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Hackernoon logoThe Darkhorse Dapp Killer: A Deep Dive into The Tezos Architecture, Governance, and Scalability by@julianhosp

The Darkhorse Dapp Killer: A Deep Dive into The Tezos Architecture, Governance, and Scalability

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@julianhospDr. Julian Hosp

Co-Founder CakeDeFi & I-Unlimited, Bestselling Author, Keynote Speaker, Medical Doctor, Athlete

Tezos certainly stands out from the mass of the many ICO projects of 2017 due to the continuing positive financial development of its token. This alone makes it interesting to deal with the Tezos project. A look at the basics of the project should help to understand if the chances for a further good development of the project are positive or if there are obvious dangers or bigger obstacles and a lot of Hopiom is involved.

Tezos is a decentralized platform for dApps and Smart Contracts and is therefore in competition with Ethereum, EOS, NEO, Cardano etc.
Already when looking at the competition, questions like “Why another dApp and Smart Contract platform?” or “Does Tezos have a chance to compete against these competitors?

This blog will first examine the financial development in more detail and then look at the question of specifics and competition.

Where does Tezos come from?

When asked about the meaning of the word Tezos, Arthur Breitman, the founder of Tezos, once said in an interview “it is the ancient Greek word for smart contracts”.

Would be a great origin, of course, if there had been a word for Smart Contracts 2500 years ago ;-)

The truth is, Tezos was chosen as name, because it is short, catchy and unique. If you enter Tezos at Google you don’t get dozens of other things for which Tezos is also used as a term. This certainly helps to be found, especially in the early stages.

The Tezos Foundation has — like so many other Blockchain foundations — its headquarters in Zug (CH). The history of the Foundation and the relationship with the Tezos founding couple Arthur and Kathleen Breitman was for a time marked by fierce disputes. Under Swiss law, the Foundation and its Board Members must be independent of each other.

Therefore, the plan was that the Tezos Foundation should incorporate the company Dynamic Ledger Solutions Inc. (DLS), which was owned by Arthur and Kathleen Breitman, would buy the Breitmanns for 8.5% of all funds from the ICO and 10% of all tokens.

Johann Gevers, the founder of the Crypto Valley Association Zug, was appointed Chairman of the Board of the Foundation.

Swiss Foundation is fully controlled by its board of directors, in this case Gevers and two other board members. The Breitmanns and Gevers were involved in heated public disputes. As a result of these disputes, which dragged on for an extended period of time, Gevers then “voluntarily” resigned. Due to the disputes, there were significant delays in the start of the project, which reduced the value of the Tezzies by 50%, leading to a number of class actions:

- Sale of unregistered securities
- Incorrect information on the use of funds
- Incorrect network start date
- Misleading advertising, unfair competition etc.

Although the contributions to the ICO were described as non-refundable donations, it is clear that the Howey test would consider them as security.
It seems that the class action lawsuit related to the ICO is finally about to be settled and that this chapter can be closed.

Despite all these events, the Tezos platform was then launched as Betanet on 30 June 2018. As the Betanet proved to be stable, it became the Mainnet in September 2018.

Financial development

Among the 10 largest ICOs in 2017, there are only 2 that currently show a positive ROI, EOS with 131% and Tezos with 288%.
Filecoin, the largest ICO 2017, currently has a ROI of -51%, all other ICOs have performed even worse from a financial point of view.

In a market as volatile as the crypto-currencies it is always good to measure the performance of a coin against Bitcoin, the undisputed #1. Only when you look at the financial performance of a coin against Bitcoin over a period of time can you see if it is really performing exceptionally well. It should also always be taken into account that the risk of Bitcoin approaching zero is considered to be lower than the comparable risk of other coins.

As can be seen from the table, Tezos has not only performed very well compared to Bitcoin, but has also seen an excellent price development, especially compared to the big competitors in the dApp and Smart Contract area.

Here is an overview of the development in 2020

Overall a very good development of the price, especially compared to the competition.

Very interesting here is the large fluctuation within the first almost 3 months in 2020 (upper two bars).

Financial figures

Governance-Model

The decentralised governance model of Tezos is certainly one of the very important aspects of this project. This area is essentially divided into mining (baking) and decision-making (governance).

Mining

Tezos uses a form of Delegated Proof-of-Stake (DPoS), often called Liquid Proof-of-Stake (LPoS). While EOS, which uses DPoS, has only 21 active block producers (delegates) and a number of standby delegates, according to mytezosbaker.com there are currently 118 so-called bakers in 36 countries, which are supposed to produce a block every 60 seconds. In addition to the bakers officially named on mytezosbaker.com, there is an even higher number of bakers not publicly known. Baker are the block producers in Tezos, their number can reach several ten thousand nodes in the future.

Besides certain HW requirements to run a node (Tezos Baking is Disk I/O intensive), the Baker needs 8,000 XTZ (at the beginning of Tezos there were 10,000).

This set of tokens that is summarized here is called “Roll”. In the future, the number of XTZ required for a roll will be further reduced to lead to more decentralization of baking. This change will happen in steps to observe the effects on baking.

The number of 8,000 XTZ does not have to be owned by the baker himself, but can be delegated by XTZ owners who do not want to become active as bakers themselves and still receive a part of the baking rewards. This form of simple passive income makes Tezos very interesting for many users. The important thing here is that the delegate (baker) does not own, control or even issue the tokens delegated to him.

The tokens remain in the owner’s wallet. This also has the advantage that the circulating amount of XTZ is not greatly reduced. For example, if 90% of the tokens were bound in the rolls, changes in demand for XTZ would have a greater impact on the variance of the price. In addition to various staking pools, Exchanges such as Coinbase and Kraken also offer staking of Tezos, currently with an annual return of ~6 percent.

The right to create a block (beacon) is granted several weeks in advance. An XTZ coin is randomly selected and transfers the right to create the block to the roll in which the coin is currently located. Accordingly, the more coins in the roll, the more likely a baker is to get the rights to create a block.

In order to be able to exercise its right to create a block, the baker must deposit a corresponding safety deposit. This safety deposit is lost if the baker violates the baking rules.

The amount of the safety deposit is fixed at 8.25 percent of the roll. This means that the baker should have at least 8.25 percent of the tokens in his roll. Since, as mentioned before, the rights to the baking are determined weeks in advance, the baker has time to buy or borrow missing tokens.
For each block he generates, the baker receives 16 XTZ plus the fees.

However, bakers can also be called in for a second task. This is to check the correctness of generated blocks (endorsing) and to confirm this accordingly.

Bakers must also deposit a security deposit for this. 32 Bakers are randomly selected to verify a generated block and receive 2 XTZ for each block they verify. Bakers who have proven to be scammers in the past are added to the black list, which can also be found on mytezosbaker.com.

The number of tokens issued by the protocol for baking and verification is such that the number of tokens increases by about 5.5 percent per year.

Governance

Tezos Foundation

The Tezos Foundation is based in Switzerland and regulated by the corresponding laws. The objectives of the Foundation are to promote and advertise the further development of the Tezos protocol and related technologies.

Furthermore, the promotion of the community is an essential mission of the Foundation.

For these purposes, the Foundation awards grants to members of the community, for the development of teaching materials, to scientific institutions, developers and other persons and institutions that help in the further development of Tezos. 

The Foundation’s semi-annual report, which was published on 19 March 2020, contains interesting facts about this.

For the six months since the last report in August 2019, over 200 requests for funding have been received, resulting in 78 grants. The recipients of the grants are spread over 26 countries.

The evaluation up to the allocation of funds follows a four-step process.

Here is the breakdown of the USD 37.6 million in funding approved through this process since August 2019

Details on the use and the organisations involved can be found in the half-year report. This report shows very well the multitude of groups involved in the ecosystem.

On-Chain Governance

The above-mentioned connections regarding consensus have a corresponding influence on on-chain governance. The participants of the consensus/baking are the decision makers regarding changes to the Tezos Protocol.

The owner delegates not only his baking rights to the baker, but also voting rights. Due to the — in all likelihood increasing — decentralization of baking, there should not be an unfavorable concentration of voting rights, as is the case with Lisk, for example. The owners of the tokens are always free to change delegates if their voting behaviour is not in accordance with their own preferences.

Voting takes place in three steps.

During the initial exploration phase, the bakers can vote with Yes (Yay), No (Nay) or Abstention (Pass). In order for the proposal or change that was voted on to be successful and for the project to move into the exploration phase, at least 81.39 percent of the Bakers must have voted in order for the quorum to be reached. Of those who voted yes or no, at least 80% must have voted yes. This is called supermajority.

When the test phase is finished, the promotion phase starts. Again, there will be a vote according to a similar pattern as described above for the investigation phase. If this vote is successful in terms of acceptance of the change, one of the core ideas behind Tezos comes into play.

After a successful vote, the Tezos nodes switch to this new protocol.
This automatic switchover to the new protocol is the self-amendment protocol of Tezos.

This process is intended to avoid forks such as Bitcoin -> Bitcoin Cash or Ethereum -> Ethereum Classic.

The first live test of this process started on February 28, 2019 with a proposal called Athens A, in which a vote was taken to reduce the minimum size of a roll (from 10,000 to 8,000) and increase the maximum gas fee.

The process for amendments to the Protocol runs over voting cycles of 131,072 blocks, i.e. about three months.
On tezos.help you can see the coordination phases and results of the protocol changes introduced:

Here is an example of the Athens Update:

The voting behaviour of the individual delegates and their voting weight can be seen further down on the corresponding page.

In the test phase there are no votes:

Here are the results of the final vote

Following the successful vote, the corresponding amendment to the minutes was incorporated into the minutes and the nodes switched to these minutes on 30 May 2019.

This was the first vote, and a proof of the functionality of decentralized governance. Further votes followed.

Roadmap
As mentioned above, the Tezos Foundation decides on funding for the development of external projects, which submit a corresponding application.

Since a large number of organisations are working on the further development of Tezos and submit applications for funding, there is no explicit roadmap. The Foundation responds to applications and suggestions instead of giving guidelines on what development one would like to see.


On Reddit you can find the following about the roadmap:

However, the half-yearly report mentioned above provides information on the initiatives for which subsidies have been approved.

Team

Community:

Facebook: 1600 subscribers
Twitter: 25,000 followers
Reddit: 22,600 members
Tezos itself maintains a large community and spends considerable funds from the budget for this purpose.

Foundation Council:

The Tezos Foundation consists of the following Councils & Communities:
- Foundation Council
Management & Administration of the Foundation and assets
- Executive committee
Asset management on behalf of the Foundation Council
- Audit committee
Audit of financial & business reporting of the foundation. Responsible for — taxes and audits.
- Investment Committee
Provides the Founda¬tion Council with recommendations regarding investment of the assets outside of grants. With USD 635 million of assets certainly makes sense.
- Technical Advisory Committee
Technical support for the Foundation Council in all protocol issues, etc.
- nomination committee
May propose new members of the Council.

Overall, a comprehensive organization in which there should be sufficient checks and balances.

Partnerships

Partnerships are an important part of building the ecosystem of a platform. Furthermore, partnerships with reputable organizations also give a company a higher profile in the marketplace.

The Tezos Foundation has entered into numerous partnerships to date, which have also led to an increase in the price of XTZ. One example is the partnership with Brazil’s largest investment bank, Banco BTG Pactual, which has resulted in a ~20 percent increase in the price of XTZ coin.

Technology

Tezos is written from scratch in the programming language OCaml and does not originate from a fork of another platform. Like Ethereum, Tezos has been developed for Smart Contracts and decentralized applications (dApps).

Both projects have so-called “Turing Complete” programming languages for the creation of Smart Contracts, which require the respective currency — XTZ and ETH — as gas for execution.

Unlike Ethereum, which is known to use Solidity for Smart Contracts, Tezos uses the Michelson programming language. Whether it is a good idea to use a different programming language than the competitors for both the platform and the Smart Contracts seems questionable. Tezos is convinced of its own way and its necessity.

A major difference that Tezos points out is that external contract calls in Michelson do not allow entry invariance.This is not the case in Ethereum, which has led to attacks like the well-known Ethereum DAO hack.

Another advantage of Michelson as a high-level language from Tezos point of view is the good readability of the code. This should also enable non-programmers to understand the Smart Contracts that are signed. A certified compiler is required to convert this high-level language correctly and reliably into code.

The possibility of a mathematical verification of the Michelson code increases the resistance against bugs, although bugs can never be excluded.

Furthermore the calculation of gas quantities in XTZ should be easy.
OCaml is a functional programming language that allows the program code to be checked and thus helps to avoid errors. Error avoidance — as far as possible — was an important demand of Arthur Breitman from the beginning.

Scalability

The current limit of 40 transactions per second is low for a block chain with DPoS as consensus protocol. This limit is a precautionary measure and should be increased if necessary.

Applications

BTG Pactual and Dalma Capital intend to use the Tezos Blockchain for Security Token Offerings (STOs) worth over one billion USD.The Berlin-based Fundament Group intends to offer the first BaFin-compliant digital security in Germany based on the Tezos platform.London-based Globacap also intends to offer regulated digital securities to the UK Financial Conduct Authority (FCA).

Further applications can be found in the half-year report

Results

The decentralized governance model, which is intended to avoid forks despite decentralization, should be emphasized. However, it should be noted that only those protocol changes will be voted on which have been previously reviewed by the Tezos Foundation. Furthermore, the possibility to build up a passive income by participating in baking is interesting for many XTZ owners.

The financial resources of the project are excellent and the pending settlement of the class action lawsuits will remove uncertainties. Due to the large number of partnerships and the extensive community, Tezos could become a serious competitor for Ethereum, EOS & Co.

Pros:
- Very substantial financial resources
- On-Chain Governance prevents forks
- Staking allows the generation of passive income
- Large number of staking pools (Bakers) good for decentralization
- Large active community of partners and developers

Cons:
- Still low scaling
- Used programming languages hardly used elsewhere
- Established competition like Ethereum
- No clear roadmap

Now I would be interested in your conclusion about TEZOS — let me know in the comments and which coin we should look at next!

PS.: If you are interested in getting cashflow from your cryptocurrencies, check out my own company Cake DeFi

(*Disclaimer: I do not hold any Tezzies, nor do I benefit from its price action. This article is purely an analysis of Tezos. This is not an investment recommendation. As with any investment, your capital is at risk and the return is not guaranteed. Before you decide on an investment, please read our risk statement or contact a financial advisor.)

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