundation: Bittensor is a Substrate-based chain (built on Polkadot's SDK) with a Frontier integration for EVM compatibility. Subnet logic primarily resides on the Substrate layer.
• Tokenization Steps:
  1. The subnet owner transfers full ownership of the owner key to a joint multisig wallet. Co-signers include TAOFU, the subnet owner, and two trusted third-party entities.
  2. The subnet owner receives proxy access to the admin pallet for operational upgrades but cannot unilaterally control financial aspects like the alpha tokens.
  3. TAOFU generates a specific smart contract for each subnet, minting 21 million fungible SNS tokens.
  4. The subnet owner decides the percentage of SNS tokens to offer on the launchpad.
  5. The TAOFU funder base participates in the sale.
  6. Post-sale, participants claim their SNS tokens. TAOFU automatically adds liquidity to its native DEX using a portion of the SNS and the raised funds.
• Investor Considerations: Investing in SNS involves speculating on a subnet's future performance, the team's execution capabilities, and its ability to attract TAO emissions. The locking of the subnet's alpha tokens in a multisig is a positive factor, reducing potential sell pressure.

Navigating the Bittensor Ecosystem: Competition and Value Capture

• A key challenge discussed is the fixed number of TAO tokens emitted per block, while the number of subnets is expected to grow. This means potential dilution of incentives per subnet.
• Mikuel emphasized the need for the Bittensor ecosystem to "grow the pie collectively" by attracting external value capture from both Web2 and other crypto domains, rather than cannibalizing value from within.
  • He stated, "the most important factor is not to cannibalize from within the system... the better goal would be to collectively strive to attract as much value capture from the outside world."
• Successful subnets launched via TAOFU can contribute significantly to this overall value growth.

TAOFU's Curation and Due Diligence Philosophy

• TAOFU operates as a permissioned launchpad, implying a level of curation and responsibility towards its community.
• Key Evaluation Criteria for Subnets:
  • Team's Ability to Deliver: Assessing if the team can execute on its promises.
  • Business Viability: Looking at projects from a traditional business perspective, including potential Web2 relevance and how they leverage TAO incentives to subsidize costs. Mitch noted, "if they're able to leverage TAO and basically subsidize part of their costs through the incentives that TAO offers... That could be a really interesting case."
  • Value Accrual to SNS Holders: Ensuring a clear mechanism for how external value captured by the subnet or its parent business funnels back to benefit SNS holders, especially if the subnet is part of a larger enterprise.
  • Reasonable Valuations: While the final decision rests with the subnet owner, TAOFU imposes constraints on what it deems reasonable valuations for sales.
• TAOFU plans to work with a curator model, potentially collaborating with entities like Contango or Yuma for due diligence.

Vision for Future Subnets and AI's Trajectory

• Dream Projects for TAOFU:
  • Mitch expressed excitement for creative AI applications: advanced music generation, AI agents repopulating old games, or creating alternate endings for movies.
  • Mikuel hopes to see builders creatively use Bittensor's infrastructure for diverse problem-solving, even beyond direct AI or crypto applications. He also stressed the importance of privacy-focused LLM solutions, allowing users to have their own trained models with secure storage.
• Broader AI Perspectives:
  • Both founders are optimistic about AI's rapid advancements, citing Google's recent presentations.
  • Mitch foresees AI driving significant improvements in areas like drug discovery and overall quality of life, potentially extending lifespans.
  • Mikuel echoed this, particularly highlighting the intersection of robotics and AI, and believes current generations might live to be 120-200 years old due to AI-driven breakthroughs.
  • Regarding Artificial General Intelligence (AGI), Mitch suggested it might arrive "sooner than we think, maybe 2027 is a good guess."

Introducing Tao Private Network (TPN): TAOFU's Inaugural Subnet Sale

• TAOFU is not only a launchpad but is also launching its own subnet, Tao Private Network (TPN), registered as Subnet 65. It was the first subnet registered post-DTAO.
• TPN's Purpose: To provide developer-friendly, open infrastructure for building global IP tunnels.
  • The flagship product is a consumer-facing VPN application, showcasing the capabilities of a decentralized VPN powered by Bittensor.
  • The underlying infrastructure is open for any developer to build upon, enabling secure and private IP connections across over 80 countries.
• How TPN Leverages Bittensor:
  • TPN utilizes Bittensor miners to power its VPN services, significantly reducing infrastructure costs.
  • Miners are incentivized with TPN's alpha token (Alpha 65).
  • Future plans include implementing payment rails where users pay microtransactions for IP connections, with proceeds used to buy back the Alpha 65 token.
  • The subnet's incentive mechanism is adaptable, allowing TPN to reward miners based on current needs, such as lower latency, higher bandwidth, or greater geographical IP uniqueness. Mikuel described it as "this ever-evolving moving river meandering to where it needs to go."
• TPN Sale Details:
  • The sale for TPN's SNS tokens will occur in the upcoming weeks (monitor TAOFU and TPN official X/Twitter accounts for exact dates).
  • A whitelisting period will precede the sale. The sale itself will have a fixed price with a soft and hard cap.
• Vesting for TAOFU Sales:
  • For SNS sale participants, there is no vesting; 100% of tokens are claimable immediately after the sale concludes, as the sale price is identical to the initial DEX listing price.
  • The subnet owner's portion, TAOFU's commission, and any curator's commission are subject to a mandatory 2-year linear vesting schedule.

The Future of the TAOFU Platform

• TAOFU's platform encompasses more than just sales:
  1. Tokenization Services
  2. Launchpad for Sales
  3. Native DEX for SNS token trading
  4. Bridge Interface: A user-friendly interface for the official OpenTensor Foundation bridge (EVM to Substrate and back).
  5. Governance Module: SNS holders can vote on how the accrued alpha tokens in the owner key are delegated to validators.
  6. Analytics: Detailed analytics per incubated subnet for SNS holders.

Conclusion: Democratizing Access and Fueling Bittensor's Growth

TAOFU is strategically positioned to lower capital barriers for AI innovators on Bittensor, fostering a more diverse and robust ecosystem. For Crypto AI investors and researchers, TAOFU offers a new avenue for early-stage exposure to Bittensor subnets and a platform to monitor their development and governance.