Tezos

What is Tezos (XTZ)?

Tezos is a second-generation blockchain, meaning that, like Ethereum, it is a network that’s based around smart contracts.

While this is a foundational similarity between Tezos and Ethereum, the two networks differ significantly in their approach toward hard forks.

Ethereum and Bitcoin, two of the oldest and most secure cryptocurrencies in the industry, have both been subject to several hard forks. Many of these have come as a result of major splits in the respective communities over ideology and philosophy. These splits resulted in spinoff currencies that still have a significant following.

Tezos claims to be “secure, upgradeable, and built to last,” and that it will “remain state-of-the-art long into the future.” The Tezos vision is to make sure the network is futureproof and innovative as blockchain technology continues to develop.

Tezos was also built with mechanisms to ensure active community governance and participation, one of the key pillars of Web3.

Beyond the avoidance of forking, Tezos also attempts to avoid the costs and potential centralization experienced by some proof-of-work networks and alleviate security concerns plaguing digital asset adoption.

When Was Tezos Launched?

Tezos went to mainnet in 2018, but its technology whitepaper was published far earlier, going back all the way to September 2014. Its founder used a pseudonym to publish this paper, in a nod to Bitcoin’s pseudonymous creator Satoshi Nakamoto.

Tezos conducted its ICO a year prior to the mainnet launch, raising a record $232 million. However, controversy has followed the project ever since.

In an ironic twist, given that Tezos attempts to avoid division as a protocol, the organizational structure put into place was the cause of severe consternation.

Who are the Founders of Tezos?

Tezos was founded by Arthur Breitman, who penned its 2014 whitepaper using the pseudonym L.M. Goodman.

He wrote that Bitcoin lacked a governance process that invited contributions from the community that uses the network and that new tokens could not be created on Bitcoin. These arguments became fundamental problems that he sought to solve with Tezos.

Breitman and his wife, Kathleen, created the Tezos Foundation in Switzerland in order to have greater autonomy over the network’s assets. Unfortunately, due to the country’s regulatory structure, their Board of Directors was granted more power over the assets than was anticipated.

The Foundation’s President at the time, Johann Gevers, locked Tezos assets away from their own creators, the Breitmans.

As a result, the project stalled and could not get going again until the Breitmans could recover control of the project’s source code and resume their work on Tezos.

How Does Tezos Work?

Tezos is a decentralized, open-source, proof-of-stake blockchain network. It enables participants to transact in a peer-to-peer fashion via its native currency, XTZ, as well as to deploy and use smart contracts.

Smart contracts are pieces of code that execute predefined actions when the requisite conditions are met, and they cannot be changed once deployed onto the network. That means users can read all of the code before interacting with it, shifting the element of trust in the transaction onto the code itself.

This allows smart contracts to eliminate the need for expensive trusted intermediaries like escrow services, banks, lawyers, etc.

One of the major benefits granted by smart contracts is that they facilitate the development of decentralized applications. Ethereum, the industry leader in the space, has a thriving network of decentralized applications, or dApps, and Tezos is commonly viewed as a potential competitor.

Tezos has attracted the attention of many large institutions when it comes to building dApps, with Red Bull Racing, Societe Generale, Gendarmerie Nationale, and Stably all involved in different capacities.

What Makes Tezos Unique?

One of the main things that sets Tezos apart is that it functions like a self-amending network, which in essence comes down to on-chain governance.

The main reason for this structure is that the main crypto assets during Tezos’ early days, Bitcoin and Ethereum, went through several major hard forks.

Hard forks take place when a cryptocurrency’s community and developers fail to find a consensus about the network’s direction. In Bitcoin’s case, one of the first major community splits came from a debate about how to scale the network to satisfy increased use.

Part of the community wanted to increase its block size. In the end, the division caused Bitcoin to experience a hard fork, with the chain splitting into Bitcoin and Bitcoin Cash. Tezos aims to avoid this sort of eventuality by being a “self-amending crypto ledger.”

On Tezos, users can vote on important network changes that can be implemented without hard forks. There are three main protocols that comprise the Tezos platform:

• Network Protocol determines blocks and broadcasts them across the chain. Everything needed by Tezos Nodes, such as downloading the state of the network, connecting users and broadcasting finished blocks, is part of this protocol.
• Transaction Protocol determines the validity of transactions by keeping a record of all blockchain information.
• Consensus Protocol lets the network reach consensus on its state. With this protocol, any upgrade or change to the network has to be voted on by platform stakeholders.

How is the Tezos Network Secured?

Tezos is a proof-of-stake (PoS) blockchain network secured by XTZ holders locking their coins into smart contracts.

This staking allows holders to delegate their tokens to specific “bakers,” or nodes on the Tezos network known as validators on other networks. Bakers have the duty of approving transactions on the network and earning rewards for doing so.

This incentivisation is one of the key tenets of PoS networks, with the other being “slashing.” Slashing is the penalty for misbehaviour or acting against the protocol by approving transactions that aren’t valid.

Bakers are given a public rating by Tezos nodes across various metrics such as yield, efficiency, free space, and overall reliability.

This structure wherein Tezos smallholders can delegate their tokens to bakers is called Delegated proof-of-stake (DPoS). DPoS also allows stakers to choose which bakers to delegate their voting power to when community proposals require election.

One of the motivations for Tezos choosing DPoS as a consensus mechanism was to avoid the potential centralization brought to proof-of-work (PoW) blockchains via mining pools.

PoW chains are secured by computers dedicating their computational power towards solving mathematical problems. The computer, or miner, that solves the problem first is credited as having produced the next block of the blockchain and is granted the block reward.

However, mining an established or growing cryptocurrency as a small miner running fewer or less powerful machines is becoming less viable since the probability of getting that block reward is akin to a lottery.

This has led to the creation of mining pools, wherein miners group up and share rewards when blocks are found by the pool. This can provide smaller-scale miners with guaranteed regular rewards. On the other hand, this often leads to centralization, where the mining pools account for a large proportion of the network’s mining power.

What is the Use of XTZ?

XTZ, also called a Tezzie, is the native token of the Tezos network. It functions as a medium of exchange on the Tezos network and, more importantly, plays a crucial role in Tezos’ on-chain governance system.

Each upgrade or modification to the network that is proposed by developers has to be voted on. Stakeholders have a voting power determined by their stake in the network, or how much XTZ they have locked away in the platform.

Developers then earn XTZ if their upgrade proposals are accepted, and validators, or bakers, are also incentivized with XTZ for their part in ensuring network security. Smallholders who do not wish to run a node can delegate XTZ to bakers and earn a share of their rewards.

Who Controls XTZ?

Kathleen Breitman is the CEO of Dynamic Ledger Solutions, the company she and her husband, Arthur Breitman, co-founded. However, the role of these founders is not crucial to the running of the Tezos network.

Thanks to the on-chain governance structure of the Tezos network, community members and developers are encouraged and, in fact, incentivized to submit proposals for upgrading the network.

These proposals are then voted on by the network’s stakeholders, creating a dynamic, decentralized blockchain network.

How Much XTZ Is In Circulation?

Tezos does not have a maximum supply for its native token, but XTZ is both minted and burned when various events occur.

Slashing of bakers is one of the major instances when XTZ is burned. XTZ is also burned when data is stored on-chain and when trades are made on the liquidity baking smart contract.

XTZ is minted when blocks are produced, when endorsements are included, and when liquidity baking is subsidized.

As of July 2022, over 900 million XTZ are in circulation.

How Do You Buy XTZ?

As an established cryptocurrency with plenty of popularity, XTZ is available on most of the major cryptocurrency exchange platforms.

It can be purchased against several fiat currencies, stablecoins, and often against major cryptocurrencies like Bitcoin and Ethereum as well.

Purchasing XTZ is often simply a matter of setting up an exchange account on an exchange that supports Tezos. However, participating in on-chain governance and staking XTZ will require non-custodial storage using a wallet.

Is It Possible to Buy XTZ Instantly?

Yes! Buying XTZ or indeed any cryptocurrency on an exchange is an instantaneous process as long as there is sufficient liquidity. However, the XTZ does not actually transfer to your account. Instead, it’s just a notional trade that you will see reflected in your account.

Shifting XTZ into a non-custodial (where you control your own assets) wallet may take a short while. Tezos is a faster network than both Bitcoin and Ethereum and can finalize transactions quickly, but withdrawing from an exchange isn’t always quite that simple.

You may have to wait until the exchange completes any required KYC (Know Your Customer) or AML (Anti-Money Laundering) activities before releasing your funds onto the blockchain and into your wallet.

How Do You Store XTZ?

Like any cryptocurrency, XTZ is stored in a wallet. Wallets exist in many types, including:

• Custodial. This is a type of wallet where another party, such as an exchange, stores and secures your tokens for you.
• Non-custodial. This is your own wallet, where your tokens are fully under your own control.
• Cold wallets. Using a cold wallet, coins are effectively in cold storage, kept offline for greater security and to avoid any sort of hacks or other attacks.
• Hot wallets. Unlike cold wallets, these wallets require an internet connection. They come in forms like browser extensions and desktop clients.
• Hardware. Hardware wallets come in the form of specialized devices like the popular Ledger wallets.

…and more.

Wallets can be a combination of these types as well, such as non-custodial mobile hot wallets like Trust Wallet, custodial cold wallet services from an institutional provider, or hardware cold storage like Ledger or Trezor.

Tezos Energy Consumption

According to Tezos, its energy consumption comes to around 0.001 TWh per year, which is significantly less than the consumption of proof-of-work chains like Bitcoin and Ethereum.

PoW is well known to consume more energy than PoS variants thanks to the fact that it needs computers to dedicate computing power to the network. The more and the more powerful the computers are, the better on a PoW network.

Meanwhile, with PoS, nodes can often be run on less powerful machines. Plus, since only validating nodes need to stay connected all the time, delegators can simply set up their stakes and delegation before going offline.

In fact, a Tezos node can actually be maintained on a Raspberry Pi 4B or CM4 with 8GB of RAM.

Is XTZ a Good Investment?

Tezos is an early star of the cryptocurrency industry. Four years on from its mainnet and eight from its conceptualization, it has survived many challenges.

Tezos combines the value proposition of smart contract blockchain technology with Web3 principles of on-chain governance and decentralization. Furthermore, it brings the energy efficiency of proof-of-stake to create a solution that ticks most users’ boxes.