In this era of cryptocurrencies, it can get quite confusing to identify the differences between the thousands of different digital assets now listed on websites such as CoinMarketCap. One can understandably ask himself “Why Tezos even matters?”
In this short introductory article, I will answer this simple question by presenting the three main aspects which make Tezos differ from the other types of cryptographic ledgers. They are its unique governance mechanism, its reliance on a proof of stake consensus algorithm and its focus on formal verification. This is what makes me think Tezos matters, for the investor, the trader or simply the curious individual.
After getting its share of bad press in 2017 and early 2018, the Tezos main network officially launched on September 17th. This not only marked the long-awaited release of a network that raised 232 M $ during its ICO but also the launch of the first purely Proof of Stake cryptocurrency of this scale.
Proof of Stake
The fascinating computer science problem of reaching consensus on the state of a system between different nodes that have different sets of incentives is one that attracted a lot of bright minds in many spheres of science. Proof of Work is an elegant part of the solution that is now widely recognized for having been put into use as part of the Bitcoin protocol by the mythical Satoshi Nakamoto.
Despite its incredible success, some critics of POW have proposed alternative methods of consensus, one of which is the Proof of Stake algorithm. The idea is that instead of requiring validators to solve computationally intensive calculations to compete for the block reward, a random selection of validators based on their stake on the network is used for the same effect, thus requiring a lot less energy expenditure to maintain the ledger.
Tezos launched initially as a pure POS cryptocurrency. The emphasis on “pure” is to differentiate it from the delegated proof of stake (DPOS) model used by other digital assets. The main difference being that there is not a fixed amount of validators needed, but a dynamic theoretical number of 80,000 validators. Hence, anyone, given a minimum stake of 10,000 XTZ (native cryptocurrency), can participate in the validation process on the Tezos network, which allows for greater decentralization.
Baking is the process by which validators on the Tezos network propose and sign blocks. It is akin to mining in a proof of work protocol like Bitcoin, but it does not require for the baker to solve heavy computations and therefore is a lot less resource intensive.
For the moment, the requirements for running a baking node are quite modest, 8 GB of RAM and a stable internet connection with significant bandwidth is all someone needs to be its own baker. In the current Tezos implementation, the reward for baking a block is 16 XTZ, there is also a reward for endorsing a block which amounts to 2 XTZ per endorsement.
People who choose not to become a baker can also choose to delegate their holdings to a baker which will charge a small fee for baking with the delegated amount. At last, it is also important to note that bakers also have a significant role on the network because they also act as stakeholders in the governance process and can vote on protocol improvements.
Another differentiating aspect of Tezos is the formal governance mechanism implemented at its core. After witnessing the different systems proposed by projects such as Bitcoin and Ethereum, it was clear to the founder, Arthur Breitman, that there was a need for a formal governance mechanism in a blockchain network.
By formal, we mean here that the rules for upgrading the protocol to keep up with innovation are embedded at the protocol level and the rules by which upgrades can be pushed unto the software are explicitly written in the code. Instead of forking, anyone can propose an upgrade to Tezos that will be subject to a vote by the stakeholders following a formalized procedure. This could hopefully encourage a more decentralized decision-making process which can help the protocol in keeping up to date with the latest advances in technology.
Last but not least, another important characteristic of the Tezos protocol is its focus on security. As we have seen numerous times in the past, blockchains like any other software are prone to bugs that can be particularly harmful, especially since most of them are currently designed to transact value.
A poorly designed smart contract can easily be breached and could potentially result in the loss of a significant amount of money. A robust solution to this problem is to use a functional programming language that makes it easier to do formal verification on the code before deploying it.
In simple terms, this means it is possible to have a mathematical proof that a program will act according to some predefined constraints. Tezos uses OCaml for the code protocol and also Michelson for the smart contracts, which are both programming language that can be formally verified. It is only natural that mission-critical systems such as blockchains have this kind of focus on security for them to be considered valuable in the long term.
In short, amid what certain call a cryptocurrency bear market, Tezos matters because it proposes valuable propositions that place this network at the edge of innovation, be it on a computer science or economic level that ought to be considered.