Tezos was one of the most exciting cryptocurrencies to be announced during the 2017 market boom with claims of a self-amending blockchain protocol and on-chain governance. It had a hugely successful ICO that raised $232 million and has announced partnerships with major companies including Ubisoft. What has generated so much interest in this cryptocurrency?
What is Tezos?
Tezos is a smart contract and dApp enabled, self-amending blockchain platform with a focus on smart money and user participation. It was founded by Kathleen Breitman and Arthur Breitman and launched in 2018.
Tezos aims to provide a platform for Decentralized Finance (DeFi) and combat the governance issues that have arisen in other cryptocurrencies. It uses a liquid Proof-Of-Stake consensus mechanism to provide this. Tezos has a native token, tez (XTZ), that is designed to function as smart money and a stable form of value storage.
Tezos had an Initial Coin Offering (ICO) during the cryptocurrency boom of 2017 and made headlines when it raised $232 million. However this was quickly beset by controversy as part of this initial fund was locked away by the President of The Tezos Foundation, Johann Gevers after a dispute with the co-founders. This delayed the launch until the end of 2018.
Investors took legal action in a case that was settled by refunding some of the initial investment. Since then it was seen as a very promising cryptocurrency with some successes that had not met all of its goals.
However, recently Ubisoft, a popular gaming company, announced that they would be launching a blockchain-based platform on the Tezos network. This would introduce playable NFTs for use in games.
This announcement and recent partnerships with mainstream financial service providers have caused a lot of interest and speculation around Tezos and the tez token has increased in value in 2021. Tezos has also been chosen to platform many popular NFTs due to its energy efficiency including the OneOf platform.
Tezos Use Case: Staking and Baking
Tezos uses a consensus mechanism called liquid Proof-of-Stake (lPOS) for validating transactions on the network. This is similar to Proof-Of-Stake in that users stake tez tokens to take part in validating transactions and producing blocks to earn rewards.
One major feature of Tezos lPOS mechanism is that anyone can take part as a block producer either by staking the necessary amount of tez or delegating their XTZ to a block producer. These block producers are referred to as bakers within the Tezos ecosystem. The production and validation of these blocks is referred to as baking. To be a baker a user has to stake 8,000 XTZ which is known as a roll.
Block producers or bakers are chosen at random to process transactions and sign off on blocks. Once a block is validated a small issue of tez tokens are issued as a reward to the baker. This is split proportionally with anyone who has delegated coins to contribute to forming the roll. The amount of coins produced by the consensus mechanism is capped at 5% annually.
By staking tokens this way users can receive tez as a reward for participating in processing and validating transactions. As a security feature, validating incorrect information can result in losing some or all of the staked tokens. Users can also easily switch their delegated tokens to a different baker. Together this incentivizes honest user participation.
Tezos Use Case: Governance
Tezos can be credited with being a major player in the growth of on-chain governance within cryptocurrencies. Previously most blockchains used some form of off-chain governance. With on-chain governance changes to the network are encoded into the blockchain directly.
Off-chain governance involves informal governance methods. Discussion and protocol changes are discussed through many different channels on boards, at conferences or by foundations and organizations. The blockchain is altered partly off-chain and changes are often only developed by a small group of developers or a committee.
However for these decisions to be implemented the network has to reach a consensus. If not all token holders agree this can cause years of disagreement or hard forks. This can be seen with Bitcoin’s hard fork that led to Bitcoin Cash or the split of Ethereum and Ethereum Classic. This can cause instability in the market and also lead to long waiting times for changes to be adopted as people discuss it on various forums.
On-Chain Governance within Tezos
With on-chain governance, changes are not decided by a core group of developers. In this form every one can read about and discuss changes. Each voting node is able to cast votes and once a majority reaches a consensus the proposed change is implemented directly on to the code of the blockchain. This self-amending allows for collective decisions and prevents hard forks.
To take part in the Tezos governance system token holders must stake a roll or 8,000 XTZ to become a baker. Again users can delegate tokens to a baker depending on their voting preferences to take part and change their delegation easily.
This allows a decentralized form of decision-making as network upgrades are automatically enacted once a decision is reached. Many bakers are also developers who propose protocol upgrades.
Tezos and User Participation
This means every holder of XTZ coins can take part in governance either directly or by delegating coins to a baker in line with their preferences. New tez tokens are minted when a change is approved and implemented and distributed proportionally to all holders of staked coins. This prevents a concentration of new coins and encourages every coin holder to take part.
Additionally, the network requires 81% of the coin supply to be staked for a decision to be made which encourages high user participation. This governance mechanism allows every XTC holder to be part of deciding the future of Tezos. However, there has been some criticism that this puts a lot of the power in the hands of bakers and large token holders of the network.
Tezos’ governance system is also designed to reward developers for improving the network. Developers who propose changes receive a requested amount of XTZ for their approved changes as a further incentive. This reward is minted upon approval and is used to fund the development of the network.
Tezos Use Case: Security Token Offerings
Tezos’ XTZ can be used to purchase many different tokenized assets using Security Token Offerings (STOs). An STO can be seen as ownership rights that are recorded onto the blockchain and programmed using a smart contract. This creates an immutable record of ownership and this ownership is tokenized to open up illiquid assets such as real estate to a wide pool of investors.
With asset tokenization tangible or intangible assets can be converted into digital ones. Assets such as real estate, stock, bonds and art are tokenized onto the blockchain and investors can purchase ownership rights to a portion of the asset. This allows multiple investors to own part of the rights to goods that would not otherwise be liquid enough to facilitate this.
The regulations and rights of the investors are written directly into the smart contract preventing disputes and issues. This creates liquidity and enables an investor to extract capital very quickly. With assets such as real estate normally it is very difficult to extract investment or gain capital quickly. Either the entire building must be sold, a loan taken against it or a lengthy regulatory process to divest interests must be started.
Tezos and Asset Tokenization
By tokenizing an asset investors can immediately trade their holdings and recoup investment. Transactions can be done in real time with low costs and with the regulations of the smart contract built into all transactions. This allows liquidity in a market where there previously was none.
Tezos has many successful tokenizations in partnership with corporations which makes it an attractive market to purchase assets in. Using XTZ you can invest in films with Logical Pictures, purchase a portion of the ownership rights in the St. Regis Aspen Resort with Elevated Returns or River Plaza in Manchester with Alliance Investments. There is also a wide variety of financial assets and digital assets tokenized on the network.
Tezos Use Case: Smart Money
The tez token, XTZ, is designed to be used as smart money. It is scalable with extremely fast transaction fees and can be used for smart contracts and dApps (Decentralized Applications) within the network. XTZ was designed to be a viable cryptocurrency for mainstream adoption.
With many blockchain networks transaction times can be lengthy due to the consensus mechanisms used. Bitcoin is one of the slowest and a transaction can take between 10 minutes to almost an hour to process. Ethereum can take up to 15 minutes due to network congestion. In comparison, Tezos can process a transaction in under a minute.
Its transaction fees are only a fraction of most other major cryptocurrencies. Ethereum fees have reached as high as $45 in 2021 which is unsustainable and unaffordable for everyday e-commerce. Tezos has maintained an average transaction fee of under $0.22 all year.
With traditional currency this waiting time can be much longer. Banks have lengthy regulatory processes, waiting times and operate within banking hours only. This means a transaction can take several days. And fees can be extremely high with part of the value lost in conversion.
This means that if some in America wanted to transfer $5,000 to someone in Asia over the weekend using traditional methods, this would take several days, incur high fees and lose value in conversion. With Tezos this transaction would take under a minute with extremely low fees. XTZ is a reliable, convenient way to store and transfer value.
Tezos: A Viable Cryptocurrency?
Although Tezos got off to a rocky start, it has seen huge growth in the past year and announced major partnerships. These partnerships with Ubisoft and major financial institutions have solidified Tezos reputation as a viable cryptocurrency with a bright future and mainstream practical applications. It has made strides in the NFT landscape due to its low-energy lPOS consensus mechanism.
Holders of XTZ are incentivized to take part in governance and staking with XTZ issued as a reward. XTZ also funds the development of its network.
Tezos has seen mainstream adoption for asset tokenization and financial services. While it is not the most popular cryptocurrency out there, it has potential to see many more real-world applications.