Tezos: a Blockchain Built to Last and Evolve
June 29, 2021
Tezos is one of the first alternative projects to Ethereum to appear on the scene. It offers a smart contract protocol and a native standard token. Another distinctive feature of Tezos is its consensus and validation mechanism, the Liquid Proof-of-Stake.
A mythical ICO
Tezos was conceived by Arthur and Kathleen Breitman in 2014 and launched in 2017. It belongs to the ICO generation, and it was not just any ICO. It raised $232 million, which was quite a record for that year.
The structure of the project was also typically 2017: the Foundation in Switzerland funded a company that was responsible for building the project, based in the United States.
The Tezos Foundation provides funding for projects that improve the Tezos ecosystem, and in particular issues grants to its developers every year: in 2020 it gave out 37 million in total. The Foundation thus allows the project to continue to develop and maintain its structure.
Verifiable Smart Contracts
Tezos and its smart contract language, Michelson, were designed with security and formal verification in mind.
Formal verification allows developers to prove mathematically that the code works correctly, according to its formal specifications or properties. This is essential for financial smart contracts, which represent, for example, tokenised assets or loans, and which require guarantees that funds will not be lost or frozen due to bugs in the code.
Tezos’ native protocol provides a solid and secure foundation for smart contract development, driving all of DeFi’s derived technologies and foundational functionality.
Even before Polkadot, Tezos had found a way to avoid forks.
Tezos was conceived with the intention of introducing a formal mechanism for the implementation and adoption of new features and updates, discouraging the need for hard forks. This is why the Tezos blockchain is called ‘self-amending’.
This way of updating directly involves the governance system, since it is through the governance processes that decisions are made regarding changes to the protocol or to project development. This is why Tezos’ governance is called ‘on-chain’, i.e. managed directly on the blockchain.
If you want to learn more about this topic, we recommend reading our article dedicated to Governance.
Performing on-chain updates accelerates innovation, reduces the likelihood of conflicting community divisions, and allows for stable stakeholder coordination within the Tezos ecosystem.
For developers working on Tezos, flexible upgradability provides a strong guarantee that the protocol will run smoothly long into the future, and for stakeholders a guarantee that the protocol has the ability to adapt to future needs and keep up with the times.
Liquid Proof of Stake and Baking
Tezos’ approach to consensus has been described as Liquid Proof of Stake. Tezos allows its holders to earn rewards by delegating their Tezos without having to lock them. This gives the “liquid” nature to Tezos’ proof-of-stake.
The parties to whom you delegate your Tezos are called Bakers, other Tezos owners who are responsible for creating the blocks on the blockchain and for validating transactions according to the Proof-of-Stake system. In return for this work, they receive an incentive based on the number of their own XTZs staked, plus the XTZs delegated to them.
Bakers then give to the delegators their share of the rewards.
The mechanism for selecting and rewarding bakers has been compared to baking bread. After being selected (kneading), the bakers have to wait a period (leaven) before actually validating transactions (baking) and then more time before they can use their frozen reward (take out and let it cool down).
Use cases in DeFi
Tezos is developing apps and services to create a complete DeFi ecosystem. Here are some of them.
Currently (June 2021), the most widely used decentralised exchanges on the market are based on the Ethereum and Binance Smart Chain blockchain. Therefore, the only standard tokens supported are ERC-20 and BEP-20.
For a project based on blockchain and native smart contracts such as Tezos, it is essential in today’s market to be able to be used in application cases such as DEXes and NFTs.
Speaking of FA2, this native Tezos token standard supports a wide range of token types – fungible, non-fungible, non-transferable, as well as multi-asset smart contracts.
In May 2021 Hic et Nunc, Tezos’ blockchain-based NFT marketplace surpassed the better-known OpenSea in terms of daily active users.
The platform is much less expensive in terms of energy than NFT marketplaces that use Ethereum and are therefore currently proof-of-work based.
In June, Tezos also launched OneOf, a marketplace focused on music NFTs and featuring projects from a number of well-known artists, including John Legend, Quincy Jones, Doja Cat and Whitney Houston. As of June 2021, Tezos has 5 more platforms for the creation and trading of NFTs.
Tezos not only bases its governance system on blockchain, but also promotes the development of automated governance through DAOs.
The Homebase project currently in beta allows anyone to create and interact with DAOs on Tezos.
Homebase allows developers and communities to launch and participate in Tezos-based DAOs to carry out any kind of project in a simplified way.
Homebase features an intuitive user interface to customise and launch a DAO in just a few steps and provides DAO participants with a dashboard to create and vote on proposals that can modify or update governance smart contracts. Ease of use solves a major barrier to DAO adoption.
DeFi before it was DeFi
Tezos is developing all the building blocks of DeFi, from token swaps between different blockchains to decentralised lending.
We have talked about PoS, Smart Contracts, DEXes, token standards, but we have not yet mentioned interoperability between blockchains.
The two functionalities that enable interoperability between blockchains, and in particular the use of assets belonging to different blockchains, are wrapped tokens and cross-chain swaps.
- Token wrapping
In a nutshell, this allows you to use a cryptocurrency for its market value even on a blockchain of which it is not native.
For example, BTC can only be used on Ethereum in the form of Wrapped Bitcoin (wBTC), i.e. in the form of a token that is pegged 1:1 to the price of Bitcoin and can be redeemed in its underlying from the Bitcoin blockchain.
Another practical example is to use BTC in yield farming features on Uniswap, which only supports Ethereum standards. The only way to do this is to deposit Wrapped Bitcoin into Uniswap’s liquidity pools, without having to convert Bitcoin into a cryptocurrency with a completely different value.
On Tezos, Bitcoin becomes BTCtz.
- Cross-chain Swaps
On Tezos, these are token swaps between different blockchains that support different token standards. This means, for instance, that on dedicated platforms you can exchange BTC with BTCtz: the former is based on the Bitcoin protocol, the latter on the Tezos protocol.
If this type of technology is optimised, it will enable native cryptocurrencies of different blockchains to be exchanged on decentralised exchanges besides centralised ones.
The TEZEX exchange is currently in beta and will initially allow exchange between the Ethereum and Tezos blockchains.
News and prospects
One of the latest stories regarding Tezos’ business is the launch of RedBull’s F1 team NFT on its blockchain. Speaking of F1, McLaren Racing has selected Tezos to become the team’s Official Technical Partner in a new multi-year technical partnership.
On the gaming front on the other hand, it is surprising to find out that in April 2021 Ubisoft joined the Tezos bakers. Tezos’ last announcement for this sector was about a game on blockchain called Emergents, which was due out in May 2020, but no news on it since then.
As a financial blockchain, Tezos is currently cheaper than Ethereum in terms of cost and transaction speed, however it has to deal with Ethereum’s other competitors. The smart contract game is about use cases and DeFi services. Tezos seems to be successfully heading towards NFTs, gradually building up the rest of the DeFi services.
Thanks to Nicolas, Manager of Tezos Boutique bakery for reviewing this article