What is Tezos?
Jul 30, 2020 - 6 min read
One of the major platforms for smart contracts and a high achiever of the 2020 crypto markets, Tezos attracts both investors looking to diversify their crypto portfolios via an alternative store of value, and developers working with high-value digital assets and financial applications. Tezos is a proof-of-stake (PoS) blockchain with on-chain governance and a built-in mechanism for incorporating future technological innovations to always remain state-of-the-art.
The history of Tezos began in 2014 when Arthur Breitman and Kathleen Breitman, under the pseudonym LM Goodman, published a position paper, outlining the motivations and philosophical underpinnings of Tezos. Shortly after the position paper, a more technical white paper was published.
The proposed Tezos protocol addressed one of the major drawbacks of blockchain technology as seen at that point, so-called “fork-based governance”. To tackle this, the Tezos protocol incorporated an on-chain governance mechanism and self-amendment to lower the coordination costs required to upgrade the blockchain. On-chain governance means that all proposed protocol amendments are voted on by token holders. If a proposed amendment is approved via this decision-making process, then it is automatically implemented via self-amendment. It is expected that changes beneficial to the community will be approved by voters, and “hard forks” can be avoided. This is meant to better retain the network effect of Tezos over time.
In 2017, the Tezos Foundation launched one of the most popular fundraisers to date and managed to accumulate $232M in donations to support the development of the protocol outlined in the Tezos white paper – the highest sum raised by a crypto project up to that time.
After the network’s launch in June 2018, the Tezos ecosystem established a more institutionalized and solid presence in the now more mature crypto markets. In 2019, Tezos stakeholders approved and implemented two protocol amendments – Athens and Babylon. Both included changes to make staking the native Tezos cryptocurrency (XTZ), also known as “tez,” more attractive, while Babylon also simplified the development of smart contracts on Tezos.
The expansion of the Tezos ecosystem is promoted by the Tezos Foundation in Switzerland, which supports the Tezos community through financial grants and knowledge sharing. The Foundation also invests in forward-looking blockchain research, for instance in collaboration with the IMDEA Software Institute in Spain.
Tezos as an open-source platform for smart contracts supports digital assets and trust-minimized financial contracts and applications. The platform’s native smart contract language, Michelson, provides high security through a formal verification mechanism which ensures that the code works as intended. This feature of Tezos is beneficial for smart contracts and applications that involve significant real-world value, such as tokenized assets or loans.
The Tezos Foundation has established several partnerships to support the digitalization of capital markets. One such project is the collaboration with the London-based Globacap, a platform for digital securities, regulated by the UK Financial Conduct Authority (FCA). Globacap will be using Tezos as the preferred underlying blockchain for its securities.
Tokenizing real estate is another use case of the Tezos blockchain. Through a collaboration with tech company tZero and Manchester property developer Alliance Investments, the Tezos blockchain is being used to tokenize £500M of the planned real estate in the UK. This comes in addition to a similar project of $1B with the US investment firm Elevated Returns. In Germany, the Tezos Foundation is working with the Fundament Group on developing digital property bonds, compliant with the regulation of the German regulator – BaFin.
In 2019, Tezos became a platform for the first smart contract issued by a public body when the French Armies and Gendarmerie’s Information and Public Relations Center validated judicial expenses incurred during investigations on the Tezos blockchain.
Tezos as a cryptocurrency gives its holders an opportunity to receive rewards for helping to secure the network, either actively (“baking”) or passively (“delegating”). The Tezos consensus protocol – liquid proof-of-stake – is a form of proof-of-stake (PoS) where token holders can participate in the consensus mechanism via delegation while retaining ownership of their tokens. When Tezos owners delegate their assets to “bakers” (similar to “miners” in Bitcoin), those bakers participate in the consensus and voting processes on their delegators’ behalf. The bakers then share rewards with their delegators. Delegating XTZ does not involve the actual transfer of the assets, so users can retain ownership of their tokens and change the bakers they delegate to at any time.
When token holders bake or delegate their tokens, they receive rewards proportional to their share of all tokens and retain their proportionate share of the total supply of tokens. When holders do not bake or delegate, their shares of the total supply are diluted over time as new tokens are minted via baking rewards. For this reason, inflation in Tezos is “non-dilutive inflation” in that holders can easily avoid dilution by baking or delegating.
With the growing interest from both private and public sectors, the market for smart contract platforms is far from being saturated. This gives room for competition and growth among the players, including Tezos.
An important ingredient in the success of Tezos is the work of the Tezos Foundation and other teams such as TQ Tezos and Nomadic Labs. In 2019, the Foundation supported projects that trained over 1,300 new developers and awarded 78 grants. The grantees include research institutions and companies such as Kyoto University and Metastate, working on security and core protocol advancements, as well as tech and decentralized finance companies developing tools and infrastructure for the expansion of the Tezos ecosystem. About one-third of the grants are distributed to support community engagement through events and hackathons in various countries around the world.
In 2020, the Tezos cryptocurrency experienced some significant price volatility and followed a general deep dive in March. The rebound for Tezos was remarkable and prompted its mention as a cryptocurrency “on track to smash bitcoin” in Forbes. At the time of writing, Tezos is among the top 15 cryptocurrencies by market capitalization, with a $2.2B market cap. Tezos is one of the most popular coins to stake, with more than 400 active bakers and a staking ratio (the percent of all tokens staked) approaching 80%.
The Tezos community is currently working on improving security and privacy of the core protocol and supporting more accessible tools for the developers. The Tezos protocol amendment implemented in March 2020 – Carthage – introduced changes that allow developers to run more complex applications. It also improved the blockchain security against possible attacks. A planned amendment proposal will implement ZCash technology to add privacy-preserving features to Tezos, if approved by stakeholders.