Tezos (XTZ) is a blockchain platform for smart contracts and decentralized applications (dApps) that has a formalized on-chain governance model. The platform is self-evolving and can amend itself without requiring hard forks.
Tezos has its own native token called “tezzies” (XTZ), which function as the fuel for the blockchain, similar to how Ether fuels the Ethereum network. The protocol was developed by Arthur Breitman, who published a series of white papers in 2014 that talked about Bitcoin’s problems, predicted the mass influx of tokens and outlined his own solution—a “self-amending” cryptocurrency called Tezos.
How Tezos Works
Tezos is a distributed, peer-to-peer, permissionless network, whose system is based on smart contracts that provide a unique on-chain governance mechanism that improves on similar platforms like Ethereum. It has the ability to evolve and implement new innovations over time without requiring a hard fork.
Self-amendment – Tezos can upgrade itself without forking the network into two different
blockchains. This greatly reduces the coordination and execution costs for protocol upgrades, and future innovations can be seamlessly implemented.
On-chain governance – All Tezos stakeholders participate in governing the protocol. The voting mechanism provides a formal and systematic procedure for stakeholders to reach agreement on proposed protocol amendments. With self-amendment, Tezos can also change the voting process to adopt better governance mechanisms in the future.
Decentralized innovation – The staking mechanism Tezos implements encourages participation and decentralizes the maintenance of the network. It fosters an active, open, and diverse developer ecosystem that is incentivized to facilitate the development and adoption of Tezos.
Smart contracts – Tezos offers a platform for creating smart contracts and building decentralized applications that can’t be censored by third parties. Tezos also facilitates formal verification to improve security by mathematically proving properties about programs such as smart contracts.
Proof-of-stake consensus – Staking nodes provide the resources required to run the network. Any stakeholder can participate in the consensus process in Tezos and receive rewards for contributing to the stability and security of the network.
The Tezos Network Shell
Tezo implements a network shell to enable its governance and self-amending capabilities. The network shell breaks down the Tezos protocol into three distinct sub-protocols:
The network protocol – This is usually referred to as the “gossip” protocol. It broadcasts transactions between nodes across the network, facilitates the download of the blockchain, and enables peer discovery.
The transaction protocol – This is responsible for the transactional layer and is defined by XTZ’s scripting language. It handles everything from the creation of new tokens during mining to the utilization of digital signatures for transaction validation. A fork of this protocol is usually referred to as a “soft fork.”
The consensus protocol – This protocol articulates the model for reaching consensus of the state of the blockchain across all nodes in the network. Tezos uses an optimized proof-of-stake consensus protocol. The protocol is vital for the sustainability of the blockchain as it makes the blockchain immutable and prevents double-spending. A fork of this protocol is referred to as a “hard fork.”
The network shell functions as the interface between the network, transaction, and consensus protocols. It enables them to be amended at a protocol level via the on-chain governance feature.
Proof-of-Stake Consensus & “Baking”
Tezos uses an optimized proof-of-stake (PoS) consensus mechanism that validates blocks in a process called ‘baking’ instead of conventional ‘mining.’ Participating stakeholders are randomly selected to ‘bake’ (validate and publish) all transactions and add them to the blockchain. Users who don’t want to directly participate in the consensus protocol can choose to delegate their rights to other users who will participate on their behalf.
Chosen bakers must first leave a security deposit before they can participate. The deposit amount is dynamic depending on the number of blocks a baker is required to create. Bakers receive block rewards for helping secure the network. Bakers who act dishonestly can lose their security deposit.
To participate in baking, stakeholders must have at least 8 GB of RAM and a reliable internet connection. You can requet to join the baking operation on the Tezos resources page.
Tezos ICO Controversy
XTZ was launched after a successful initial coin offering (ICO) in July 2017 that raised $232 million USD worth of BTC and ETH, making it one of the highest funded crowdfunding projects to date. The Tezos Foundation got the funds, which it labeled as “non-refundable donations,” but failed to deliver the tokens to investors for several months after the ICO ended. The delay was caused by an internal power struggle between Brietman and Johann Gevers, who was the president of the Tezos Foundation at the time.
The Tezos Foundation was hit with lawsuits for failing to deliver the promised tokens and the U.S. Securities and Exchange Commission (SEC) stepped in. The lawsuits alleged that the tokens should be considered securities under U.S. law, which means they must be registered with the SEC before they can be legally sold to investors.
In June 2018, the Tezos Foundation unexpectedly announced that it would be implementing KYC/AML checks for all investors, essentially asking everyone who participated in the ICO almost a year ago to authorize themselves before they can receive their tokens. The decision was likely caused by mounting pressure from the SEC.
The requirement for KYC checks splintered the Tezos community and started talks of launching a fork of Tezos that would be an independent network with a special emphasis on no KYC checks.
The Tezos Foundation has resolved its internal conflicts and powered through all of these problems to successfully launch the Tezos betanet and eventually the mainnet on September 17, 2018.
XTZ Volume, Pricing and Market Cap
The total available supply of XTZ caps at 763,306,930 tokens. The Tezos Foundation initially planned to cap the supply at 10 billion tokens, but in the end it decided to base the supply on the number of tokens that were sold in the ICO.
XTZ was valued at $0.47 USD after the ICO. Its price rose to reach an all-time high of $11.21 USD in December 2017 but then fell to less than $5 in the months that followed. Its market cap reached over $1.4 billion USD a year after the ICO, landing Tezos among the top 20 cryptocurrencies by valuation. Its market cap has since fallen to less than $300 million USD, but XTZ is still among the most valuable cryptocurrencies on the market.
Buying, Storing and Selling XTZ
XTZ can be acquired from Bitfinex, Coinone, Gate.io, HitBTC, Kraken, RightBTC, and ZB.COM. There still isn’t an official XTZ wallet yet, but recommended storage options include:
Web wallets: Kukai, TezBox
Mobile wallets: TezBox, WeTez, Tezos.blue (available on Android, iOS, and Windows)
Desktop wallets: Kukai and Atomic Wallet
Hardware wallets: Ledger Nano S and Trezor (linked via TezBox)
Liquidity of XTZ
XTZ has good market liquidity. Despite its rocky start, Tezos appears to be thriving now that its investors have received their tokens and the baking process has began. Governance on the blockchain is a complicated problem and the success of the self-evolving model used by Tezos could set a new standard for decentralized networks. It’s a project worth keeping an eye on.