Most recent update: [June 26, 2023]
What is Tezos?
Tezos is a “self-amending” decentralized platform for building decentralized apps (dApps); in a way, it is similar to something like Ethereum, but what sets it apart from other platforms is its unique on-chain governance mechanism. XTZ (colloquially known as a ‘tez’ or ‘tezzie’ by users), Tezos’ native token, is used by holders of the token to vote on the direction of the project.
For those who are familiar with the cryptocurrency projects of today, this may not seem like a revolutionary feature. Tezos was created in 2014, however, and you might say that it pioneered the decentralized autonomous organizations (DAOs) that we see now. Additionally, many projects require users to stake off-chain on a website or external platform in order to vote on a proposal, whereas Tezos does all of this on chain. By using this system, Tezos aimed to eliminate the chance of the protocol forking when updates or changes were made. And, because proposals are settled on-chain, Tezos is much easier to upgrade than other protocols and is always open to the newest, up-to-date innovations.
Who is behind Tezos?
Tezos was founded by a husband and wife team consisting of Arthur and Kathleen Breitman.
Arthur Breitman is the CTO of Tezos and has had experience working with major firms like Goldman Sachs and Morgan Stanley. He is a computer scientist by trade and was inspired by watching the rise and innovations of Bitcoin. He wanted, however, to improve on the rigidness of the asset; he observed Bitcoin go through several hard forks, so he came up with the idea of Tezos to build on the original ideas of Bitcoin.
His wife, Kathleen Breitman, is the CEO of Tezos. She has had extensive financial experience working with companies like Bridgewater Associates and R3, where she gained a wealth of knowledge on distributed database technology.
How does it work?
Tezos is a decentralized platform for building dApps; it is designed to both execute smart contracts and design brand new programs. Unlike other platforms, however, the on-chain governance system ensures that Tezos is easily upgradeable and, as Tezos themselves puts it, will “remain state-of-the-art long into the future.” This all revolves around the derivative XTZ token, which token holders use to vote on proposed upgrades to the system.
Although staking and governance is now commonplace with DAOs, Tezos has a unique method of having users participate in its governance mechanisms. Holders participate by first staking a certain amount of XTZ – this process is known as “baking.” To become a baker, they must stake 8,000 XTZ. There is some financial incentive to this, as holders can choose to simply stake their tokens, or they can delegate their XTZ to bakers and receive a portion of newly minted XTZ from the protocol. Generally speaking, the vast majority of XTZ holders are not bakers – bakers usually own a larger amount of XTZ and may have developer experience. In the Tezos voting system, it is similar to our democratic process where the average XTZ holder delegates their coins to the baker whose proposals fall in line with their own wants for the protocol. Bakers are then tasked with voting on proposals in a four-step procedure that lasts 23 days, with the weight of each baker’s votes equivalent to the amount of XTZ that they stake. Once a proposal has received a majority vote, it is then run on a testnet over the course of 48 hours. Upgrades are only fully implemented once the proposal attains a super-majority. For a more in-depth look at how the entire Tezos process works, you can check out the additional resources at the bottom of this article.
Unlike other tokens, there is no maximum supply of XTZ. According to Kathleen Breitman, Tezos utilizes an inflation-based funding model, so despite there being no limit on XTZ tokens, they are able to hold their value. Tezos accomplishes this by rewarding XTZ holders with a proportionate amount of newly minted XTZ tokens every time an upgrade cycle passes. An analogy that Breitman uses to illustrate this concept is by comparing Tezos to the US treasury; imagine if every time the treasury were to increase the money supply, they also gave back a portion to your bank account. In this way, XTZ holders are incentivized to be active participants in the blockchain.
Security
Tezos uses a unique variation of the proof-of-stake (PoS) consensus mechanism called liquid proof-of-stake (LPoS). Similar to other PoS networks, LPoS is an algorithm used by the Tezos network to validate transactions and create security. When a holder becomes a baker (after a stake of 8,000 XTZ), they also become a validator that is trusted to secure the platform. Because there is a financial incentive and because XTZ holders can choose to offload their delegated tokens from a baker should they no longer trust them, it ensures that these validators perform their duties honestly.
Drawbacks & Risks
Tezos is innovative and unique in its field, but much of the value of the XTZ token is derived from the perceived popularity of the Tezos platform. Although it is a pioneer of blockchain governance, there are several competitors in the field that may perform certain aspects of the platform better than itself. Now, keep in mind that Tezos was built to be flexible and upgradeable, allowing it to keep up to date with the newest innovations – this is its primary advantage. However, when investing in Tezos, it is important to understand how the platform and its governance protocol works, and where it stands with other decentralized platforms. As always, we recommend performing extensive research and your own due diligence when investing into any asset.
Further reading
For a more in-depth look at how the baking process on the Tezos platform works, check out these resources below.
CoinMarketCap’s Tezos Deepdive: https://coinmarketcap.com/alexandria/article/a-deep-dive-into-tezos
Kathleen Breitman’s Tezos Overview on Gemini: https://www.gemini.com/cryptopedia/what-is-tezos-xtz-governance-use-cases
Tezos on Investopedia: https://www.investopedia.com/terms/t/tezos.asp
Tezos on Kraken: https://www.kraken.com/learn/what-is-tezos-xtz
Tezos on Abra: https://www.abra.com/cryptocurrency/tezos/
Due Diligence
Prior to listing Tezos on the VirgoCX Platform, VirgoCX performed due diligence on Tezos and determined that Tezos is unlikely to be a security or derivative under Canadian securities legislation. VirgoCX’s analysis including reviewing publicly available information on the following:
- The creation, governance, and location of Tezos and/or its primary development team;
- The supply, demand, maturity and liquidity of Tezos; and
- Legal and regulatory risks associated with Tezos.
Statutory Rights under Securities Legislation
VirgoCX is offering Crypto Contracts on crypto assets in reliance on a prospectus exemption contained in the exemptive relief decision Re VirgoCX Inc. dated May 30, 2022 (the Decision). Please be aware that the statutory rights in section 130.1 of the Securities Act (Ontario), and, if applicable, similar statutory rights under the securities legislation of each other province and territory in Canada, do not apply in respect of the Crypto Fact Sheet to the extent a Crypto Contract is distributed under the prospectus relief in the Decision.
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