🤔 What is Tezos ?

Tezos is a smart contract blockchain that serves as a platform for deploying decentralized applications.

Tezos provides a formal on-chain governance procedure that avoids hard forks and splitting up of the community.

💡 What role does Tez(XTZ )token play ?

XTZ is the native cryptocurrency of Tezos blockchain. It is used for:

Transaction fee: Users pay XTZ tokens as transactions fees to include their transactions on Tezos blockchain.
Staking: Tezos is a proof of stake blockchain. Validators have to stake XTZ tokens to participate in the procedure of validating new blocks.
Incentive mechanism: Validators receive XTZ for adding new blocks to Tezos blockchain. Their staked XTZ is slashed if validators do not behave honestly. This mechanism keeps the validators honest.
Delegation: XTZ holders can also delegate their XTZ tokens to stakers to share part of validator rewards.
Governance: XTZ token holders propose and vote on updates to Tezos protocol.

📝 Origin of Tezos

Tezos was first proposed by Arthur Breitman in a position paper released in Aug. 2014. He later released a white paper in Sept 2014.

Arthur Breitman believed that Bitcoin and Etherium design failed to account for a more inclusive governance process. Breitman and his wife Kathleen, therefore, designed Tezos as a token issuance and smart contract platform with an on-chain governance model, which would allow XTZ holders to vote on proposed protocol upgrades without forking the network.

In 2015, the Breitmans established a company called Dynamic Ledger Solutions (DLS), which was responsible for writing the initial code for Tezos. DLS released the source code in 2016 and used the codebase to launch an alphanet of the Tezos protocol in Feb. 2017, a few months before the Tezos token sale.

The Tezos initial coin offering (ICO) launched on July 1, 2017, the two-week sale managed to raise ~$232 million in Bitcoin ($BTC) and Ethereum ($ETH), exceeding the project’s target of $20 million.

The newly established Tezos Foundation, led by appointed president Johann Gevers, assumed control of the funds as well as the responsibility to deliver the sold XTZ to ICO contributors. The foundation, which did not include the Breitmans as board members for legal reasons, intended to use a portion of the funds to purchase Dynamic Ledger Solutions (DLS) from the Breitmans, a move that would transfer control of the Tezos codebase to the foundation.

Before the sale of DLS could take place, an internal dispute arose between the Breitmans and Gevers, leading to a delay in the distribution of XTZ tokens to investors. In response, angry investors launched several class-action lawsuits targeting Tezos and DLT, adding further delays to the protocol’s development and token issuance event.

The foundation’s early troubles caused the development team to miss its initial 2017 launch date. After the resolution, protocol development resumed, enabling the Tezos Foundation to release a beta net in June 2018.

Once it completed a testing period on the betanet, the foundation launched the Tezos mainnet in Sept. 2018.

👴🏻 Founders

Arthur Breitman

Arthur Breitman is the CTO of Dynamic Ledger Solutions which is leading the Tezos project. He is married to Kathleen Breitman.

He was born and raised in France. He received Masters in Mathematics from New York University in 2007.

Arthur was an Associate and Goldman Sachs and later Vice President at Morgan Stanley. He left in 2016 to lead the Tezos Project.

Kathleen Breitman

Kathleen Breitman is the co-founder and Chief Executive Officer (CEO) of Tezos. She lives in Mountain View, California with her husband, Arthur Breitman.

She is a graduate of Immaculate Heart Academy and also attended New York University and Cornell University.

She has held a variety of positions in different firms including Bridgewater Associates, De Dicto, and Accenture.

😌 What problems does it solve ?

No hard fork:
- There was no easy way to update earlier blockchains like Bitcoin and Etherium without a hard fork. There was no formal way to propose changes and organize community to make an upgrade. This made it very difficult to upgrade the protocols without splitting the community.
- Tezos was the first blockchain that was designed in such a manner that it was easy to propose changes, vote on updates and upgrade the protocol without any hard forks.

Proof-of-stake vs Proof-of-work: Tezos uses delegated proof-of-stake which has several advantages over proof-of-work:
- It is much more energy-efficient.
- Governments cannot ban miners, unlike proof-of-stake in which governments can trace miners depending on excessive energy usage and seize their hardware.
- It has been observed that proof-of-stake systems get more decentralized over time(Initially Bill Gates had more than 90% of the Microsoft shares, today he has less than 5% of Microsoft shares.Whereas proof-of-work systems get more and more centralized over time around hardware, cheap electricity, favorable jurisdictions, etc.
- Proof of stake miners are not stakeholders. They can use their existing hardware to mine whichever cryptocurrency is most profitable at the moment.

No downtime: Hundreds of node operators running 24 X 7 ensure the network is always online.

No trusted third party: Users do not have to trust Tezos team. The code is open source, anyone can see and verify how the code works.

Efficiency gains: Projects building on Tezos do not have to run servers and hire an army of developers.

🤖How does it work ?

Architecture

Tezos network consists of:

Baker:
- A participant needs to have a minimum stake of 8,000 XTZ to be considered a baker.
- As the name suggests, the baker is responsible for baking (producing) new blocks. When the baker is selected to bake a block, it draws transactions from the mempool, which is the pool of operations that are known about (via gossip) but have not yet been included in a block.
- Tezos run on delegated proof of stake consensus mechanism. A baker is selected as a function of their total stake to participate in signing the next block of transactions.
- XTZ holders having less than 8,000 XTZ can delegate their tokens with a Baker in return for a part of block rewards. This process does not transfer ownership of coins and hence the baker cannot spend or control the XTZ delegated to it.
Endorser:
- On receipt of new blocks, it verifies the validity of the block. If the block is valid it will broadcast an endorsement operation.
- Bakers and endorsers receive rewards (in the form of XTZ inflation or newly minted tokens) for their contributions to incentivize consensus participation.
Accuser:
- Accuser monitors all blocks received. It looks for two indications of invalid blocks: When a baker has signed two blocks at the same block height (blocks at the same level) and When an endorser injects more than one endorsement operation for the same baking slot.
- Such irregularities trigger double-baking and double-endorsing operations that cause the offender to lose a portion of its stake (i.e. a security deposit).
Node:
- It manages the context, which is the local knowledge of the Tezos blockchain state, and the connection to the gossip network and other nodes.
Client: The Tezos client is the main interface to the node. The client can read the context and inspect the state (get) and it can instruct the node to perform work such as broadcasting an operation to the network.

🏛️ Governance model

Tezos is a self-amending blockchain network that incorporates an on-chain mechanism for proposing, selecting, testing, and activating protocol upgrades without the need to hard fork.

The self-amendment process is split into 5 periods:

Proposal Period:
- Bakers can submit proposals on-chain by submitting the hash of the source code.
- A proposal submission also counts as a vote, which is equivalent to the number of rolls in its staking balance at the start of the period. Other bakers can then vote on the proposals during the Proposal Period up to 20 times.
- At the end of the Proposal Period, the network counts the proposal votes and the most-upvoted proposal proceeds to the Exploration Vote Period. If no proposals have been submitted or if there is a tie between proposals, a new Proposal Period begins.
Exploration Vote Period:
- In the Exploration Vote Period, bakers may vote on the top-ranked proposal from the previous Proposal Period. Bakers get to vote either “Yay”, “Nay”, or “Abstain” on a specific proposal. “Abstain” just means to “not vote” on a proposal. As in the Proposal Period, a baker’s vote is based on the number of rolls in its staking balance.
- At the end of the Exploration Vote Period, the network counts the votes. If voting participation (the total of “Yay,” “Nay,” and “Abstains”) meets the target, and an 80% majority of non-abstaining baker approves, the proposal proceeds to the Testing Period.
- The voting participation target tries to match the exponential moving average of the past participation rate. If the voting participation fails to achieve the target or the 80% supermajority are not met, the amendment process restarts to the beginning of the Proposal Period
Cooldown Period:
- Cooldown period is also known as testing period.
- The updates are exhaustively tested in this period.
Promotion Vote Period:
- At the end of the Testing Period, the Promotion Vote Period begins. In this period, the network decides whether to adopt the amendment based on off-chain discussions and its behavior during the Testing Period.
- As in the Exploration Vote Period, bakers submit their votes using the ballot operation, with their votes weighted proportionally to the number of rolls in their staking balance.
- At the end of the Promotion Vote Period, the network counts the number of votes. If the participation rate reaches the minimum quorum and an 80% supermajority of non-abstaining bakers votes “Yay,” then the proposal is activated as the new mainnet.
- Otherwise, the process once more reverts back to the Proposal Period. The minimum vote participation rate is set based on past participation rates.
Adoption Period: The Adoption Period provides a “cool-down” allowing developers and bakers some additional time to adapt their code and infrastructure to the upgrade based on the results of the Promotion Vote Period.

Each of these periods lasts five baking cycles (i.e. 40,960 blocks at 30-second intervals or roughly 14 days, 5 hours), comprising roughly 2 months and 10 days.

Should there be any failure to proceed for a period, the whole process reverts to the Proposal Period, effectively restarting the whole process.

🤑 How much money does the project have for future development ?

Tezos conducted an ICO from June 28, 2017 to July 13, 2017, in which 65,681 BTC and 361,122 ETH were raised.
20% of XTZ tokens were allotted to Tezos Foundation and Dynamic ledger solutions(DLS).
Users can attach invoices while submitting proposals for upgrades. The protocol automatically mints and allots the number of tokens specified if the proposal is successfully approved in the government process.

👍 Tailwinds

Inflation funding: Tezos community can vote to mint additional tokens to fund future development.

Network effects: The value of network will grow exponentially as new users join and more apps are being built.

Tezos court case

The fundraiser for Tezos began on July 1, 2017 and received 66,000 bitcoins and 361,000 ethers, which had a market value of $232 million. The contributions were termed “non-refundable donations” though some participants considered them to be an investment. If considered an investment rather than a donation, it would fall under the purview of the Securities and Exchange Commission (SEC).

After the ICO, it was planned that the Tezos Foundation would pay to acquire DLS, and if the Tezos blockchain functioned for at least three months, the Breitmans would receive 8.5% of the ICO and 10% of the tokens.

However, things did not go as planned. By October, the Breitmans and Gevers were in a dispute over control of the project, with the Breitmans alleging Gevers pressuring the foundation council into signing a contract giving him a bonus of $1.5 million.

Gevers refused to give the Breitmans their payout, which was valued at around $70 million in cryptocurrency. By December, three lawsuits had been filed in the United States alleging fraud during the fundraiser and that Tezos was an unregistered security.

In 2018, Gevers resigned after receiving $400,000. Tezos went live that September. The Tezos Foundation paid $25 million in 2020 to settle its lawsuits before federal courts.

😨 Risks and challenges

Developers have to learn and use Michelson programming language to build apps on Tezos. Michelson is not a widely used language, unlike Solidity.

Competition: There are many layer 1 smart contract blockchains that are direct competitors to Tezos.

💰 Tokenomics

A total of 763,306,929.68 XTZ were issued at launch and allocated as follows:

79.59% was allocated to ICO participants
0.41% was allocated to Early Backers and contractors
10% was allocated to the Tezos Foundation
10% was allocated to Dynamic Ledger Solutions (DLS)

These tokens will be released as follows:

Token Inflation

Bakers earn a block reward of 16 XTZ for baking a block. In addition to the Baker, 32 Endorsers are randomly selected to verify the last block that was baked. Endorsement rewards can be up to 2 XTZ.

Block rewards are funded via newly issued coins. The annual outstanding inflation rate is set up to target a maximum of 5.51% per year.

New XTZ can also be minted to fund future development by the community.

XTZ are burned in case a baker is caught acting maliciously (double baking or double endorsement).

However, overall inflation is expected to remain at around 5%. This is not a bad thing as it incentivizes XTZ holders to stake their tokens making the network more secure.

Demand pressure

Token’s price increases due to demand pressure.

Demand pressure on XTZ will come from:

Governance: Users will acquire XTZ tokens to participate in the governance process.
Transaction fees: Users will acquire and pay XTZ tokens to include their transactions in Tezos blockchain.
Staking and delegation: Users will also acquire XTZ tokens to participate in the process of block validation.
Speculators: They will acquire XTZ tokens for future price appreciation.

Supply pressure

Supply pressure on a token decreases its price.

Supply pressure on XTZ will come from:

Stakers and delegators: They are rewarded block rewards for adding new blocks to the blockchain. They have the choice to stake the earned rewards to compound the yield or sell them.
Early investors: They have made a significant profit 0n their initial investment. Some of them will cash out to realize their gains.