Tezos is a fully upgradeable proof of stake blockchain platform offering ironclad security and energy efficiency with each transaction. A self-evolving design enables network upgrades without contentious hard forks, giving Tezos the power to change seamlessly.
However, for many Tezos is still best known for its highly contentious $225 million ICO back in 2017. What started as the highest ICO raise in history ended in several class action lawsuits and countless newspaper bylines which warned of cryptocurrency’s perils.
Fast-forward a few years and Tezos has proven itself as one of a few layer one blockchains to gain real-world traction. Today, globally recognized names like Manchester United, Formula 1, and Ubisoft have all partnered with Tezos.
It’s tempting to call Tezos an Ethereum competitor, but in reality, that’s not what Tezos set out to be. The platform is carving a solid specialization in scaling NFTs to the masses without the high fees and ecological damage synonymous with Ethereum NFTs. Here’s everything you need to know about Tezos, the XTZ token, and why its proof of stake blockchain is getting adopted for NFTs, DeFi, and more.
What is Tezos?
Tezos is an environmentally-friendly blockchain that uses a proof of stake consensus algorithm to create a secure network without emitting a large carbon footprint. However, before Tezos built a reputation for energy-efficiency, it was busy pioneering on-chain governance structures that enable forkless network upgrades. Notably, the Tezos white paper dates back to 2014.
The importance of upgrading a blockchain without contentious hard forks (i.e., splitting the network into two or more competing instances) was always central to founders Kathleen and Arthur Breitman’s vision. After all, Ethereum’s DAO hack and subsequent fork proved so divisive that subsequent blockchains all had the perfect case study for pivoting toward alternative governance models.
Their vision was roundly applauded by cryptocurrency investors who poured nearly a quarter-billion dollars into the project during its crowdfunding phase. The staggering sum raised was a record amount at the time and proved that the demand for a new approach to blockchain free from Bitcoin-inspired mining was apparently insatiable.
However, a spate of lawsuits and troubles within the Tezos Foundation hobbled development and clouded the network’s initial debut (and, presumably, impacted adoption rates).
Dramas aside, the Breitmans approached their Tezos design with two notably unique implementations. Tezos uses delegated proof of stake and its smart contracts are coded using the OCaml programming language. These are both departures from blockchain design as usual, but far from giving Tezos unacceptable quirks, instead serve to make the network highly-secure and convincingly scalable.
How Tezos Works
Like other smart contract-enabled blockchains, Tezos sends and receives cryptocurrency transactions. Sometimes those transactions are for payments, i.e., Alice paying Bob in XTZ tokens for an NFT. At other times, the transactions trigger smart contract functions like token swaps on a decentralized exchange.
The way Tezos accomplishes these transactions is where the differences from other blockchains come into play — and the differences matter. Tezos uses a triple protocol approach that cumulatively makes up what’s called the network shell. The cohesive and seamless functioning between inner-protocols enables key Tezos features, namely:
Upgrades without hard forks
Thankfully, you don’t have to be a software developer to understand how Tezos achieves these features. The starting point for understanding how Tezos works is getting a grasp of baking. Like mining Bitcoin and staking Ethereum, baking refers to the act of validating transactions and is a core component of the Tezos network.
Let’s take a closer look at what Tezos bakers do.
Your local baker prepares the delectable loaves on display every morning by preparing ingredients, combining them appropriately, and putting them in an oven at the correct temperature. When done correctly, these steps guarantee a specific outcome — namely, fresh loaves of bread.
A Tezos baker acts in much the same way to achieve a perfectly baked block of transactions. Perfectly baked means that each transaction contained in the block is correct, thereby enabling consensus building. Therefore, network transactions are the most important ingredient for the Tezos baker.
However, to properly bake them, they need more than just transactions. Tezos uses a modified version of proof of stake called Emmy+, a delegated proof of stake algorithm. In Emmy+, a high threshold holding of the network’s native token is required to be selected as a block’s baker. The current minimum holding required is 8,000 XTZ but, as you might have guessed, the more XTZ you hold, the better your chances of being selected to bake.
If you don’t have 8,000 XTZ to spare (nor the computing resources necessary for baking), you can delegate your XTZ to someone who does. That’s why, as a delegator, you want to delegate your XTZ tokens to a baker with a big tez bankroll — bakers re-distribute the rewards they receive for baking blocks back to delegators. So, if you’re on board with a big baker, your delegator rewards will stream in regularly.
Blockchain technology has been taking a lot of heat for producing insane amounts of carbon emissions. According to Digiconomist’s estimates, Ethereum, the current leading layer one blockchain, has roughly the same carbon footprint as the entire nation of Singapore.
That’s due in large part to Ethereum’s consensus design. Like Bitcoin, Ethereum relies on a proof of work consensus algorithm that, in effect, requires an increasing amount of electricity, computing resources, and heat expulsion to continue securing a growing network.
In contrast, Tezos uses the energy-efficient proof of stake Emmy+ consensus mechanism covered in the previous section. The benefits of baking mean the Tezos network does not rely on the cost of electricity, amongst other factors, to keep the network safe. Instead, it uses a combination of incentives (baking rewards) and penalties (slashing a baker’s stake) if the baker acts maliciously.
Using a system of incentives and penalties rather than resource allocation (as in PoW systems), Tezos, along with other proof of stake designs, consumes orders of magnitude less energy than Bitcoin and Ethereum. Currently, Tezos uses roughly 25 million times less energy than Bitcoin per transaction and nearly 2 million times less energy than Ethereum.
Moreover, as computer hardware technology improves and renewable energy sources continue their meteoric rise, the already miniscule energy requirements for the Tezos network should decline further.
Built for Programmers
Simply put, if you don’t have a rich base of developers working on your platform and within your ecosystem, your network is unlikely to succeed. Ecosystem tools must encourage developers to learn the network, migrate from elsewhere, or otherwise feel motivated to build programs people want to use on your blockchain.
That’s a point Tezos focused on early and accomplished well — the proof, as they say, is in the pudding. Today, Tezos boasts one of the most adopted networks in the cryptocurrency industry. At just over 130 projects in total, the Tezos ecosystem has seen the likes of Coinbase, Red Bull, Rarible, and gaming giants Ubisoft join the network.
Enabling easy access to the network for traditional big-name companies is paramount — but doing so with new technology like blockchain is tricky. That’s why, at the functional programming level, Tezos is written in OCaml, a language already widely used by companies like Facebook and Docker. However, at the smart contract programming level, Tezos has introduced a custom language called Michelson that uses stacks instead of variables to modulate contracts in an immutable way.
Of course, not everyone is keen to learn a new programming language — especially if they’re already experts in something more common like Python. That’s where SmartPy, a smart contract development tool for Tezos, comes into play. It creates Michelson code outputs via an included compiler making it super simple to write in Python while developing smart contracts for Tezos applications.
Low Transaction Fees on Tezos
At the end of the day, Tezos just works. It may not have the highest transaction per second speed in the world, and neither does it have the name brand cache Ethereum enjoys, but it doesn’t seem to need either.
What brings applications to Tezos is the reliable nature of the network, its light footprint, and the extremely low transaction fees charged for using decentralized finance applications and buying NFTs. In fact, it’s because of these low transaction fees that NFTs thrive on Tezos.
During times of high transaction volume, Ethereum gas fees tend to spike into the hundreds of dollars, making it common to pay more in fees than the value of the NFT being bought. Imagine that.
That’s where the current boom of Tezos NFT platforms is coming from. Objkt, fxhash, Teia, and Versum are all posting record NFT sales volumes on the strength of Tezos’ user and wallet-friendly transaction costs.
What is The XTZ Token?
Tezos has a token with a pretty cool name — XTZ. It sounds like ecstasy, which is the feeling you get after paying a single-cent transaction fee after years of being robbed by Ethereum. But the XTZ token, or tez as some call it, is more than just a cool-sounding cryptocurrency.
Using XTZ for Governance
Governance is how all the blockchain magic happens on the Tezos network. In a nutshell, people work together using Tezos cryptography to propose ideas, vote on them, then implement them without any blockchain splits (i.e., hard forks) required. This setup saves everyone a lot of hassle by allowing for seamless upgrades to take place. How do people propose and vote on Tezos governance measures? The answer is by signaling skin in the game with your XTZ token holdings. But not just anyone holding XTZ can propose amendments or vote on them — that’s a responsibility left to bakers. That’s why it’s crucial to delegate your XTZ with a baker who shares your values and vision for the network.
Earning Staking Income With XTZ
When you delegate your XTZ to a baker to increase their chances of being selected to endorse a block, you share in the rewards they receive. Right now, the rewards for staking (delegating) XTZ are around 6%, but that number isn’t fixed. Sometimes it’s more, sometimes less — it all depends on network activity and the success of your elected baker.
To stake your XTZ, all you have to do is make a few simple clicks from within a Tezos wallet such as Temple. Then, you should start receiving rewards within 3-weeks to 1-month. The difference in how long you wait amounts to whether your delegator waits for their rewards to become liquid before paying you or if they pay delegators upfront from personal funds.
Additionally, delegating your XTZ does not require you to lock your tokens, unlike regular token staking. Instead, you can freely add or withdraw XTZ from your balance while staking. If your balance changes, the amounts reflected will shift in later payouts.
Buy NFTs With XTZ
XTZ is the primary currency across major NFT marketplaces on the Tezos blockchain. Unlike other networks, Tezos does not have a highly-developed multi-asset ecosystem full of stablecoins and alternative tokens. So, when it comes time to pay for an NFT on one of the many Tezos NFT platforms available, simply reach into your wallet for XTZ.
After a dramatic ICO and very public lawsuits, Tezos went into low profile mode as people appeared to write the project off as a failure. However, that perception couldn’t be farther off. Tezos has quietly attracted a thriving art community, significant gaming and sporting franchises, and the very vocal support of Coinbase tech lead Andrew Choi.
That all adds up to make Tezos one of today’s most exciting ecosystems, if only because it’s one of the few blockchains outside of Ethereum drawing organic adoption from everyday users. After all, not everyone is spendy enough to afford Ethereum’s high transaction fees, and moreover, the time for lowering cryptocurrency’s impact on the environment is now.
About The Author:
The Shrimpy Team
The Shrimpy Team is comprised of highly experienced content writers who analyze and research the latest market trends, delivering content suitable for both beginner and veteran crypto investors.
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