How Does Tezos Work?
With XTZ reaching its ATH (all time high) in August 2020, the project has once again drawn some attention. Regardless of its price performance, it is difficult to deny that behind the hype is a solid and dynamic project which indicates that Tezos has the potential to form a lasting part of the future crypto landscape. If cryptocurrencies and smart contract platforms are sometimes based on technical innovations, their true relevance is found in their governance. Let’s delve deeper into what this cryptocurrency has to offer.
There are numerous questions and studies around the conceptualisation of blockchain governance, and more particularly in the context of direct processes. However, the governance of a distributed network also poses potential vulnerabilities as hackers could take control of and hijack it.
Blockchain governance is therefore a crucial issue, and sometimes underestimated.
Like with technical decisions, each project has a different approach and brings diversity to the crypto ecosystem. For example, the community and players involved with Bitcoin take a very conservative approach, and as a result, changes to Bitcoin are rare. Ethereum, on the other hand, is different. To meet the evolving needs of the Ethereum 2.0 protocol, updates are frequent, even if the process remains similar to Bitcoin. We will see in this article that Tezos detaches itself from both of these, and we will look at what the direct consequences are of this approach.
What makes Tezos special
It is relatively easy to draw a parallel between Ethereum and Tezos, as both run smart contract platforms. However, the way in which Tezos’ governance works differs from Ethereum in several ways.
Ethereum has evolved through hard forks, but the Tezos process allows more flexible modifications and each improvement can be integrated individually, without requiring an update from nodes (‘bakers’ as they are called by Tezos – instead of miners).
In creating Tezos, Arthur Breitman wanted to put the governance of the project at the heart of its creation.
Arthur and Kathleen Breitman, the couple behind Tezos
At the time, he had noticed that ecosystem projects had many difficulties in effectively coordinating their participants. This is why you will find differences such as the rejection of the use of hard forks or the use of proof-of-stake at Tezos.
Who governs Tezos
While anyone can theoretically participate in the governance of Tezos, you will actually need to be part of the network, and your potential for influence is primarily determined by the amount of XTZ you hold. Let’s take a look at those who are involved with Tezos’ governance and their roles within it.
Tezos is a proof-of-stake blockchain, more specifically, liquid proof-of-stake. This means that the validator of a new block is not selected on their ability to provide proof-of-work like on Bitcoin, but on the funds that they have staked on the system. If they act dishonestly, they will lose access to those funds.
In the context of Tezos governance, the bakers play various important roles. Apart from contributing to the general network operation by validating transactions, they are also at the heart of the protocol’s evolution, since they have voting rights proportional to their staked XTZ. The right to vote depends on how many rolls of tokens you have (one roll equals 8,000 XTZ) – meaning you have a chance to have a say on proposals.
Endorsements provide additional security for block validation. Each block is not just validated by a single baker, but co-signed by 32 endorsers! The amount of XTZ pledged by each endorser is not as high as the bakers, but so too are the rewards.
If you do not hold enough XTZ or have the necessary equipment to become a baker/endorser, you can still participate in the governance of Tezos! This is possible since Tezos has a delegation system, which allows any user to transfer the ‘voting weight’ of their tezzies to another trusted user.
The four stages of Tezos governance
The four stages of Tezos governance
While Bitcoin has BIP (Bitcoin Improvement Proposal) and Ethereum has EIP, Tezos’s protocol evolution proposals are soberly called ‘amendments’. These can be suggested by anyone, but can only be validated by the community.
Each amendment must undergo a dedicated process, divided into four different phases, before it can be adopted within the protocol. This means that the whole process lasts almost exactly three months from proposal to activation. The four phases are as follows:
- The proposal period. Bakers are allowed to submit up to a maximum of 20 proposals. If any of these proposals receive enough ‘upvotes’ (similar to ‘likes’ on Facebook), reaching a 5% quorum, it can advance to the next phase.
- The exploration period. Here, bakers vote again with the goal only to determine whether the proposal is worth testing. The objective is therefore not to obtain a majority, but simply to meet the quorum, i.e. the minimum number of participating members to validate the proposal. This threshold is not fixed and depends on the quorum of previous ballot participation. That being said, it is set at 80% from the genesis block.
- The testing period. Before any proposals are applied to the system, they need to be tested on a parallel network (testnet) for 48 hours. This protects the main blockchain network from any potential corruption.
- The promotion period. Based on the previous phases and off-chain discussions, bakers vote once again and for the last time, and if the participation rate reaches the quorum, as well as 80% supermajority agreement, the proposal is adopted as the new main net. This completely avoids having to resort to a hard fork.
For more detailed information on the quorum and supermajority requirements, read this article from the official website.
Tezos’ First Amendment: Athens
An illustration of Catenae
There is nothing better to understand how something works than giving an example. So let me show you an example of Tezos’ first amendment, which was proposed by Nomadic Labs. Athens was an amendment which contained two proposals:
- Increasing the gas limit
- Increasing the gas limit and reducing the requirements of one roll to 8,000 XTZ
It was the latter of these proposals which was selected and passed the various phases, thus being incorporated into the protocol.
Since then, there have been many proposals that have not been validated by bakers. Among them we find Athens B, Brest and Babylon. As you can see, the community chose to follow Nomadic’s example of naming the proposals by cities in alphabetical order.
The weaknesses and vulnerabilities of Tezos governance
Firstly, this may have been in your mind already and is a big weakness that many find – large amounts of XTZ lie in the hands of a few. This means, inevitably, they have leverage on Tezos’ governance, which is in direct disagreement of Tezos’ attempts to have a balanced community.
Keep in mind that there is no single definition of decentralisation, rather, it is a spectrum. The proliferation of Tezos’ staking services by centralised platforms (Coinbase, Binance) could ultimately prove to be damaging to its governance, for example.
Secondly, Breitman, Tezos’ founder, believes its protocol must be attractive enough for developers to prefer to continue working on improving an existing project, rather than starting on a new one. A hard fork therefore sends a very strong message, and would raise questions about the political health of the protocol. However, that’s what happened in 2019 with the DUNE spin-off, started by the OcamlPro team, who were behind Tezos’ development. This news was very controversial and raised suspicions about the future of these two protocols.
Finally, as with Bitcoin and Ethereum, in fact with decentralised projects in general, Tezos does not have a clear roadmap. It is difficult to predict which proposals will be made, validated and accepted by the community. The result is that we can only rely on the roadmaps of the development studios surrounding the project, such as Nomadics Labs, to get an idea of Tezos’ future potential.
So that’s all for today guys! Hopefully this has given you a better insight into what drives Tezos and has allowed you to see a different view on the subject in relation to other existing projects. As always, if you have any questions or comments about this article, please let us know on our socials!
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Just your average global millennial embracing, and interested in, the future of money and finance. Excited by blockchain tech as well as fintech but have a special passion for DeFi and Yield Farming, what will this technological disruption bring next?
The views, thoughts, and opinions expressed in this article belong solely to the author, and should not be taken as investment advice. Do your own research before taking any investment decisions.