Full article by: Yubrew
My snap response was elevated anxiety and wiping sweat off my forehead. Immediately tao emitted to lp’s is cut in half. Any sell pressure from miners could tank net tao flow, quickly snowballing out of control
But after calming down, I realize good subnets could prosper. I’ll go into a bit of subnet history, but you can skip ahead to “why good subnets win”
Here’s a quick overview on the evolution of subnet emissions –
Phase 1: subnets get tao
Subnets got risk free capital in the form of tao emissions. Subnet owners just had to convince root validators to point emissions towards them. Validators had to evaluate and decide how to set weights. This was very centralized, and made things political with high registration fees towards the end.
Phase 2: dynamic tao
Subnets get tao emissions based on ema of price.This moved things in the right direction with the incorporation of market dynamics. Every subnet gets their own token and lp. The tao emissions get sent directly to the subnet lp. Now voting for subnet weights costs tao, and misallocations of weight into bad subnets result in loss of capital. Merit increasingly matters to get higher prices. It is also more decentralized and free market as more people are involved in voting with their tao.
Phase 3: net tao flow
Some zombie subnets have deep liquidity in their LPs so large sells do not have much price impact and discourages continuous competition and innovation on a subnet owner level. The fix is net tao flow, rewarding subnets that continuously have buying demand whether from investors, revenue and buybacks, or other.
phase 3.1: tao halving
TAO halving basically cuts root staking yield in half. Also cuts TAO emissions to subnet lp’s in half. This is a chain event similar to Bitcoin halvening, reducing block rewards by 50%. The problem is subnet alpha still gets emitted at the same rate until each subnet’s alpha halvening. In the meantime, subnet price across the board could tank.
As we enter phase 3.1, who is set up to win? or “why good subnets win”
Here’s my layman’s intuition – There are currently 128 subnets, and there’s a lot of bullshit in there essentially robbing TAO emissions. The effect of net tao flow + tao halvening means less bullshit is tolerated and will go to 0 faster. It’s a much needed purge that will increase the output quality of the average subnet.
This is the mathy reason why good subnets win (credit const?):
a) less Tao available to buy to stake
b) less alpha (alpha_in) available to get from the LP
Resulting in 1.5x more scarcity in alpha of good subnets
I also think this shift in incentives will make it easier for good subnets to rise up to where they should be. If a subnet doubles in price, it effectively gets the same rate of TAO to the LP.
I operate a subnet, this is just my opinion, maybe your opinion’s different:
revenue > team and opportunity > investability > onchain and offchain financials > structural outflows > intangibles
1. Subnets with substantial revenue and profit
So far there are several promising subnets that could crack substantial revenues, but no one has delivered 10m arr to 100m arr. Whichever subnets achieve this reach rarified status and they automatically win.
In lieu of hard revenue, we need to go by proxies, which is the next point.
2. Team and Opportunity
These are where you ask standard seed VC questions:
– Who’s in the team? – What is their background and have they done anything impressive? Are they capable, ambitious and high integrity? – Is the problem big and why does the team care? – Is the opportunity big? – What’s the team building and where are they at? – Do I think they can become successful? – Is now the right time? Is the market growing fast?
3. Investability
I prefer doxxed teams who have accomplished exceptional things. I like no prior conflicts of interest. This might include legal things like an entity optimized to own the subnet, clean cap table and ideally only alpha as the value accrual instrument, sufficient domain experience, able to explain things well, a history of building and shipping.
This means no equity investment, no operating multiple subnets, no other tokens. I want 100% effort going into one thing, and if the team wins, only subnet alpha should accrue value.
There is a conflict of interest with those that have raised rounds from equity or have multiple tokens. Their alphanomics may be more complicated with potential conflicts on multiple classes of stakeholders. I think having one group running multiple subnets is not investable. Which token will accrue value? If I don’t know, I don’t invest.
Price is also a factor. Is their chart down only, and keep going down? Did their chart hit equilibrium and potentially ready for an up move? Is their chart up only, and a crowded trade? Successful investing means getting into something good that others have not yet recognized.
4. Subnet Financials
Do the owners sell alpha? If so, how much and is it reasonable? Did they raise outside financing? Do they have other tokens? Do they need to sell alpha in the future?
It’s easy to scan subnet twitter for fundraising announcements, otc deals, key hires, partnerships, etc.
Less visible but very useful are bootstrapped teams who have not sold any alpha. Financial austerity and capital preservation will probably be the dominant strategy. Being able to do more with less is very helpful and a good trait to look for when less tao is coming in.
5. Structural outflows from miners and validators
If it costs a lot to mine, miners need to recoup their costs through selling alpha. Cheaper operational expenses from a well designed IM leads to less structural tao outflow from miners and stakers.
Infrastructure projects are in an interesting spot. I think they are the closest to PMF considering the high margins and costs of centralized alternatives and high demand from clients but infra is not free.
6. Intangibles
It’s hard to be a subnet owner. You’re hit with a lot of demands and constantly need to juggle different priorities. How you deal with these challenges and eventually succeed is done differently by each team. But there are common threads.
Harsh Truth
I’m not an investor. I haven’t gone through all of this analysis for each subnet. But going through the work and diligence is how I would approach it. After all these filters, there are likely only 3-5 subnets worth investing in.
Did I hit all the points? Which subnets are on your short list?
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