Tezos is a liquid proof-of-stake smart contract platform focusing on formalizing blockchain governance and enabling formal verification for smart contracts, which provides certain mathematical guarantees that a smart contract does what it is programmed to do. Tezos’ on-chain governance processes is designed to be broad in scope, allowing token holders to alter any parameter of the protocol, including the ledger operations, consensus algorithm, and governance model. This is intended to allow the protocol to remain flexible and adapt with changing technology based on token holder’s interests—thus addressing a perceived problem with Bitcoin and other cryptoassets, where miners, validators, or other stakeholders can exert outsized influence on protocol direction. Tezos describes its governance as 'self-amending,' because stakeholder approved protocol changes are implemented automatically.
Tezos’ founding is a tale of controversial fundraising, a sensational raise, organizational infighting, and lawsuits. Co-founded by Arthur and Kathleen Breitman, Tezos raised $232 million during its 2017 token sale. Criticism surrounding the token sale includes:
- In its Terms of Allocation, contributions are described as ‘non-refundable donations’, with sale participants waiving the right to class action lawsuits. The attempt to cast token sale participants as ‘donors’, with the implicit goal of avoiding securities regulation, was not unique to Tezos, though it did seem like the starkest version of double-speak during the 2017 ICO boom.
- The supply of tokens, XTZ or ‘tezzies’, was not released to sale participants till June 2018, nearly a year later from end of sale, and introduced new KYC requirements to retrieve previously purchased tokens.
- The process for claiming purchased tokens was perceived by some as onerous, and included several items easily misplaced, such as the token sale contribution, seed phrase, token sale user password, user public key, and the activation code received from KYC completion.
- Internal disagreements and lawsuits also led to delays in betanet launch and release of development funds, and the project faces SEC scrutiny.
Despite this friction, the mainet launched as of September 2018.
Tezos is a platform that, like Ethereum, supports Turing complete smart contracts, yet differs from Ethereum in its consensus algorithm, governance mechanisms, and smart contract programming languages. Tezos major features include a liquid proof-of-stake consensus algorithm, on-chain governance and native funding, formal verification for smart contracts, and a zero knowledge proof scaling solution.
For consensus, Tezos uses a variation of proof of stake dubbed ‘liquid proof-of-stake’, which is designed to lower barriers to entry for validators. Liquid proof-of-stake differs from delegated proof-of-stake in that delegation is optional (anyone can become a delegate that contributes to consensus directly by delegating themselves), that validation requires modest computing power, and that the set of validators is dynamic, not fixed. Users also have the option of delegating their tokens to others, who perform the work of validating the network state. In addition to acting as a full consensus node, ‘bakers’, Tezos' equivalent to miners, can become signatories and earn rewards for signing completed blocks. Right to bake is determined when owned tokens are randomly selected to create blocks, with baking additionally requiring the baker to freeze tokens in a dynamically set bond, forfeitable upon malicious behavior.
Tezos additionally uses checkpoints: hashes of the blockchain’s state stored outside of the blockchain itself. These checkpoints are read by the nodes (usually hardcoded into the client software) to validate the current blockchain up to that point. Checkpoints limit the window in which attacks on the network can take place— an attacker who wanted to fork the network would need to build up an alternate chain and push it to the network between two checkpoints hashing events. Despite this, checkpoints are controversial because they are considered a form of centralization, as they are stored off-chain and managed by the foundation.
Onchain governance and native funding
Tezos’ governance is self-described as ‘broad scope’ by design, meaning that the ledger’s operations, consensus algorithm, and governance model are designed to be revisable in light of reasons and evidence. In practice, Tezos has governance processes for funding protocol development, making and incorporating protocol changes, and for determining participation in network consensus. Participation in Tezos’ governance processes is tied to token holdings: tezos token holders can delegate tokens, influencing who participates in consensus and governance as a baker, and bakers can propose and vote on development proposals or protocol amendments.
Tezos attempts to simplify formal verification for smart contracts. The team invented Michelson (described as a mix between Forth and Lisp), a purely functional programming language, for its smart contracts. Tezos itself is implemented in OCaml. OCaml is primarily a functional language popularized in the financial industry by the hedge fund Jane Street.
Formal verification provides certain mathematical guarantees that a smart contract does what it is programed to do. This typically involves creating an abstract mathematical model of the smart contract that can be proved to be equivalent to the specifications provided. By doing so, one can establish an equivalence between the smart contract and the specifications, so that as far as the specifications are accurate, the smart contract will also be accurate. This eliminates many common forms of bugs in smart contracts. However, that does not mean that the smart contract will behave as ‘expected’ — just that the contract will be consistent with what is expressed in the formal verification.
Long Term Scalability
For long term blockchain scalability, Tezos plans to implement Zcash’s zero knowledge proof protocol, with a few minor revisions. Tezos’ proposed method separates the execution of a smart contract and its verification by the consensus nodes. The smart contract’s actual execution is done on specialized servers, so is in respects executed in a more centralized manner, but with the consensus nodes verifying that the execution is indeed valid, based on the proof submitted to them.
This method greatly reduces the load on consensus nodes, as they only verify the proof and do not need to execute the entire smart contract. This also preserves the decentralization property of the smart contracts, since the consensus nodes would reject any invalid execution being presented to them by a malicious actor. Tezos plans to eventually switch to the STARKs protocol, which is similar to SNARKs but is less resource intensive and does not require trusted setup. More information about Tezos’ approach to scaling can be found in their blog post.
The Tezos token, XTZ, is the native blockchain token for Tezos. XTZ’s functions are somewhat analogous to Ethereum’s ETH: XTZ will be a store of value, the sole means of paying transaction fees, and payment for smart contract execution. The token is also used to determine who participates in both the liquid proof of stake consensus and governance process, with token holders able to delegate tokens to determine who acts as a baker, and to provide validator oversight, with bakers staking tokens forfeitable upon malicious behavior. The overall token supply increases at a 5.4% emission rate each year, subject to change by vote.