$TAO The Collapse Behind: Examining the DeAI "Impossible Triangle" Through Bittensor Infighting

Author: Max.S

The market’s faith in “Decentralized AI” (DeAI) is facing an unprecedented stress test.

Recently, the absolute leader in the decentralized AI track, Bittensor ($TAO), experienced a highly destructive internal earthquake. One of the top development teams within the Bittensor ecosystem, Covenant AI, which had just successfully trained a 72B large language model, suddenly announced via social media that they were withdrawing entirely from the Bittensor network. In their departure statement, Covenant AI directly targeted Bittensor founder Jacob Steeves, criticizing his “absolute and dictatorial” control over the network, accusing him of arbitrarily cutting off token rewards for subnet participants, and outright claiming that the so-called decentralized AI was merely a carefully staged “charade.”

This black swan event caused $TAO tokens to panic sell on the secondary market, with a single-day drop of 15% to 25%, instantly vaporizing hundreds of millions of dollars in market value. The crypto community, amid the public split between top teams and founders, also began to seriously examine a deeper industry question: in an AI field heavily reliant on computational power capital and complex engineering, is tokenomics-driven “decentralization” a utopia that redefines production relations, or just a glamorous veneer covering centralized power?

To understand the destructive power of this incident, one must first recognize Covenant AI’s significance within the Bittensor ecosystem.

In Bittensor’s multi-subnet architecture, most subnets are still in early stages—API calls, model fine-tuning, or simple task routing—rarely capable of training models from scratch or handling large-scale parameter models. Teams capable of training large models from the ground up are few and far between. Covenant AI is a representative of this “hardcore” segment. Just before announcing their withdrawal, this team delivered a milestone achievement: successfully training a 72B parameter open-source large model in a decentralized network environment.

Given current compute costs, training a 72B model requires mobilizing massive GPU clusters (equivalent to thousands of H100s running continuously for weeks), incurring extremely high hardware and electricity costs. Covenant AI was willing to bear these huge upfront sunk costs primarily because of Bittensor’s “Emissions” mechanism—if their models and compute power perform well in subnet evaluations, they can continuously receive $TAO token rewards as lucrative compensation. This is the most attractive flywheel effect in the DeAI narrative.

However, the flywheel came to an abrupt halt at its peak. According to Covenant AI, after investing heavily to train and deploy the 72B model, founder Jacob Steeves and his stakeholders, through control of validator nodes, cut off the token rewards flowing to Covenant AI’s subnet without warning or transparent governance processes.

For miners and developers, cutting off emissions is akin to “pulling the plug.” The ROI of their massive compute expenditure instantly evaporates. This systemic risk—highly unpredictable—directly triggered Covenant AI’s furious exit.

The term “charade” (戏码) used by Covenant AI in their withdrawal statement precisely hits at Bittensor’s most fragile nerve: network control.

Bittensor’s core design relies on Yuma consensus, where “validators” evaluate the contributions of “miners” and decide how to distribute the system’s newly minted $TAO tokens. Theoretically, this is a decentralized game system based on staking and algorithms. But Covenant AI’s accusations reveal a harsh reality: while compute power is dispersed, power and capital are highly centralized.

In the current mainnet of Bittensor, the top validator nodes that dominate token distribution are heavily staked by early investors, the foundation, and addresses associated with Jacob Steeves. This means the founder is not only the rule-maker but also the ultimate judge.

Covenant AI pointed out that when subnet outputs do not align with Jacob’s personal preferences or threaten the interests of other “factional” subnets, Jacob can easily leverage his large staking weight to alter the Yuma consensus distribution results. This “one-man rule” intervention makes the smart contract layer’s decentralization a mere illusion. Developers spending millions on compute power find their fate ultimately subject to a founder’s subjective will or behind-the-scenes manipulation.

Objectively, Jacob and his supporters might argue they are “maintaining overall network quality” or “preventing certain subnets from exploiting rule loopholes to mint tokens.” But in the absence of transparent DAO governance, on-chain hearings, or appeal channels, such centralized interventions—“acting on behalf of heaven”—seriously undermine the core value of the network as a “trustworthy, neutral infrastructure.”

A 15-25% single-day plunge in $TAO is not just retail panic selling; it’s a re-pricing of institutional capital’s “governance risk discount” of Bittensor.

Bittensor’s high valuation and market cap are supported by the narrative that it is the only real candidate for a “decentralized OpenAI.” This grand story relies on the system’s predictability: as long as you contribute compute power and quality models, the protocol will automatically ensure your rewards through code.

The Covenant AI incident shattered this expectation. Top-tier financial practitioners and institutional investors despise “unpredictable single-node failures,” and here, that failure point is Jacob Steeves’ power.

If even the absolute top team capable of training a 72B model can be instantly rendered ineffective by founder intervention, then for other token-holders and compute providers who are watching from the sidelines, deploying heavy assets on Bittensor is essentially a Russian roulette game that could “blow up” at any moment. When high-quality supply-side actors (miners and developers) refuse to enter due to fears of centralization tyranny, the application scenarios and intrinsic value of $TAO become hollow. The frantic capital flight is an early vote of no confidence in the deteriorating fundamentals.

Covenant AI’s departure is not just a PR crisis for Bittensor; it is an inevitable pain point for the entire decentralized AI track as it reaches deeper waters. It brutally exposes the industry’s “impossible triangle” in DeAI: the trade-offs among model quality and scale, trusted decentralization, and aligned incentives to prevent malicious behavior.

Centralization of scale vs. mechanism decentralization: training cutting-edge AI models (like those above 72B) is a typical heavy-capital, centralized engineering effort requiring highly coordinated GPU clusters. This is inherently at odds with Web3’s permissionless, distributed node philosophy.

Prevention of spam vs. trusted neutrality: to prevent malicious nodes from manipulating traffic to mint tokens (Sybil attacks), the network must introduce subjective “quality assessments.” But with AI evaluation standards still not fully objective or mathematically formalized, giving this authority to a few validators easily leads to centralized rent-seeking.

Bittensor attempts to bridge these two through token economics, but the Covenant incident proves that the supporting pillar—governance mechanisms—is still fragile.

Covenant AI’s departure punctures the romantic bubble of Bittensor’s “absolute decentralization.” For $TAO, this may be a painful disillusionment, but for the entire DeAI industry, it is a necessary wake-up call.