What is Tezos (XTZ) and How Does it Work? | KuCoin Crypto Gem Observer

2022/07/20 10:09:19

Blockchain technology has undergone massive changes since the launch of Bitcoin in 2008. However, most first-generation blockchain platforms feature limitations, including scalability and security. To address these issues, developers have to implement upgrades to the networks.

In some cases, the only solution is implementing hard forks on the networks. However, in most cases, hard forks drive wedges between community members with different outlooks. An example is the case of Bitcoin Cash, which forked into Bitcoin Cash and Bitcoin SV after developers failed to reach a consensus on how the network should proceed.

Hoping to address the issues affecting first-generation blockchain networks, Tezos launched as a self-amending blockchain network.

What is Tezos?

Tezos is an open-source, community-governed blockchain network. The network can run smart contracts for asset settlement and decentralized applications (dApps). Smart contracts and dApps that run on Tezos enjoy perks like censorship resistance, decentralization, and user control. The network also supports non-fungible tokens (NFTs).

Unlike first-generation blockchains, Tezos does not use a Proof-of-Work (PoW) consensus mechanism. Instead, Tezos leverages a Delegated Proof-of-Stake (DPoS) model. This model allows stakeholders to participate in vital protocol and governance decisions through an on-chain governance protocol.

Tezos uses formal governance to avoid discoordination and conflict among stakeholders in its ecosystem. This system means Tezos users can vote on vital network upgrades, which implement themselves without the need for hard forks. Additionally, the DPoS model minimizes the energy consumption of the Tezos network.

How Does Tezos Work?

As aforementioned, the Tezos blockchain is self-amending. The self-amending process features five periods. These are the Proposal Period, Exploration Vote Period, Cooldown Period, Promotion Vote Period, and Adoption Period. These periods last for approximately 14 days and five hours, around the same time needed to bake 20,480 blocks.

The proposal period allows delegates to submit or upvote proposals. In the exploration period, delegates can cast one Yay, Nay, or Pass vote on a given proposal. The cooldown period allows delegates to scrutinize the proposal. In this period, the community can discuss more details of the proposal. Developers can also conduct additional tests during this period.

In the promotion period, votes are tallied to check whether Yay voters reach the quorum. If the quorum is reached, the proposal proceeds to the adoption period. If the number of Nay voters exceeds Yay voters, the proposal reverts to the proposal stage.

The adoption period involves developers rolling out tools for the upcoming protocol upgrade. They release these tools off-chain, and community participants such as bakers update their infrastructure to support the new features. The proposal becomes active at the end of this stage.

Tezos runs on three vital protocols. These are the Network protocol, Transaction Protocol, and Consensus Protocol.

The Network protocol discovers blocks and broadcasts them through the Tezos chain. On the other hand, the Transaction protocol determines the validity of transactions. Meanwhile, the Consensus protocol enables Tezos to reach a consensus on the state of its blockchain.

In the Tezos ecosystem, the process of signing and publishing blocks is dubbed baking. People behind the baking process are known as bakers. Bakers are significant because they ensure all transactions in a block are correct. They also check whether there is consensus in the order of transactions and whether there are instances of double spending.

Bakers need to stake Tezos native token, XTZ. At the moment, bakers need to stake at least 6,000 XTZ. With the baking process being competitive, bakers with more XTZ get higher chances of baking a block and earning rewards.

Tezos adopters that don’t want to set up a baking system can become delegators by lending their XTZ to bakers. By lending out their tokens, delegators help bakers increase their chances of baking a block. In return, the baker shares baking proceeds with the delegator. To avoid malicious actors from stealing XTZ from delegators, Tezos does not allow the lender to transfer XTZ ownership while lending out tokens.

Who Created Tezos?

Tezos is the brainchild of Arthur and Kathleen Breitman. Arthur studied applied mathematics, computer science, and physics in France and financial mathematics at New York University. He previously worked as a research engineer for Google X and Waymo. On top of this, Arthur served as a quantitative analyst at Goldman Sachs and Morgan Stanley.

On the other hand, Kathleen studied at Cornell University and worked for a hedge fund before creating Tezos with her husband. Kathleen currently serves as the CEO of Dynamic Ledger Solutions, the company which created the first version of Tezos.

What is XTZ Used For?

The XTZ token enables holders to participate in the governance and protocol development of the Tezos network. By baking or delegating XTZ, the platform’s users earn rewards. These rewards encourage them to remain active participants. This model helps improve the network’s decentralization, preventing a small number of XTZ holders from controlling the network. On top of this, XTZ serves as a store of value and a means of payment.

What Makes Tezos Unique?

Unlike other blockchains, which have to undergo hard forks when developers and miners disagree, Tezos is self-amending. The blockchain leverages a Delegated Proof-of-Stake (DPoS) consensus model, which allows token holders to vote on governance and protocol development matters.

The five-stage proposal implementation process ensures the majority of the network’s users agree on protocol updates before launch.

Closing Thoughts

Tezos’ governance model and protection against hard forks position the project and its token for success. The DPoS consensus model also offers high decentralization by allowing token holders to participate in the protocol’s governance and development.