Tezos is a decentralized blockchain network, which links itself to a digital token known as Xtz, tez or tezzie. It governs itself by establishing a true digital commonwealth. Now, what do we mean by the commonwealth? It is a group that chooses to be linked together because of shared goals and interests. Thus, tezos establishes a commonwealth means that all the token holders work together for the improvement of the blockchain protocol, i.e. they have shared goals.
A brief history of Tezos:
Tezos was founded by husband and wife, Arthur Breitman and Kathleen Breitman. Arthur Breitman has had valuable experience working for some of the largest investment banks, such as Morgan Stanley and Goldman Sachs. A computer scientist and mathematician by training, he had always closely followed Bitcoin’s historic rise. However, he observed that the network could not evolve. Tezos is his solution to this problem.
Tezos had also received some significant funding. Tim Draper, a well-known venture capitalist, contributed $1.5 million and now holds a 10% stake in Dynamic Ledger Solutions (DLS), a company founded by Arthur which owns the right to Tezos’ code.
Unique features of Tezos:
1) On-chain governance and self-amending:
Before we delve into the concepts of on-chain governance, we need to understand what the word fork means in cryptocurrency’s dictionary.
A soft fork is a backward compatible method of upgrading the blockchain protocol. It may happen that not all nodes upgrade to the new protocol, they can still verify transactions and push them to a block, provided they do not break the new protocol rules. For example The protocol suggests that the size of the block should be changed from 3MB to 2MB. Older nodes can still verify transactions, but they need to keep in mind the new size rule. If they try to push a block that is greater than 2MB to the blockchain, new nodes will reject the block since they violate the new protocol.
The hard fork is a change in blockchain protocol which is incompatible with the previous version; thus nodes that do not update to the new version are not able to verify transactions and push blocks to the blockchain.
For example, if a change in protocol mandates increase in block size from 2MB to 4MB, the older nodes will not see this block as valid and thus, will reject it.
Hard forks fall into two categories:
- Planned hard fork: It is an update that has already been made clear in advance by the project developers. Usually, a high degree of consensus amongst the developers and community is reached beforehand.
- Contentious hard fork: This takes place when there is a severe disagreement between the stakeholders, like the developers, network users and miners. The protocol is then forked into two blockchains. Both blockchains will have their currency, and developers will progress in the way they feel best. The best example is of Bitcoin and Bitcoin cash, which was itself split later into bitcoin cash and bitcoin SV.
One thing we need to understand is that forks are not a bad thing. Blockchain networks should continuously evolve and improve. For that, forking becomes necessary. But, the only problem faced is of the contentious hard fork, since it entirely splits the blockchain into 2.
How does Tezos mitigate this problem?
Tezos mitigates contentious hard fork using on-chain governance and self-amendment. It allows developers to put forward source code modifications and new protocols, and get paid for it in return, by attaching a request for compensation in the proposal submission. Adding this compensation structure provides incentives for developers to continue improving upon Tezos rather than having to work for free or being sponsored by a central entity.
Once, the proposal submission takes place; stakeholders cast their votes in favour or against the proposal. If more than 80% of the votes are in favour of the proposal, then it gets passed. Bypassed we mean that it gets run on test net for a period of 3 months, i.e. there is a pilot phase of 3 months. This helps to probe for any possible unexpected or unpredictable outcomes, that may not have been initially evident.
After the pilot phase ends, another vote procedure carries out and gets implemented if the majority agree. This helps to verify the proposal before its implementation and helps the bakers/stakeholders make an informed choice, thus reducing the chances of the contentious hard fork.
2) Liquid Proof of Stake:
Before we go on explaining liquid proof of stake, we need to know what exactly is proof of work that is followed in the majority of cryptocurrency coins.
Blockchain is a distributed ledger of transactions using cryptocurrency. However, care must be taken that whatever transaction record is being added to the block in the blockchain is verified. This responsibility bears on individual nodes, called miners which are engaged in a task called ‘Proof of Work’. Miners have to use their computational power to solve cryptographically and mathematically hard puzzles. The miner who is able to solve the puzzle first gets a reward in cryptocurrency. However, these puzzles are too hard and take a large amount of computational power and energy. To counter these problems, a new consensus protocol was created, known as Proof of Stake.
In proof of stake, the bakers have to lock up some of their coins as a stake, locking them in a virtual safe. The more a baker stakes, the better is the chance of being selected as the validator- as they have more amount on the bet, in case they act maliciously while validating the transaction, the more they shall lose. However, there is a degree of chance that is added to this process so as to avoid the scenario, where the wealthiest bakers are always selected to validate the transactions and hence, become more affluent.
In case the block gets successfully appended, the validator shall earn a reward proportionate to the stake.
Now, comes the concept of liquid proof of stake. The bakers, if selected, can delegate their validation rights to other token holders due to reasons like lack of time, knowledge or resources. However, they do not pass ownership of tokens upon completion of the baking process. Unlike in Delegated Proof of Stake, delegation is optional.
3) Formal Verification:
Tezos is coded using OCaml. The smart contracts that are built on Tezos are programmed using Michelson. What makes them a unique feature of Tezos? They happen to be functional languages.
There are two types of programming languages, imperative and functional. In imperative, the coder needs to specify each and every step that the computer needs to take to reach the goal. All traditional programming languages like C++, Java and Solidity are imperative languages. While functional languages adopt a functional approach to problem-solving, it is easier to reason mathematically. Thus they are supposed to be more secure for contract creation. Functional languages also increase the readability by humans and maintainability, because each function is designed to accomplish a specific task. Thus it also becomes easy to correct the proofs and avoid bugs.
Ther have been many instances of bugs within poorly coded Ethereum smart contracts, which could have been easily avoided had formal verification been implemented using functional languages. The only problem with formal verification is that developers may find it challenging to apply correctly.
Concerns regarding Tezos:
Before talking about the infamous ICO of Tezos, we need to fully understand what
ICO is. When a cryptocurrency startup wants to raise money through ICO (Initial Coin Offering), it usually creates a whitepaper, which is similar to a prospectus in the stock market world. It outlines what the project is about, its expansion plan and how much money is needed, what type of money will be accepted etc.
During the ICO campaign, people who trust the startup and the supporters buy some of the project’s tokens with fiat or digital currency, as specified in the whitepaper. These tokens are similar to shares of a company in an IPO. If the money raised does not meet the minimum fund requirement of the firm, the ICO is deemed unsuccessful, and the money may be returned. If the funding requirement is met within the projected timeline, the funds are used to pursue the planned goals of the project.
So now coming on to Tezos’ ICO, it drew massive attention. The ICO began on July 1, 2017, and earned $232 million, making it one of the largest ICOs of all time.
However, just after basking in the success of the ICO, a significant dispute took place between Tezos President Johann Gevers and founders Arthur and Kathleen Breitman. The result of which was excessive delta in the launch of the Tezos platform. In March 2018, Tezos platform was still not launched. Because of this, Tezos was caught in a legal battle, and investors initiated a lawsuit against the startup. The lawsuit ultimately allowed the investors to seek a refund for the amount invested in ICO.
Future of Tezos (XTZ)
The future of Tezos looks bright again now with a record rise in the prices of Tez. In the words of Warren Buffet, “Only when the tide goes out to do you discover who’s been swimming naked”, which makes us believe that Tezos is better suited for the future, but ultimately everything depends on its ability to deal in more technological innovations and survive the market.