An introduction to Tezos

By Allen Walters | Publish0x posts | 10 Feb 2020

Tezos main net has been up and running since the summer of 2018 without any major issues. In this period, Tezos' unique on-chain governance model, has since done what it was designed to do and took Tezos though multiple upgrade cycles, improving and adding functionality. Tezos' native token is XTZ, and with the continuing price increase the last few months, many start to discover Tezos as a new interesting project. Mostly the focus seems to be aimed on the staking rewards. This is not the most interesting feature of Tezos though. If we look at other technical fundamentals, Tezos looks like a promising long term hold, not just because of staking rewards. Let's dive into the real reasons why one could expect it to be a long term hold.

An introduction to Tezos.

Content:

Decentralization.
Unique governance model:
- 1. Swift evolution
- 2. Tezos upgrade protocol prevents harmful chain splits.
Liquid PoS, not to be confused with DPoS.
Institutional-grade smart contracts.
Multiple smart contract languages
Funding system
Developers community.
Privacy
Tenderbake
NFT's (Non-Fungible Tokens).
New boundaries: First decentralized public blockchain that is used by Authorities
STO issuers shift towards Tezos
Some developments for application of Tezos in autonomous driving

Decentralization:

Something that is often forgotten, is the fact that real decentralization is one of the main factors that make blockchain different and valuable as a trustless database. Lets not forget which qualities made blockchain-based cryptocurrencies the revolutionary technology that it is famous for: “Blockchain, a decentralized, digital, safe, distributed ledger that can store any data, where the data is immutably stored once this data is registered.” Immutable is only immutable if there is no central power that can make mutations on its own. Decentralization is a huge deal that is often forgotten. BTC is as big as it is due to its decentralized nature. It's a program let loose on the internet. No central party can force their will on a truly decentralized blockchain. Since Tezos launched, Tezos is a truly decentralized blockchain.

Why do most cryptocurrencies choose for centralized or semi-centralized variations? This is due to the fact that decentralization brings issues that slow down and challenge smooth evolution and changes in its core code that are needed to keep up with market demands. Adding new functionality, fixing bugs, etc, it is a lot harder to do this in a fast manner in decentralized systems. Tezos uses a governance model that solves this issue, while maintaining to be fully decentralized.

Tezos' unique governance model (who decides how to move forward in Tezos' blockchain evolution):

One of the biggest problems for decentralized blockchains is the fact they need to evolve swiftly, to upgrade, add functionality, fix bugs and other things. To improve the core code and add extra functionality, the blockchain code needs to be upgraded and there needs to be consensus amongst the nodes, the majority needs to approve the changes and upgrade their nodes. (Nodes = computers run by miners/ stakers/ bakers.) If a change in the code is made and there is no majority, then the new code doesn't get's implemented in the main chain. But if a minority of the nodes decides to use the new code anyway, the blockchain will split (Fork). The main chain will continue to use the old code and a new chain splits and uses the new code. So this means there is no upgrade for the main chain. (For example BTC and BCH where BTC stayed as it was and the split chain used the changed code and became BCH.)

The above shows 2 problems:

The inability to evolve swiftly to new market demands. (For example the need for BTC to scale to be able to handle more transactions per second.)
The risk of a split chain, hard forks. (If an STO is launched on a chain that forks, then owners of tokens now own these tokens both on the original chain and the new chain. That's not a good thing for regulated tokens. Big nono.)

1. Swift evolution

Tezos solves this with their on-chain governance model which includes self-amendment. Upgrades are presented through a fixed amendment model. This all happens on the blockchain. The first pahse is the proposal phase. Any baker can submit a proposal in this period. The proposal that gets the most votes, advances to the next second phase. The second phase is the exploration phase. In this phase the voting is focussed on this single proposal. A supermajority needs to be reached for the proposal to advance to the third phase: the testing phase. In the third phase the proposal is tested on a testnet. Bakers can join and test the proposal on the testnet so they can decide whether or not they want to vote in favour of implementation in the main net. The final voting is done in phase four. Again a supermajority needs to be reached. After this the proposal is implemented in the main net and Tezos has evolved in a matter of 3 months.

The implementation of the upgraded protocol is automated. This means that after the final voting phase has finished and a supermajority is reached, the Tezos protocol calls for "activate". As a result, the nodes automatically download the code and they will start using the new protocol at the start of the next cycle.

You can follow the process here. Amendments are discussed on social media, with the Tezos Agora Forum as the main discussion forum. With two amendments implemented in last year, the governance model proofs it works. This is unique, this is groundbreaking, this is why Tezos' evolution is swift, this is why Tezos will evolve faster and smoother than any other chain. For an in-depth explanation of the process, I fully recommend reading this article.
Tezos' governance model also has benefits for projects that are build on Tezos. Projects like StakerDAO (And other DAO's to come) will be able to integrade this governance in their project. The Coase cardgame, Tezsure and USTDZ will do so too. The possibilities are enormous.

2. Tezos upgrade protocol prevents harmful chain splits.

Hard forks can cause community splits and chain splits. This means that whatever ran on the old chain, now lives on two chains. You had tokens on the original chain? Now you have two: one on each new chain after the split. This can cause trouble for Stablecoins, STO's and NFT's. Stablecoins are backed by actual value. So doubling the amount of coins is unacceptable. The same goes for STO's, with the addition that the SEC is watching that space carefully.

A recent example that emphasizes the real threat that hard forks could cause for DeFi and stablecoins is the possible upcoming ProgPoW fork for Ethereum. MakerDAO has a decision to make: will they stay with the original chain, or run on the ProgPoW chain? MakerDAO founder Rune Christensen confirmed that choosing the wrong chain, could collapse the DAI stablecoin if they end up choosing the chain which ends up with the lowest ETH price.

Tezos' on chain governance and auto-upgrade solves this issue. There are no split chains due to the revolutionary governance model of Tezos. Please read this full article on this topic.

PoS (LPoS for Tezos)

Instead of Proof of Work (PoW), Tezos uses Proof of Stake (PoS) as consensus mechanism. Tezos' variation of PoS is called Liquid Proof of Stake (LPoS). Everyone who owns Tezos (XTZ), can direct their coins towards the PoS system and become a block validator, for which in return they earn rewards. In Tezos, “staking” is a term that is not used. Instead this is called “Baking”. “Bakers” are the ones that start up a node and fixate a minimum of 8k XTZ. Baking will earn them rewards. (So as miners earn rewards in PoW, Bakers (Stakers) earn rewards in PoS.) Anyone who does not have the ability to start up a node, or simply does not want to, can “Delegate” their XTZ to a Baker of choice. Delegators don’t need to fixate their XTZ, and can stop at any time. Delegating is a very simple process in Tezos. In return for facilitating the bakingprocess for Delegators, Bakers get a percentage of the rewards that delegators earn.
Incentive to bake is apparently big enough to make Tezos the most decentralized PoS chain up to date with 400-500 nodes which, in turn, have an enormous amount of delegators. Delegators already have some influence on the voting process. Many Bakers already ask their delegators to voice their opinion on what to vote. More and more delegators even mention the importance of a democratic based vote from their bakers. This means that the voting model could evolve more into something where delegators will get more fixed influence.

From an investment point of view, LPoS is more interesting because owners of XTZ have the possibility to earn rewards instead of miners. On top of that, in PoS systems, there is no selling pressure from miners. Miners need to cover costs. (Electricity and money invested in expensive hardware.) So miners sell to cover costs. In PoS the stakers (bakers for Tezos) have way less costs to cover. (Less expensive hardware and way less energy costs.) Less selling pressure = less supply in the supply and demand balance. Also the incentive to hold long term is bigger if you can earn extra XTZ while holding on to your XTZ.

That Liquid PoS is a system with enormous potential, shows the latest developments. One after the other, big exchanges give their users the opportunity to delegate their coins while stored on their exchange. OKEx, Coinbase and Kraken lead the way. XTZ has become the first cryptocurrency with daily rewards on exchanges. Lately, for the first time ever, a Stock exchange launched an ETP based on Tezos (1-1 backed by XTZ) and give a return based on LPoS rewards. (Swiss' main stock exchange SIX)

The stablecoin USDtz, which is in development on Tezos, also fully utilizes LPoS rewards and will offer unique opportunities. (Returns if fixate for certain period, on-chain-lending)

Institutional-grade smart contracts:

When ETH offered the possibility to launch ICO’s with their ERC20 token, regulations where totally ignored. Now the realization has landed that regulations need to be implemented. For STO's (Security Token Offerings), you need to be able to have restrictions on the tokens you launch. ETH has made some progress and has a number of STO's on it's record, but new standards need to be developed. TokenSoft has just completed it’s proof of concept for its ERC-1404 token which allows integration of regulations and strict KYC documentation on smart contract. The ERC-1404 tokens still have their limitations though. One of the issues is the fact they are limited in interoperability.
Tezos already has their own standard of smartcontracts which make it possible to issue STO's. On top of that, these contracts are formally verifiable. Which means you can test them formally before you launch millions of $ of value on them. This is quite unique.

For independent judgement, lets start with the introduction of one of the leading security token issuance and management platforms and the creator of the ERC-1404 token: Tokensoft. TokenSoft partnered up with Tezos and will issue STO's on Tezos. Tokensoft projects that 25% - 35% of their 3 billion worth clientele will choose Tezos based STO issuance. “TokenSoft provides blockchain-enabled compliance infrastructure for issuers seeking to place equity, debt or derivatives on the blockchain. In 2017 TokenSoft launched the first platform to enable blockchain issuers to comply with securities laws internationally. In 2018, TokenSoft acquired US FINRA registered Broker Dealer TokenSoft Global Markets. In 2019, TokenSoft launched the world's first custody solution for security tokens which enabled cold-storage, multi-signature custody of blockchain-based securities. To date, TokenSoft customers have issued almost half a billion and are currently seeking to issue $3 Billion+ onto the blockchain.” (Source)

Tokensoft about Tezos:

"After performing diligence on the Tezos blockchain, we found that Tezos is great for high complexity, high value. With the formally verified contracts, you can now test high-value transactions prior to publishing them to the blockchain, providing greater confidence in safely and securely using the blockchain. Anything which furthers security and reliability is of interest to our clients."

More detailed:

The Tezos blockchain provides a high level of security and resilience to the security token market:

So Tezos is already able to provide high quality for STO issuers. But development doesn't stop and Tezos is working on a new standard: the NyX Standard. The NyX standard on Tezos will only improve the high standard Tezos already has for STO offerings. Developed by Equisafe, Nomadic Labs and OCTO Technology, the NyX Standard will be fully integrated in the Tezos chain. “The Nyx Standard will leverage the Tezos blockchain to automatically secure and execute over 160 predefined business rules, which will reduce transaction costs and avoid a number of administrative errors, specifically on topics of conformity.” The “ NyX is constituted of 160 fcts, 4 contracts & 3 modules. We’ll be able to do more than 1404. They will also be formally verified.”
The NyX is in development and is expected to be launched in Q1 or Q2 this year. Not only will the NYX standard have more extended functionality and options, but the final issuance of Security Tokens on Tezos will be as simple as filling out an on-line form. It deserves a full read, so here the link to the full NyX article. And here the Equisafe article. I want to emphasize that if you have any interest in Tezos and STO's, it's highly recommended to read these two articles.

STO's announced on Tezos so far:

STO's will have the following potential positiveeffect on the XTZ price: STO tokens are stored on the Tezos blockchain. Any transactions made, will need XTZ as gas. (Like ETH on Ethereum.) When transaction volume rises, XTZ scarcity rises. The first STO's won't have a huge effect, but every STO adds volume, and thus more demand for XTZ, which results in more scarcity and more upwards price pressure.

Multiple smart contract languages

"You don't have to write Tezos smart contracts in Michelson. There are other languages like SmartPy (Python), LIGO, Liquidity, Morley (Haskell), Fi (JavaScript / Solidity), Archetype (Ocaml) and compile those to Michelson. More will follow." - @djangobits

Latest article on Tezos smartcontract languages here. (Juli 7th 2020) “With its stack-based Michelson smart contract language, formal verification process for reliably proving smart contract functionality, and wide array of development SDKs, Tezos has positioned itself as an extremely developer-friendly blockchain platform.”

Funding system:

The Tezos Foundation has $650 million worth of funding at their disposal. This is obviously an enormous amount, that not many other projects can match. This warchest will fund Tezos' development for years and possibly decades. Any organization with a project that can move Tezos forward, can apply for a grant to fund their project. These are organizations that:

Improve Tezos and develop new amendments (see governance system)
Build projects on Tezos.
Increase growth of the developer community.
Community related organizations that provide education, partnerships etc.

The funding system doesn’t only provide a more decentralized structure by expanding into independent sub organizations, but it also makes Tezos' total and organic organization grow exponentially.

Besides funding by the Foundation, there is also the option to be funded by the Tezos protocol itself: developers that insert a proposal into the amendment cycle, can add an invoice that asks for a payout in XTZ (Tezos' native coin). If the amendment is accepted after the voting rounds the protocol mints the amount of XTZ and deposits it on the address that is included in the invoice. An example of protocol invoicing can be found in the first amendment that was proposed (and accepted) by Nomadic Labs: "Athens A". This invoice was symbolic (100 XTZ) and was added to show the concept works and is ready to take Tezos to the future. Besides eternal funding for developments, this feature also ads to the decentralization level of Tezos: anyone can work on improvements for Tezos core protocol and be compensated for it. (Assuming the amendment is accepted and implemented.) So even at this stage, if the Tezos Foundation does not fund work on a certain development, this development can still come through, both technically and financially. (Although it has to be pre-funded by the development team itself.)

Developers comunity:

The building of a developers community forms the basis for a storm of projects to be launched on Tezos. This takes time, but is in the making. The funding system Tezos uses, has given shape to several organizations that spread out world wide and form the basis of a growth in the Tezos developers community. Tezos is training 500 developers with their Tezos Blockstar Programme in collaboration with B9lab. Additionally, organizations like Nomadic Labs, Cryptonomic, and Stove Labs host workshops quite often. In august, @AMangiero stated that there are over 800 #Tezos developers who have been trained or are being trained.

In December last year, the Tezos Foundation announced they had 1,338 developers who were either still in training or had completed a Tezos training course.

Tezos Southeast Asia just announced their partnership with Tribe, which is Singapore’s first government-supported blockchain ecosystem platform. Tribe will run it’s training program for developers on the Tezos blockchain. With this partnership, Tezos Southeast Asia pushes an extremely interesting set of Singapore government applications towards Tezos. The training will start in Q1 2020.

“Tribe has experience in conducting both business and technical masterclasses for enterprises on other blockchain platforms and recognizes the potential in Tezos as a leading platform that would revolutionize various industries.”

Tribe’s official partners include Enterprise Singapore, IMDA, BMW Group Asia, ConsenSys, IBM, Intel, Nielsen, PwC, R3, and Temasek amongst others. It is a big step for authorities to deploy an application on a decentralized blockchain platform. Something that, thusfar, has not been done yet. The Partnership with Tribe could push the boundaries here.

Privacy

NomadicLabs is working on an implementation of the Zcash Sapling Protocol which will add privacy options to the network.

Tenderbake

Nomadic Labs, announced Tenderbake, a Classical BFT Style Consensus for Public Blockchains. The paper was published in collaboration with CEA-LIST. CEA-LIST is one of three specialized technological research institutes of CEA. CEA is a French Government funded research organisation with an annual budget of 4.7 billion Euros. (Credits to @The_H4LF_50UL) "Inspired by Tendermint, Tenderbake is a first exercise in experimenting with immediate finality in Tezos."

Recent developments on Tezos' Tenderbake is also being followed by the Bank of France. The Bank of France's interest in Tezos isn't a new development, they have been testing a Tezos node in the past (18 April 2019).

More info on Tenderbake here on TezosAgora.

NFT's (Non-Fungible Tokens).

NFT’s are unique tokens. Of each token, there exists only one. For example: 1 XTZ is one of many of the same, but an NFT would be something like a unique painting, only one exists. A well known use-case for NFT’s would be blockchain gaming. Unique items, owned by one specific player, registered on the blockchain. Fun part is that NFT’s can be tradable and, if there is demand, have value. For Tezos, NFT standards are in devellopment, and there is a game for Tezos in the making: Coase, a gaming company by Kathleen Breitman, Zvi Mowshowitz, Brian David-Marshall, and Alan Comer, will build a digital collectible card game on the Tezos blockchain. Kathleen Breitman on NFT standards on Tezos: “Plenty of people are working on different standards. What I'm also working on, which strongly differentiates us from other efforts in smart contract + gaming land, is a unique custody approach for NFTs.” There will also be an on-chain marketplace for NFT trading.

New boundaries: First decentralized public blockchain that is used by Authorities

The first smart contract ever developed by a public authority was deployed on Tezos. The French Gendarmerie’s cybercrime division (C3N) deployed their first smart contract on Tezos blockchain in November 2019. This is huge validation of the Tezos project. It shows the amount of trust authorities have in the security and development possible on Tezos.

Full press release:
November 19,2019

"The French Armies and Gendarmerie’s Information & Public Relations Center (SIRPA) announced that since September 2019, the Gendarmerie’s cybercrime division (C3N) has been validating judicial expenses incurred during investigations and recording them on the Tezos blockchain.

Debuting on the Tezos network, this is one of the first examples of a government entity using a smart contract for operational purposes.

The new program allows C3N to acquire cryptocurrency from Europol-allocated funds in order to cover operational costs. Utikizing a blockchain protocol like Tezos for this process simplifies administrative overhead by ensuring C3N funds remain auditable and traceable while maintaining strong security. The smart contract was deigned to only allow access to permitted individuals, effectively allowing C3N to justify an expense without any risk of disclosing operational activities and jeopardizing ongoing investigations.

Tezos is an open-source platform for assets and applications backed by a global community of validators, researches, and builders, with funding from the Tezos Foundation. Nomadic Labs is Tezos'main research and development centre. Based in Paris, it brings together more than 40 research engineers working on the development of a Tezos implementation."

In the end of January 2020, they announced they'd like to expand their initial project on Tezos. C3N has been running a smart contract on Tezos to simplify accounting. “On this type of financing, Europol asked us for precise accounting. So we spent the money and each transaction was entered on the blockchain quickly after purchase. This is what enabled us subsequently to have payments validated by Europol, ”explains Edouard Klein, R & D project manager at C3N.

The switch from accounting on traditional databases, has not only simplified accounting for C3N, it also drastically reduced costs. Where they previously had to add 40.- EUR for administration costs, these costs are now reduced to a few cents.

"We reported to Europol on December 18, with the history of all transactions recorded on the blockchain. With Europol, it worked very well and they validated our account book without any problem.”

“With this project, we have shown the technical feasibility of the project. Now we would like to scale up. But it takes political will to expand it.”

STO's and STO issuers shift towards Tezos:

Andra Capital

Tezos industrial grade smart contracts and long term governance model seems to be enticing enough for STO platforms to make the switch from Ethereum to Tezos. Andra Capital announced to launch their $500 million worth of STO’s on Tezos, while in 2018 they initially announced to use Ethereum as platform of choice.

Andra Capital’s announcement on Ethereum in 2018. Source.

"We’ve seen significant demand from issuers seeking to issue on the Tezos blockchain due to its institutional-grade qualities,” said Mason Borda, CEO of TokenSoft. "With Silicon Valley Coin’s availability in 50+ countries, Andra is showcasing the benefits of a globally accessible blockchain. TokenSoft takes pride in delivering an automated investor onboarding experience tailored to each jurisdiction and supporting transfer restrictions for ongoing administration."

Transfer Agent Vertalo

Transfer Agent Vertalo announced that they made Tezos their default blockchain for STO issuance. “The company has chosen Tezos because its smart contract abilities are available in multiple programming languages, Hendricks said. He also cited Tezos’ rate of transactions per second, stable network of participants and the collateralization opportunities offered by being a proof-of-stake network.”

Some developments for application on Tezos in autonomous driving

Tezos Korea and Chorus Mobility had a technology seminar at the Hyundai Motors Headquarter last year. They showcased Tezos and discussed future use cases to investigate possibilities for Tezos application in autonomous vehicles.

Chorus Mobility is working since 2018 on a Tezos-Based concept for vehicle to vehicle payments. In may this year Chorus Mobility received support and seed funding from the Tezos Foundation.

There is more interest in Tezos in that particular industry: Lately Carlo van Driesten, Project Lead Virtual Test & Validation, BMW Group, discussed Tezos blockchain in relation to autonomous agents. In the beginning of this year, they had a meeting with Nomadic Labs in Paris.

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