What Is Tezos (XTZ)?

Over the past two years, the blockchain ecosystem has been populated with hundreds of new decentralized applications, of which most are built on the Ethereum chain. Many times, this factor has caused a slowdown in transactions and the consequent increase in the gas price, which has prompted some users to ‘migrate’ their operations to other blockchains. However, Ethereum has not been the only chain to suffer from slowdowns. In fact, many of its competitors were affected by the same phenomenon, which has prompted developers to find innovative solutions to the scalability problems mentioned. Some of these solutions resulted in a hard fork of the chain, causing additional slowdowns. However, there is a project called Tezos that does not require hard-forks, thanks to its characteristics.

Tezos was created in 2014 by Arthur Breitman, who wrote the project’s white paper under the pseudonym of L. M. Goodman. Breitmain criticized Bitcoin and aimed to create a blockchain with an inclusive governance process that invited contributions from the community who use the network. In July 2017, the Switzerland based Tezos Foundation purchased all the intellectual property rights relating to the network, and subsequently organized an ICO (Initial Coin Offering) to raise funds. This move was successful and proved to be the most successful ICO to date; by January 2021 it ranked as the seventh-largest crypto coin offering. Finally in 2018, the project’s mainnet was successfully launched.

Tezos (XTZ) is an open-source and highly scalable blockchain platform designed for creating and hosting decentralized applications (dApps) and assets. One of its main features is its ability to evolve by upgrading itself without having to split (‘fork’) the network into two different blockchains. This is a very important point, as a fork usually divides the community, alters stakeholder incentives, and disrupts the network effects that are formed over time. So, to work around this problem, Tezos implemented a system where users can vote on important network changes that can implement themselves without the need for hard forks. In theory, this solution should not have any impact on the performance of the chain, and therefore, it should make it highly scalable.

How Does Tezos Work? System of Operations and Consensus Mechanism

Tezos’ blockchain can be split into two distinct parts: Network Shell and Network protocol.

The network shell is the code that handles transactions, administrative operations, and amends itself based on how users vote. It basically acts as an interface between the blockchain and network protocol. This shell is agnostic to the network protocol.

The network protocol is the part of code that sends proposals to the shell for reviews. After a certain period of time, it may promote the test protocol to replace the primary protocol.

To achieve consensus among the nodes in the network, Tezos uses an election mechanism called the Liquid Proof of Stake (LPoS) to select validators. LPoS is considered to be an innovation of DPoS (Delegated Proof of Stake), as delegation is entirely optional for network users. Every token holder can delegate voting rights to validators, who are known as ‘bakers’. In addition, the number of validator nodes is dynamic, as opposed to the fixed number in DPoS systems. In fact, Tezos can support up to 80,000 validators, which potentially makes it more decentralized than its competitors. In order to become a baker, a single node is required to bake 8,000 XTZ tokens. If a token holder does not have that amount of tokens or does not want to set up the required hardware themselves, he or she can delegate the coins to a baker.

What Is the XTZ Token?

XTZ is Tezos’ native utility token and cryptocurrency. It can be used as a medium of exchange or to participate in the platform’s on-chain governance functions. Transaction costs are generally very low compared to other similar protocols.

Tezos’ circulating supply count is around 908M tokens. XTZ doesn’t have a max supply and is subject to an annual inflation rate capped at 5.4%. It is important to note how the governance model functions through the holders of the token, whose votes are essential to approve any upgrade made by developers. Developers can also earn XTZ if their upgrade or modification proposals are accepted. In a nutshell, the potential of this token is mainly focused on the control and interaction with smart contracts, on the governance of the blockchain and on its block generation process.

Tezos Ecosystem

Although the Tezos project was launched very recently, there are already dozens and dozens of use cases, ranging from infrastructure to DeFi. Below are some of the most popular projects currently built on Tezos or using its blockchain.

• MountX: A new Real Estate Capital Investment Platform whose plan is to tokenize many real estate assets in both Mexico and Canada by leveraging the technology offered by Tezos. During an interview, the Co-Founder & CEO of MountX Enrique Suárez, said: “We decided to go with Tezos as it offers powerful technical innovations in terms of consensus mechanism, smart contract security, and self-upgrade procedures”;
• Tezos Liquidity Baking: A decentralized liquidity pool for XTZ / tzBTC pair. tzBTC is basically a ‘wrapped’ bitcoin on the Tezos blockchain. Tezos Liquidity Baking involves the creation of a stand-alone single-pair DEX (decentralized exchange) that supports trading with this pair. This can be done by minting a symbolic amount of XTZ at each block;
• Tezos Finance (Tezfin): A decentralized on-chain lending platform that will operate on Tezos blockchain. It will allow users to lend and borrow crypto assets. Basically, the same concept as Aave or Compound, but in addition, it will allow users to trade with synthetic assets created on the Tezos blockchain;
• Tezos & Ubisoft: Ubisoft, one of the leading companies in the video games sector, has entered into an important partnership with Tezos. The developers have confirmed the integration in upcoming NFT video games, which will be tradable among other things, and will most likely be minted on Tezos.

There are many other examples of use cases on Tezos, demonstrating that this is considered a well built and highly integrable blockchain, suitable for many sectors.

Is Tezos a Good Investment?

In most cases, the more developer activity there is on a project, the more demand for its token there will be to cover gas costs. At the moment, there are over 130 different projects built on the Tezos blockchain, and more are on the way.

A growing network demand, together with a positive market trend, should increase the price of XTZ in the medium to long term. However, it is important to point out that XTZ does not have a max supply, and is therefore subject to an annual inflation rate capped at 5.4%.

This means that the price of XTZ is not driven by scarcity like Bitcoin and could face downward pressure if demand for XTZ did not scale to meet its growing supply. On the other hand, the staking (or baking) returns earned by the network participants make the dilution of XTZ’s supply irrelevant and encourage more users to participate in securing the network.

For example in April 2021, almost 80% of all XTZ were locked up earning staking returns, meaning that there were less XTZ on exchanges, and the available supply was therefore effectively reduced. This factor usually has a very positive effect on the market.

How to Own XTZ?

One way to own XTZ is to go through a centralized crypto exchange, so the first step is to create a Gate.io account and complete the KYC process. Once you have added funds to your account, check out the steps to buy XTZ on the spot or derivatives market.

News on Tezos

In September 2020, it was announced that the French banking giant Societe Generale planned to use Tezos blockchain for experimenting with a central bank digital currency, in particular the implementation of a potential CDBC for Banque De France. The French institution also revealed plans to start offering crypto-asset structuring, issuing, exchange, and custody services to professional clients.

This is very important news, as this partnership could dramatically increase the adoption of the XTZ token, and thus bring the Tezos project to the top of the ranking of the most used blockchains in the sector.

Useful References

For the latest updates about Tezos, you can visit:

• The official website
• Twitter
• Discord
• GitHub
• Telegram
• Reddit

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