Deep Dive Review into Tezos (November 2018) - Crush Crypto

Deep Dive Review into Tezos (November 2018)

Summary

  • Project name: Tezos
  • Token name: tezzies
  • Ticker symbol: XTZ
  • ICO date: July 2017

What is Tezos?

Tezos is a distributed, peer-to-peer, permissionless network that seeks to improve on older blockchain protocols such as Bitcoin and Ethereum.

One of its differentiating features is its on-chain governance that promises a self-amending blockchain – the protocol can evolve by upgrading its own code after coin holders have approved the changes.

This avoids some of the political and technological issues that have affected other blockchains, such as the Ethereum hard fork following the DAO hack, and the hard fork drama that happened in Bitcoin and Bitcoin Cash.

The project had a two-week uncapped ICO in July 2017. It collected approximately $232 million worth of cryptocurrencies and set a record for the largest ICO at the time. It currently has a market cap of over $782 million (as of October 31, 2018) and ranks among the top 20 cryptocurrencies in the world in terms of market cap.

There are 3 key layers in Tezos – network layer, transaction layer, and consensus layer. The components are modular, which makes it easy to upgrade by swapping modules in and out seamlessly. Other networks, such as Bitcoin and Ethereum, can be represented within Tezos by implementing the proper interface to the network layer.


Key Features

  • Self-amending: Tezos can be upgraded without the need for forks in the blockchain because of its self-amending feature. On-chain governance also means XTZ owners vote on the direction of the blockchain – the election cycle provides a formal process for any proposed protocol changes.
  • Liquid Proof-of-Stake: Tezos uses a proof-of-stake consensus model where every stakeholder can participate in validating transactions on the network and be rewarded accordingly. 

This table summarizes the differences between Tezo’s proof-of-stake consensus model and delegated proof-of-stake:

  • Formal verification: The Tezos blockchain facilitates formal verification, a technique which mathematically proves the correctness of the code governing transactions. This helps secure smart contracts and avoid bugs in the code.
  • Turing complete smart contracts: Tezos supports Turing complete smart contracts and provides a platform for building smart contracts and decentralized applications (dApps). 

Key Milestones

Tezos is an open source project and its source code can be viewed here: https://gitlab.com/tezos/tezos

  • August 2014: The position paper for Tezos was released.
  • September 2014: The whitepaper for Tezos was released.
  • August 2015: Arthur and Kathleen Breitman co-founded Dynamic Ledger Solutions, Inc., a US-based company to develop the Tezos blockchain.
  • September 2016: The source code for Tezos was published on GitHub.
  • February 2017: Public alphanet was launched
  • July 2017: Tezos raised more than 65,000 bitcoin and 360,000 ether during a public ICO (approximately $232 million). Tezos Foundation was created.
  • October 2017: The Breitmans sent a letter to two other members of the Swiss Foundation controlling Tezo’s funds and called for the removal of Johann Gevers, the President of the foundation. 
  • February 2018: Johann Gevers resigned from the foundation
  • June 30, 2018: Betanet was launched with a genesis block that became the seed of the network.
  • September 17, 2018: Mainnet was launched.

It should be noted that in the original white paper, it was stated that the Tezos network would launch in “summer 2017”. However, the network was not launched until June 30, 2018, almost a year after the initial promise.

The delay was partly due to the infighting between the foundation board members which led to the ICO funding being unutilized for a while.

For more details and for future updates, please check out Tezos Foundation’s news page at https://tezos.foundation/news and Tezos’ official blog at https://medium.com/tezos.

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Future Development

Tezos does not have a specific development roadmap. However, it is an open source project and its development progress can be tracked on GitLab.

Arthur Breitman, the co-founder of Tezos, recently published a blog post on October 20, 2018 discussing his high level views on the direction of Tezos going forward: https://medium.com/tezos/a-few-directions-to-improve-tezos-15359c79ec0f.


Token Economics

XTZ is the native cryptocurrency for the Tezos blockchain. With Tezos, coin holders can participate in the validation process by making a security deposit. This is a process calling “baking”. They are rewarded for contributing to the network and ensuring its security and stability and can lose their deposit if they exhibit dishonest behavior.

Initially, the inflation of the circulating supply is set at a maximum of 5.5% per annum. Each block is “baked” by a stakeholder and endorsed by 32 other random stakeholders. Coin holders can delegate their stake to a baker who can bake the coins for the holders for a fee. Click here for a list of bakers.

For more information about baking rewards and endorsements, please read the official documentation here.

Transaction fees on the Tezos network are optional and users can send transactions with zero transaction fee. However, we believe that if the network is congested, bakers will prioritize transactions with higher transaction fees.

Part of the newly minted XTZ coins will be rewarded to the contributors that won the proposals voted on-chain. The contributors will use the funding to execute the proposals.


Team

Tezos was created by Arthur Breitman and his wife, Kathleen Breitman. They released the position paper and whitepaper in 2014 and the project has been in development ever since. The biographies of the two co-founders are summarized below:

Arthur Breitman – Arthur was born in France and studied at École Polytechnique in math, physics, and computer science. He went on to a career in quantitative finance, working in various positions at Goldman Sachs and Morgan Stanley. He also worked as a portfolio manager for White Bay Group, a family office.

Kathleen Breitman – Kathleen co-founded Tezos in October 2016. Prior to that, she worked in strategy and consulting at R3 CEV (a distributed ledger startup), Accenture, and De Dicto and in various positions at Bridgewater Associates, The Wall Street Journal, etc. She obtained her BA from Cornell University in 2012.

The developers behind Tezos operate independently from Tezos Foundation (see below). They are primarily located in Paris, France and have been working on the ledger through a partnership with OCamlPro, OCamlPro is a software company focused on the development of OCaml, a programming language.

Tezos Foundation is managed by the Foundation Council, which is comprised of seven people responsible for overseeing the operations, capital deployment, and strategy of the foundation. The biographies of the people currently sitting on the Foundation Council are summarized below:

Ryan Jesperson, President of the Tezos Foundation – Ryan has been the President of Tezos Foundation since February 2018. Previously he was the COO of DivvyPay, a fintech company, and co-founder of JMS Technologies, a software solution company. He is also the owner of a consulting and investment firm, RNJ Management, LLC.

Michel Mauny – Michel has worked at Inria, the French National Institute for computer science and applied mathematics, for more than 30 years as a researcher and external collaborator. From 1989 to 2005, he led the research team that further developed OCaml and he is currently a Director of the OCaml Software Foundation. He was previously a professor for 11 years at ENSTA ParisTech, an engineering school in France.

Marylène Micheloud – Marylène is currently the Co-President of the Valais Academic Association and the Vice President of Combustia, a fuel retailer. Before her retirement in 2014, she spent a number of years in research and teaching.

Olaf Carlson-Wee – Olaf is the Founder and CEO of Polychain Capital, a crypto-focused hedge fund. He is also the Founder and a managing member of Cryptographic Financial. He was previously the Head of Risk & Product Manager at Coinbase, and was the first employee of Coinbase.

Pascal Cléré – Pascal is currently the President of Nomadic Development, a company based in France that is focused on developing the Tezos blockchain protocol. His previous positions include Senior Vice-President of Alstom Digital Mobility, President of IRT SystemX, and Vice-President of the Security Solutions and Services division of Thales.

Lars Haussmann – Lars is the Head of Corporate Management and Company Administration at Haussmann Treuhand AG, an accounting and tax consulting firm, where he has worked for 20 years. He has experience in corporate management, administration, and accounting. Lars is also a non-executive director of various Swiss companies in multiple industries.

Hubertus Thonhauser – Hubertus is the Founding Partner of Enabling Future, a VC firm focused on early stage tech startups. He was an early investor in Base58 Capital, a crypto-focused hedge fund, and Change Bank, a blockchain startup. He also has a decade of experience in the gaming industry.  


Analysis

Strengths

  • The self-amending feature of Tezos allows for any disagreement to be settled through the on-chain governance feature and this can help eliminate the hard fork drama surrounding some of the major blockchains. Also, the on-chain governance allows the network to adapt and improve over time.
  • Tezos Foundation has ample resources to support development of the protocol. The Foundation is among the most funded blockchain projects and has been actively providing grants to those helping to grow the ecosystem.
  • Tezos Commons Foundation provides grants to projects that strengthen the Tezos ecosystem.
  • In a press release on September 10, 2018, Ryan Jesperson, the President of the Foundation, said that they have committed more than $30 million in grants over the last six months (to be paid out over multiple years) to various academic institutions, development groups, etc. to support the protocol. 
  • On October 11, 2018, the Foundation said they have committed funding to train more than 1,000 new software developers in 2019 focused on Tezos.
  • According to the latest funds and asset management update from the Foundation (released on October 10, 2018), they have around $500 million in assets.
  • Baking threshold is fairly low, which makes it easy for coin holders to participate in the staking and governance process. This is good from a decentralization standpoint. For small coin holders or those who do not want to maintain a node themselves, they can delegate their stake to other bakers for a fee.
  • The team members, including co-founder Arthur Breitman are easily accessible on social media. This provides a layer of transparency and confidence to the project.

Weaknesses

  • Throughput of the Tezos network is currently at approximately 40 transactions per second and there are many blockchain projects looking to achieve significantly higher throughput. This level of capacity is not nearly enough for mass adoption.
  • The project has been in the negative spotlight numerous times – there was a significant delay in ICO contributors receiving their coins, class action lawsuits, and a management crisis at Tezos Foundation. As a result of the internal dispute, the board was reorganized with new members. However, there is still not a lot of clarity over how the funds from the ICO will be used.
  • Some of the roadmap in the whitepaper in the “Mars-shot” scenario, which we believe raising $232 million would qualify, include (1) negotiating with a small nation-state the recognition of Tezos as one of their official state currencies, and (2) purchasing a banking license and deploying the Tezos blockchain as a backbone for business operations, which we believe will not happen.
  • Tezos has so far been unsuccessful in building a developer community, despite having a large war chest. According to this list, there are only 9 dApps being built on top of Tezos. Money is not the sole motivator for developers. If developers choose to build on Tezos only because of the funding they would receive, the chance of those dApps succeeding will be lowered significantly.

Conclusion

Overall Rating: ​C

We are of the view that on-chain governance, the most unique feature that Tezos brings, is overrated. We believe that on-chain voting, just like voting in other spaces such as publicly listed companies or politics, do not represent what most stakeholders truly want and are easily manipulated.

For example, during EOS mainnet launch, it took a week to receive 15% of all EOS coin holders’ vote. There weren’t enough votes until cryptocurrency exchanges voted on behalf of their clients.

On something as uncontentious as launching the EOS mainnet, which is something that should obviously be in the interest of all the EOS coin holders, the network had a difficult time receiving 15% of all the coins to vote.

We can assume that the matters pertaining upgrading Tezos would receive even less participation. If only a single digit percentage of coins voted, is the decision really representative of all the coin holders?

Moreover, a lot of coin holders delegate their stake to bakers, who will stake and vote on behalf of the delegates. The bakers could bribe by offering a lower fee in order to obtain more voting power.

As a result, the voting results may not accurately represent the true wishes of the underlying coin holders.

For those who would like to learn more about on-chain governance, here are two articles providing a more in-depth discussion: From Vlad Zamfir, blockchain researcher, and Fred Ehrsam, co-founder of Coinbase.

Moreover, it is not to say that Tezos will never have a hard fork. For example, if there’s a contentious topic in the future, even though a vote will set up and one side will win, the losing side may decide to fork to a new chain and bring part of the community with it.

On a separate note, as a new generation blockchain, the capacity of 40 transactions per second does not provide the scalability needed for mass adoption.

However, one positive catalyst for the project is that XTZ is currently not listed on any major exchanges. If it is listed on a large exchange, it could have a positive impact on the coin’s price.


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Additional Resources


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