What is Tezos?

Tezos is one of the most exciting projects in cryptospace due to its underlying liquid proof-of-stake (LPoS) algorithm and on-chain governance. Ever since its headline-grabbing $232 million ICO, Tezos was off to a rocky start but has since become one of the most reliable and high-performing blockchain protocols out there. The native token of Tezos is XTZ.

Overview for Fast Readers

  • Tezos was co-founded by Arthur Breitman and Kathleen Breitman.
  • Tezos utilizes liquid proof-of-stake and on-chain governance.
  • Liquid proof-of-stake uses the fundamentals of liquid democracy.
  • Stakers in Tezos are called “bakers” and the process of staking is called “baking.”
  • Tezos’s self-amending nature allows it to evolve smoothly and not go through contentious forks.

Who is behind Tezos?

Tezos co-founders

Co-founders Arthur Breitman and Kathleen Breitman have been developing Tezos since 2014 with a core group of developers. Within just 2 weeks, the company raised a staggering $232 million. However, the co-founders soon got into an ugly public spat with the President of Tezos Foundation, Johann Gevers, which greatly affected the project’s public perception. Eventually, Gevers left the company after receiving a generous severance package. Now things are finally sailing smoothly.

What is Tezos used for?

Like Ethereum, Tezos is a decentralized, open-source blockchain network capable of executing peer-to-peer transactions. However, its leading utility lies in hosting various decentralized applications like DeFi (decentralized finance). However, what sets it apart from competitors like Ethereum are its liquid proof-of-stake protocol and on-chain governance.

The Tezos Architecture

Before delving deeper into Tezos, let’s look into its core architecture. Any generic blockchain protocol is divided into three layers – Network Protocol, Transaction Protocol, and Consensus Protocol.

  1. Network: A gossip protocol responsible for peer listening and broadcasting between nodes.
  2. Transaction: Transactional layer that defined the accounting model implemented by the blockchain.
  3. Consensus: Defining the consensus mechanism that will help the blockchain reach agreements on different transaction states.

In Tezos, the final two protocols – Transaction and Consensus – are wrapped together and referred to as Blockchain protocol. A Network Shell aids in the communication between the network and blockchain protocols.

So, keeping all this in mind, if we were to divide Tezos’ architecture we will get the following two components – node and client.

Node

The node connects the peers through a gossip network and continually updates the state of the ledger. Since all the blocks and operations are continually exchanged between the nodes on the gossip network, the node can filter and propagate data from/to its connected peers. One can run the node with daemons such as tezos-baker-* and tezos-endorser-*. These two daemons participate in the consensus process by baking and endorsing blocks.

Client

The client is the primary tool that one can use to interact with a Tezos blockchain node. As of now, there are three public Tezos networks – mainnet, alphanet, and zeronet. The mainnet is the main Tezos blockchain. The alphanet is pretty much the same as the mainnet but uses free tokens. Finally, zeronet is the testnet where developers can test their code.

Liquid Proof-of-Stake: The Heart and Soul Of Tezos

Most of the second and third-generation blockchains use a proof-of-stake (PoS) mechanism to achieve consensus. These PoS consensus algorithms are either standard or delegated. In a standard PoS, the entire network is responsible for maintaining consensus. Simultaneously, in a delegated PoS, specific validators are selected from the network and are responsible for maintaining consensus. The former approach sacrifices speed for decentralization, while the latter sacrifices decentralization for speed. Liquid Proof-of-Stake (LPoS) marries these two concepts and helps create a hybrid consensus system that’s both decentralized and scalable. At the core of LPoS lies the idea of liquid democracy.

What is Liquid Democracy?

Liquid Democracy explained

It is a system that fluidly transitions between direct democracy and representative democracy. Simply speaking, the individual voters can vote on policies directly or assign a delegate who can take care of the policies for them. The delegates themselves can delegate their voting responsibilities to another delegate who can vote on their behalf. This property wherein a delegate can appoint their own delegate is called transitivity. If you disagree with the stance taken by your delegate, you may take back your vote and vote on the policy yourself.

How Does LPoS Use Liquid Democracy?

LPoS utilizes liquid democracy to create a system that’s scalable, secure, and flexible. The process of staking coins in the Tezos blockchain is known as “baking,” and the stakers are known as “bakers.” As you have probably guessed, the bakers can choose to participate in block production and on-chain governance by themselves or delegate these rights to someone else.

Baking Blocks on Tezos – The Process

  • A holder can stake 8,000 XTZ or “1 roll” to become a baker.
  • Post becoming a baker, they can produce blocks, confirm transactions, and earn block rewards. 
  • If a baker delegates their baking rights to someone else, they will need to share the reward with the delegator.
  • Every new block must get endorsed by 32 other random validators.
  • Bakers and endorsers are rewarded with transaction fees and a share of the inflationary growth. Tezos has an annual inflation rate of ~5.5%.

How much bond must a baker lock up in Tezos?

Since the bakers fulfill an important role within the ecosystem, it is important to keep their incentives aligned with the network’s overall well-being. As such, they need to lock up a security deposit or “bond” within the network. This bond is usually 8.25% of a baker’s stake that gets locked up for one cycle, during which Tezos produces at least 4,096 blocks going at the rate of 1 block/min.

If a baker attempts to work against the system and “double bake” to force a fork during this lockup period, they will get immediately punished by losing their bond. As such, bakers have a proper financial incentive to work in the interest of the whole ecosystem.

Tezos and on-chain governance

Another fascinating feature of the Tezos blockchain is its self-amending nature, which it achieves through on-chain governance. This is how Tezos avoids unnecessary forks. As Kathleen Breitman puts it

“The great irony of bitcoin is that it’s ultimately a tool for community consensus, but it’s [marred by] a tremendous amount of animosity. Tezos allows for innovation to happen in a systemized way as opposed to one born of politics. You’ll not find two people who loathe politicking more than Arthur and me. That’s the idea behind Tezos: let’s formalize this extraordinarily informal process.”

Self-amendment helps Tezos to upgrade without going through a contentious hard fork, while on-chain governance allows one to vote on the platform over a proposed amendment. A combination of these two features enables Tezos to evolve smoothly without going through any hiccups.

Here is how the whole process works:

  • The developers submit proposals for protocol upgrades and request compensation.
  • The proposal goes through a testing period wherein the community tests it out and explores possible improvement points.
  • Once a legit upgrade has been decided upon, Tezos initiates a “hot swap,” which kickstarts the new version of the protocol.
  • The upgrades are passively integrated into the protocol.
  • Every single step of the update requires approval from the majority of the community. This prevents any chance of a hard-fork.
Tezos on-chain governance Infographic

What does the future look like for Tezos?

Looking ahead, Tezos’ primary focus will be on becoming the top DeFi alternative to Ethereum. While Ethereum will be a leader in the DeFi space for the foreseeable future, Tezos should aim to attract developers who are disillusioned by Ethereum’s technical problems (lack of scalability and high gas fees). Recently, Tezos took a significant step in this direction by integrating the Delphi upgrade, which has slashed overall gas costs by 75%. This has made Tezos significantly more attractive for DeFi developers. It will be interesting to see how the DeFi ecosystem evolves on top of Tezos.

Summary

Founded by Arthur Breitman and Kathleen Breitman, Tezos got off to a rocky start due to internal politics but has since taken its rightful place as one of the most significant projects in the cryptospace. Tezos has carved out a unique niche for itself through a combination of liquid proof-of-stake and on-chain governance. Let’s see how this project evolves in the future.