What’s Tezos?

Tezos is a distributed blockchain platform for smart contracts and distributed applications (dApps) that calls itself a 3rd generation blockchain and competes with Ethereum. Conceptually, Tezos is very similar to Ethereum, as both projects want to create a kind of world computer and corporate blockchain. There are, however, significant differences in the technical implementation with which Tezos wishes to differentiate itself from its competitors, which include EOS, Tron, Cardano and Lisk.

However, the main difference between Tezos and Ethereum is that Tezos has developed a blockchain that can self-manage through on-chain governance and automate upgrade processes. Thus, unlike Ethereum, off-chain governance is not necessary in the sense that a small group of core developers alone decides on future changes to the protocol. Instead, Tezos holders can participate in the development of the Protocol through the Delegated Proof of Stake (DPoS), which should not be confused with those of EOS, Tron or Lisk because it functions completely differently. This process is known as on-chain governance and is intended to prevent hard forks.

Similar to Dash (DASH), independent developers are thus entitled to submit change proposals that the Tezos owners can vote on. This model is intended to ensure that the Protocol is developed in a decentralised manner.

The Tezos ICO and the company

The founders of Tezos are Arthur Breitman and his wife Kathleen Breitman, who are said to have started work on the project in 2014. However, the Initial Coin Offering (ICO) did not start until a few years later, on July 1, 2017. The ICO rode on a wave of hypes and within two weeks was able to collect 66,000 bitcoins and 361,000 ethers worth about 232 million US dollars. This makes Tezos the largest public ICO in crypto history behind Filecoin (USD 257 million).

To manage the project, the Breitmans couple set up a company and a foundation in Zug, Switzerland. The company called Dynamic Ledger Solutions has signed a contract with the Foundation to create the source code of Tezos. Once the network is operational for an agreed period of time, there is a clause in the contract stating that the Foundation will purchase the source code and Tezos brand for 10% of all tokens and approximately $20 million (or 8.5% of the ICO) from the company. Until then, the Swiss Foundation will be responsible for the management of the ICO funds and has the mandate to use the funds for the growth of the project.

A slow start …

The Tezos ICO was the second most successful after Filecoin at the time. However the project came to a standstill due to an internal dispute and legal proceedings. Shortly after the ICO, the Tezos founders Kathleen and Arthur Breitman got into a serious dispute with the president of the Tezos Foundation, Johann Gevers. Gevers, the only employee of the foundation at the time, had drawn up a compensation agreement for himself, which many investors regarded as insufficient use of funds.

The Breitmans then demanded the resignation of Johann Gevers as Tezos Foundation President. However, Gevers refused to resign and blocked all funds raised under the ICO, stalling further development of the project. The dispute was the subject of more than 7 months of legal proceedings. Accordingly, the product launch was delayed for a long time. It was not until February that Gevers gave in and resigned as President of the Swiss Foundation. In a tweet after his resignation he explained that his resignation served to pave the way for the start. The Tezos project was back on track and released a beta version in June 2018.

During this time, Tezos not only had to struggle with Gevers, but also faced a class action lawsuit accusing Tezos of selling unregistered securities. Investors claimed before a Californian court that the Breitmans misleadingly marketed the sale of Tezos Coins.

Tezos Coins: XTZ

The Tezos Coin is abbreviated XTZ and is also known as “Tezzie”. In total there are 763,306,930 XTZ coins on offer, of which 607,489,041 XTZ are currently in circulation (as of October 2018).

You can view the current price of Tezos here in the chart. If you would like to know how the prices of Bitcoin, Ethereum or 2,000 other Altcoins are developing, you can take a look at our course overview.

Tezos Delegated Proof of Stake (DPoS)

As described above, it is important not to equate the DPoS of Tezos with those of EOS, Tron, Lisk or BitShares. The differences are considerable despite the same name. The Tezos Delegated Proof of Stake allows XTZ owners to delegate validation rights to other token owners. At EOS and Tron, this delegation is mandatory, i.e. only a limited number of block producers (at EOS: 21 delegates, at Tron: 27 ‘Super Representatives’) can be elected who must first qualify. Delegation is optional for Tezos. This means that there is no maximum number of block producers and everyone can decide for himself whether to delegate his vote.

In principle, anyone can produce a block (with certain restrictions). Overall, the requirements for Tezos are significantly lower than for the other DPoS blockchains. Currently, the protocol requires 10,000 Tezos, a reliable Internet connection, good OPSEC and low computing power.

Thus, the Tezos DPoS is more similar to the proof-of-stake that Ethereum plans to implement with Casper than EOS or Tron. The Tezos DPoS gives owners (from 10,000 XTZ) the right to publish a block. The probability of being selected as a block producer (called “Baker” by Tezos) is proportional to the number of XTZ coins the stakeholder owns, plus the number of XTZs transferred from other Tezos users.

Each block is thus produced by a random stakeholder (“baker”) and endorsed by 32 other random stakeholders. Stakeholders have to pay a deposit for this. As XTZ Coins does not want to or cannot become “Baker”, they can be “delegated” to another party. However, if one of these tokens is randomly selected to validate a block, that right belongs to the delegate.

On-chain governance

All this also has an impact on Tezos’ on-chain governance model. A Tezos owner who delegates the right as a “baker” also delegates the right to vote for on-chain governance and thus co-determination over the further development of the Tezos Protocol. The aim of the on-chain governance model is the continuous further development of Tezos.

As briefly explained above, any developer can submit proposals for protocol changes and receive compensation for their work if that change proposal is accepted. Tezos has an automated process for this, which is run through for each change proposal.

When a developer submits a protocol change, the “Baker” can vote on whether the proposal should be integrated into the test network. If yes, the implementation is automatic for a predefined period of time. At the end of the test period, the “Bakers” will have to vote again on the amendment to the minutes. If the new source code runs error-free in the test network, users like the new function and the vote is successful, the change is transferred to the main network.

Criticism towards on-chain governance

Among others, Ethereum founder Vitalik Buterin and Ethereum core developer Vlad Zamfir have criticized the on-chain governance model of Tezos (and other DPoS projects). They believe that off-chain governance is the better alternative because the centralization of wealth and the apathy of voters leads to the system being dominated by certain rich parties and less developed in the sense.

To be clear: eliminate the need yes, the possibility, no. Hard-forks are valuable failsafes and you make a great case for it.

— Tezos (@tezos) July 10, 2017

The launch of EOS-Mainnet showed that only a fraction of EOS owners were interested in on-chain governance. For the initial vote, 15% of all EOS Coins were required to initialize the launch. Only 17% of all EOS owners had voted at the time, with Bitfinex having the largest number of votes, allowing Bitfinex to vote for itself and become a delegate.

Tezos is trying to prevent this with the unlimited number of block producers. However, this does not mean that powerful coalitions with voting rights cannot be formed or that stock exchanges such as Bitfinex become interest groups to be determined.

Vlad Zamfir wrote in a blog post that:

the introduction of on-chain governance is incredibly risky because it is always a revolution. It’s not necessarily a revolt against the governance processes that merge code into software repositories (since they could potentially be encoded on-chain, though normally this isn’t the case), but a revolution that overturns the processes that control full nodes.

Bottom line: Is XTZ worth an investment?

Nevertheless, Tezos is a very interesting project that was prevented from developing faster by the initial start-up problems. The release of the beta version of the Tezos network in June 2018 seemed to have been a liberating blow. To become a serious competitor of Ethereum, EOS and other blockchain platforms, however, some development time will still be necessary. Above all, Tezos as a blockchain for companies must also find real use cases in order to be successful in the long term.

Last updated: 06/07/2019