Simply Explained: Tezos (XTZ)

The Ethereum blockchain is by far the most developed of its kind. The size of its user base and the sheer number of developers building on the platform is incomparable to the other blockchains in its realm. However, the Ethereum blockchain is plagued with several issues. Specifically, high costs and slow transaction times.

That’s where Tezos comes in. Tezos is a proof of stake blockchain built to evolve over time without the need for a hard fork. It has grown substantially over the past two years. However, it is important to note that there are pros and cons to this.

Let’s dive in! Learn what Tezos is, how it works, what it’s trying to accomplish, and whether you should be interested in it

What is Tezos?

It’s a self-amending layer 1 blockchain (L1). An L1 is essentially a platform on which applications can be built, smart contracts can be executed, and tokens can be created. 

Examples of L1s include Ethereum, Solana and Avalanche. The main purpose of these platforms is to enable developers to build products in a decentralised manner. Users can then interact with these products without the need for a middleman. 

Entertainment, social media, finance and other fields have made their way into the decentralised world through these dApps (decentralised applications). L1 blockchains are the foundations on which all of this is built. Picture a city-the buildings themselves are the dApps, and the land they’re building on is the L1.

What makes Tezos special is that it’s designed to evolve and develop over time. Token holders who stake their Tez (Tezos utility token also known as XTZ) can vote on the changes they want to see. This gives governance of the blockchain to token holders.

This process is called ‘baking’, in which users stake 8,000 XTZ tokens to become eligible.

Stakers can vote on proposals in a four-step procedure that lasts 23 days. Proposals voted on by the majority are then put in a test net and if approved, go live within 2 days.

This is a type of governance which can be seen across a wide array of blockchains in the cryptocurrency space. 

Tezos consensus mechanism – Proof of Stake

To partake, holders must stake their tokens. Staking does two things. Firstly, it secures the network and, secondly, stakers are rewarded with both governance and XTZ from transaction fees. This is known as a proof of stake (PoS) consensus mechanism. Tezos specifically uses a liquid-proof of stake method which basically means tokens don’t have to be locked in for a set period.

A few notes on proof of stake. The mechanism works differently from that of proof of work (the mechanism used by Ethereum).

The difference between PoW and PoS is that instead of anyone being able to validate transactions, validators must first stake tokens to have the chance to validate. There is also no block reward. Instead, validators are incentivised by taking a small fee from every transaction they validate.

This means the problem of high fees and slow transaction times faced by Ethereum are comfortably tackled by Tezos. Once again, there are always cons going in the opposite way. 

Note that Ethereum is planning to move to this PoS mechanism in 2022, and many other blockchains including Solana and Cardano also use PoS. Since demand is so high on Ethereum, this change alone probably won’t be enough to affect these fees, and further upgrades will be necessary.

The self-amendment process

Because the DeFi space is so new, problems are encountered every day. This means innovations and updates need to be made on a regular basis to keep things operating smoothly. Usually, it takes a lot of work to make these changes and updates, and sometimes the community disagrees with what should be done. This typically results in either a long wait time or a fork in the network. 

A fork requires people on the network to upgrade their software and sometimes hardware to continue securing or building on the network. Tezos resolves this issue by making it very easy to make changes on the network. Hard forks are also avoided. For more on hard forks check out our pieces on the hard fork that separated Ethereum and Ethereum Classic, and Bitcoin and Bitcoin Cash respectively.

A big question we pose to you, as cool as this is, we must question the competency and intentions of the people voting in this process. We can’t always assume that the people voting on these decisions know what is best. 

The Granada upgrade

This was a development that occurred in 2021 in which block creation time was reduced from 60 seconds to 30 seconds. It also resulted in a reduction in gas costs by 33% for smart contracts.

Smart contract evolution

Like many other L1s, Tezos is smart contract compatible, which is why dApps can be built on it. What’s cool about Tezos is the language that developers use to code on the platform. It’s called Michelson, and developers have many positive things to say about it including its high security and usability. Compared to Ethereum virtual machine (EVM), Michelson is very easy to build on, making it more accessible to newbie developers, however, this means apps already on Ethereum will have to be completely rebuilt in order to be deployed on Tezis, something that will, of course, be a hurdle to the expansion of the blockchain.

For Cryptonary’s transparent opinion on Tezos, access the Ratings Guide here.

Disclaimer: NOT FINANCIAL NOR INVESTMENT ADVICE. Only you are responsible for any capital-related decisions you make and only you are accountable for the results.