Tezos is a blockchain platform that supports smart contracts and dapps, based on the idea of a digital commonwealth, in which governance is democratized in an efficient and sustainable manner to avoid costly hard-fork scenarios.
In 2017, the Tezos ICO raised $232 million in BTC and ETH, making it one of the largest ICOs in the industry. Based in Switzerland, the Tezos Foundation spearheads efforts to support wider adoption of the protocol.
Within the network, XTZ is the token used for all operations. With the incorporation of features such as Liquid Proof-of-Stake and on-chain governance, throughput is traded for a higher level of decentralization.
Tezos relies on Liquid Proof of Stake (LPoS), with full support of Turing-complete contracts. In the Tezos network, block generation is referred to as baking while validators are known as bakers.
1. What is Tezos (XTZ)?
Tezos’ core features include:
Liquid Proof-of-Stake (LPoS): Tezos employs a Proof-of-Stake consensus mechanism designed to maximize decentralization of governance and encourage participation among XTZ holders of all sizes. LPoS maintains a dynamic set of validators that can expand with the network, and allows stakeholders to delegate rights to other holders.
On-chain governance: All stakeholders can participate in protocol governance either directly or indirectly, through delegation. An election cycle provides a procedure for stakeholders to propose amendments and reach an agreement.
Self-amendment: The protocol can “upgrade itself” without having to fork the network into two different blockchains. Decisions to change facets of the protocol come from within the community of stakeholders and are implemented through the on-chain governance process. Self-amendment is designed to reduce coordination and execution costs for protocol changes and facilitate a smoother transition between network iterations.
2. Tezos' key features
To mitigate the governance issues faced by many blockchain protocols, Tezos employs a number of pioneering features, which are rooted first and foremost in the underlying consensus algorithm. The term Liquid Proof of Stake was chosen to differentiate the model employed by Tezos from Delegated Proof of Stake (DPoS) chains such as EOS or NEO. While DPoS blockchains split block production rights evenly between a set of active block producers, LPoS assigns the probability of block production based on the proportion of stake held by each validator; and there is no limit to the number of bakers in the system.
Liquid Proof of Stake
Tezos uses inflationary block rewards and transaction fees to incentivize validators (or “bakers” in Tezos terminology) to participate in consensus. Bakers contribute their computing power to the network to validate transactions. To participate, bakers must own at least 8,000 XTZ (or 1 roll). Rolls are aggregated at the baker level, which means a baker’s baking power is proportional to the number of tokens (or “tez”) held, rounded down to the nearest roll. The more rolls held by a baker, the higher the chance they will bake the next block.
Bakers and Endorsers (i.e., bakers that check block validity) are chosen randomly every cycle (approximately every three days or 4096 blocks). Baking rights also follow a priority order, which is randomly selected by the protocol per block. Should an appointed baker fail to broadcast a block within a one minute time frame, responsibility shifts to the second baker on the priority list. Each block is baked, and then endorsed (witness the block and checked that it was valid) by 32 other randomly assigned bakers. All Bakers and those endorsing must post a deposit for each block in which they play a role validating.
This deposit is forfeited if any malicious activity occurs. An award of 40 XTZ is awarded for baking a block, in addition to the sum of the transaction fees. Meanwhile, each Endorser is awarded 1.25 XTZ per block.
Liquid Proof of Stake allows XTZ holders to transfer, or delegate, validation rights to other token holders without transferring token ownership. Holders who possess 8,000 XTZ (1 roll) but do not wish to participate directly in baking can simply allocate their holdings to a baker, which in turn grants that baker a higher probability of validating blocks. The baker then shares a portion of the revenue received for participating in consensus (in addition to collecting a fee) with all token holders who delegated tokens. Bakers compete for holders’ XTZ by charging lower fees than others. An aggregated list of baking services is available here. Binance Staking supports Tezos staking with no baking fee.
On-chain governance and self-amendment
On-chain governance is a mechanism for facilitating the self-amending feature of the Tezos blockchain. Tezos employs this system to incentivize developers by rewarding them for their contributions, in addition to democratizing the evolution of the protocol itself through the voting process, which provides a viable alternative path to a hard fork.
Self-amendment is implemented to reduce the disruption and costs associated with hard forks, while simultaneously opening an avenue to seamlessly and democratically integrate innovative changes.
The self-amendment process is split into four periods: the Proposal Period, Exploration Vote Period, Testing Period and Promotion Vote Period. Each of these four periods lasts eight baking cycles (i.e., 32,768 blocks or roughly 22 days, 18 hours), which is approximately three months from proposal to activation. A more detailed breakdown of each period follows:
Proposal period: delegates (bakers) submit protocol amendment proposals. At the end of the proposal period, the proposal with most supporters is selected. If there are no proposals or there is a tie, a new proposal period starts.
Exploration vote period: delegates vote whether to test the winning proposal. At the end of an exploration vote period, if participation reaches the quorum (what is a quorum) and the proposal has a supermajority (8/10 Yay or Nay votes) in favor, the process moves to the testing period.
Testing period: a test chain is forked for 48 hours to test the proposed change. Following this period, the final voting period begins.
Promotion vote period: delegates can cast one vote to promote the testnet chain to the mainnet. If a supermajority is met, the testnet is activated as mainnet.
As the primary actors maintaining the network, bakers also are responsible for casting votes in the formal upgrade process. Voting rights are assigned to baker delegates based on the number of rolls in their stake at the beginning of each voting period as follows: 1 vote = 1 roll = 8,000 XTZ. Both voting periods function in the same manner. During the vote period, a delegate can cast a single Yea, Nay,or Pass. A vote is only successful if a. It has a supermajority and b. the participation reaches the current quorum. In line with the decentralized ethos underlying Liquid Proof of Stake, XTZ holders can choose a baker whose vote is aligned with theirs and delegate their stake, thereby electing a representative on their behalf.
3. Economics and supply distribution
In July 2017, Tezos raised $232 million in BTC and ETH through an Initial Coin Offering, making it one of the largest ICOs in the industry. The genesis block began in June 2018, with 608 million XTZ entering into circulation; it maintains no supply cap at this moment.
Tezos’ block time is one minute and the current annual inflation is 3.6%, implemented with the Carthage 2.0 upgrade.
The previous inflation rate of XTZ was 5.5%. The average transaction fee stands at $0.00232. Nearly 80% of the current supply is staked and the current circulating supply is 704,111,107 XTZ (as of March 2020).
4. Project team
5. Additional resources
Goodman, L.M (2014). Tezos - a self-amending crypto-ledger. https://tezos.com/static/white_paper-2dc8c02267a8fb86bd67a108199441bf.pdf
Nomadic Labs (2018) Proof of Stake in Tezos. https://tezos.gitlab.io/whitedoc/proof_of_stake.html
Tezos Foundation. A Digital Commonwealth. Access on March 20th 2020. https://tezos.foundation/a-digital-commonwealth
Tezos Website. https://tezos.com/