What is Tezos? A Detailed Review
When you think of smart contract platforms running on public blockchains, Solana and Ethereum would be the two big names coming to your mind. While the former is well-known for its high performance and low fees, the latter is chosen for its 100% uptime and mass users.
What if we tell you there’s another blockchain built using proof-of-stake (PoS) sharing similar, if not better, functionalities with a booming ecosystem across all verticals? Yes, we are talking about none other than the Tezos blockchain.
Over the years, Tezos has evolved into one of the better smart contracts platforms in the crypto space for building decentralized applications. Tezos also set itself apart from other layer-1 blockchains by eliminating the need for hard forks and implementing a unique on-chain governance system, making it a “self-amending” blockchain.
In this article, let’s understand how that works and share some exciting use cases developing in the Tezos ecosystem. Before we get into the inner workings, let’s recap the origin story of Tezos.
Tezos is one of the most time-tested PoS blockchains in the industry. Founded in 2014 by Arthur and Kathleen Brietman, Tezos started as an alternative to fix the inefficiencies of proof-of-work blockchains like Bitcoin. The couple published a position paper under the pseudonym L.M Goodman, sharing how they would implement on a protocol level with native token XTZ. Soon later, they also shared a whitepaper with updated details.
The development of Tezos was underway under a registered entity called Dynamic Ledger Solution, now recognized as the Tezos Foundation. The Brietmans received close $600,000 from early backers but ran out of funds after a short period. So they raised an additional $1.5 million from one of their close associates before launching an ICO.
In 2017, the Tezos foundation conducted an Initial Coin Offering (ICO) to officially launch the blockchain. As the wider crypto community believed in the vision of Tezos, the ICO was oversubscribed and raised a record amount of $232 million. But what came after shocked the investors and delayed the launch by more than a year.
Tezos Foundations made it compulsory for ICO investors to share their details and pass a KYC/AML check. As Tezos was under regulatory pressure, the founders claimed it was not their call. This divided the community, and people lost hope in the project. Tezos Foundation also had to pay $25 million for wrongfully selling unregistered securities. After all the dust settled, Tezos launched its beta in 2018.
Considering the ups and downs faced by Tezos early on, it’s remarkable how well they continued to build one of the strongest communities in crypto and delivered on promises made on the technical front.
What Makes Tezos special
Tezos thrived in adverse environments over the years because it followed different approaches to building a decentralized blockchain with smart contract functionality. Some of the characteristics shaping the uniqueness of Tezos are given below:
Liquid Proof-of-Stake (LPoS)
Most blockchains have adopted a proof-of-stake consensus mechanism to stop relying on miners and heavy machinery to help facilitate transaction verification. With PoS, anyone can become a validator after staking a certain amount of native tokens. This instantly reduces the carbon footprint and removes entry barriers for network participation.
At the same time, PoS promotes large token holders to receive the maximum rewards, making the blockchain less decentralized. While PoS blockchain punishes bad actors by slashing their staked tokens, the validator selection process is not optimal and favors small network users. This created variations of PoS, one of which is liquid proof-of-stake (LPoS).
LPoS is unique because it allows token holders to delegate their validation rights to other network participants without losing ownership. This is similar to delegated proof-of-stake (DPoS) with few differences.
One, LPoS can support tens of thousands (max 80,000) of validators instead of a few dozen in DPoS, making Tezos blockchain dynamic on the consensus level. Two, LPoS doesn’t need a voting system among users to decide on a validator.
Tezos brought classification to governance on blockchains by introducing self-amending functionality through a collective voting mechanism. Every token holder of ETZ can vote on governance proposals. And based on the result, the protocols will automatically implement the upgrade without creating hard forks.
For an upgrade to go through, it must first pass five stages of Tezos governance, including Proposal, Exploration, Cooldown, Promotion, and Adoption. The ones voting on the proposals and leading governance are called bakers. To make a proposal, these network participants stake a minimum amount of 8,000 XTZ, which is now cut down to 6,000 after the recent Tenderbake upgrade.
If the proposal gets 80% “yay” votes after removing the non-abstaining or “pass” votes, it will be tested on the testnet. This ensures no impact on performance is observed on the main blockchain network. Once testing on testnet ends, the community and core Tezos developers will engage in discussions and submit votes.
If the vote turns out again in supermajority, the upgrade will reflect on the mainnet. Lastly, after rolling out a new upgrade, we see a cooling down period to make necessary changes to the wider infrastructure of the Tezos ecosystem.
Tezos achieved a higher throughput than Bitcoin and Ethereum because of following a modular approach. By having separate protocols on its self-amending cryptographic ledger, it can distribute the tasks and make the blockchain more efficient.
The first protocol is on the network level. This has the purpose of broadcasting blocks to all the network participants and giving updates on the state of the network. The second protocol is for transactions. It executes transactions and stores them inside a block. To verify the validity of these transactions, we use the consensus layer. In Tezos’s case, the consensus layer is governed by the LPoS mechanism.
Use-Cases of Tezos Blockchain
Tezos blockchain experienced network effects these past two years after witnessing rapid and organic growth in use cases. From issuing a CBDC to hosting multiple NFT marketplaces, the Tezos ecosystem has come a long way. Here are some exciting use cases helping Tezos capture market share:
Tezos is slowly becoming one of the go-to platforms for asset tokenizations. We have seen corporate, and government entities choose Tezos to experiment and tokenize certain asset classes. For example, the French central bank selected Tezos to run its CBDC trials and issue digital Euros.
Tokenization on Tezos also expands to real estate. When physical assets like real estate are tokenized, the purchase barrier is lowered, and collective ownership is promoted. This improves price discovery and injects much-needed liquidity into the real estate market. Elevated Returns is one company using Tezos to tokenize real estate worth up to $1 billion.
More importantly, Tezos uses blockchain tokenization to create digital securities or security tokens (STOs). As regulators monitor asset issuance, there are no legal challenges in using STOs for raising funds. It is also more efficient than the traditional venture capital route because there are no intermediaries. Further, it gives access to hard-to-reach assets to investors worldwide. Vertalo, Equisafe, and Andra Capital are among a few companies and firms using Tezos to issue STOs.
The majority of the activity on Tezos comes from NFT marketplaces. Despite the weak sentiment in the markets, Tezos remained a dominant figure in the NFT space. Artists felt Tezos was a safe and affordable platform to launch their collections. As the art stood out from other marketplaces, Tezos instantly became a favorite of NFT collectors.
The top four applications by active users on Tezos belonged to the NFT ecosystem, with Objkt accounting for 40% of activity. The partnerships with well-known brands also put Tezos in the spotlight. Some partners are Shopify, Manchester United, Red Bull Racing, Oracle, Ubisoft, Papa Johns, and LVMH Guerlain.
Compared with Ethereum and Solana, the NFT volume on Tezos might not seem significant. However, it is acting as one of the catalysts driving adoption. As Tezos is more art-centric, mainstream artists are attracted to digitizing their work and tapping into their communities. Further, the low cost makes launching a collection for any artist easier.
Blockchain gaming is an emerging trend capable of onboarding billions of users to Web3. Some projects are selecting Tezos as their blockchain because it can scale at low costs. Although we are yet to see any breakout title from the Tezos ecosystem, we have to acknowledge there’s progress being made. More than a dozen games are now hosted on the Tezos blockchain with a growing player base. Some top games are Emergents, Pigs at War, PiXL, and Play with BRIO.
The decentralized protocols of Tezos are responsible for most activity after NFT marketplaces. Tezos smart contracts enable financial instruments to be mapped to their decentralized versions. From insurance and synthetic assets to DEXs and on-chain oracles, the DeFi ecosystem of Tezos is growing rapidly. The total value locked in DeFi is $40 million in Q3 2022. Some of the most-used DeFi protocols on Tezos are Youves, Kolibri, QuipuSwap, and Plenty Defi.
Two more promising use cases of Tezos are DAOs and decentralized identities. As the DAO landscape expands, Tezos is building the right tooling for better onboarding and management. In the case of identities, Tezos is leveraging Spruce System to give users control of their identity. This can make crypto space more equitable as identity verification removes bots permanently.
Future Direction of Tezos
Tezos has been consistent in delivering updates over the years. Since May 2019, Tezos has shipped 11 upgrades improving the functionality and overall infrastructure of the blockchain. In 2022, we saw more focus on increasing the scalability factor of Tezos. It started with a change in the consensus algorithm to Tenderbake, similar to the Ethereum Merge.
While shifting to Tenderbake was the biggest upgrade in Tezos history, it didn’t change anything performance-wise. This is where the Jakarta upgrade comes into the picture. Tezos uses Transaction Optimistic Rollups, a layer-2 scaling solution, to improve the network’s speed. It is still under development and is yet to launch for smart contracts.
So Tezos is on the verge of achieving throughput, which is now at 400+ TPS, of more than a million transactions per second. Also, the blockchain is gearing up to become EVM compatible, giving developers more opportunities to come to build on Tezos.
On the technical aspects, the future is bright for Tezos, and we can expect many more DeFi apps to come from its ecosystem. It is also within reach to see Tezos do well in the NFT space by onboarding artists and adding more functionality. If the utility is tied back to the native token XTZ, it can also do long-term well.
Born and brought up in India, Karthikeya Gutta is a crypto journalist and freelance contributor for ItsBlockchain. He covers various aspects of the industry with in-depth analysis and research. His passion towards blockchain and crypto ecosystem is mainly because he believes it can really change the world and help millions of people.
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