what-is-tezos

Crypto 101: What is Tezos?

Welcome to Crypto 101: What is Tezos? Tezos is a Blockchain platform that supports decentralized applications (dApps) and smart contracts. The platform was first developed by Arthur Breitman, research engineer for Google X and Waymo, and Kathleen Breitman, wife of Arthur Breitman.

The main reason for the creation of this Crypto was that Arthur saw a problem with Bitcoin. The currency was unable to evolve and that often led to hard forks. Hence, the two NYU graduates launch an ICO in 2017 raising $232 million US dollars. So shortly after the ICO, this cryptocurrency launched its beta network in July of 2018. The team behind Tezos has previous experiences from many big firms like Google, Waymo, Goldman Sachs, Morgan Stanley, R3 CEV, Bridgewater Associates, and more! Moreover, the team has a lot of big names behind it too, for example: Olaf CarlsonWee, founder of Polychain Capital, and Tim Draper, a renown investor.

What is XTZ?

XTZ, tez, or ꜩ is the native currency on Tezos Blockchain platform. This Cryptocurrency cannot be mined like Bitcoin. Instead, it is part of a process known as proof-of-stake where token holders receive a part of the reward for being a part of the mechanism.

What is Tezos Used For?

Like Ethereum, Tezos functions with smart contracts on their Blockchain platform. There are certain applications that are well-suited for the Tezos platform based on formal governance and focus on smart contract security. These include digital assets (tokenized real-estate, digital money, digital collectibles) and financial contracts (swaps, loans, etc). These applications work particularly well on the platform as Tezos is able to utilize its smart contract language to provide security and efficiency.

How Does Tezos Work?

Tezos uses a Proof-of-Stake (POS) consensus algorithm. Many people also refer to this as Liquid Proof-of-Stake. So to better understand this, let’s break it up into three parts: Block Creation, Delegating, and Fork Choice Rule

1. Block Creation (Baking)

Block Creation or Baking is what allows the Blockchain to continue to progress. Therefore in the Tezos platform, participants who create blocks are known as bakers. Baker assists the network by contributing computing power to validate transactions. For this, they receive a reward through newly minted XTZ (16 XTZ per block). Bakers will also have to set up a security deposit (POS) of 512 XTZ per block they create. They lock this security deposit for a total of 5 cycles (~14 days). If the baker double bakes, they may slash the deposit. 

In order to be a baker, participants must hold at least 10,000 XTZ (1 roll). Of course, with the more rolls a participant may have, the higher the chances of them receiving the rights to bake the next block. For example: if there are a total of 20 rolls activated at a point of time, and a baker owns 5/20 of the rolls. So, this would mean that the baker has a 40% chance of receiving the rights to create the new block. However, it’s important to note that rolls are calculated on a 10,000 basis, so if you have 19,999 that is considered still as one roll. 

Baking rights are also a crucial part of baking. These rights are set in terms of priorities. Let’s look at an example to better understand this: 

Priority1 = Roll 3

Priority2 = Roll 1

Priority3 = Roll 9

….

Priority10 = Roll 4

As you can see from the above example, the person who holds Roll 3 has the number one priority in proposing the block. They will be given a minute to create or broadcast a block. Once that time is over, the next person in line, Roll 1, will take over. 

2. Delegating

Now you may wonder, what can someone do if they do not have 10,000 XTZ or do not want to set up the infrastructures needed to bake blocks? This is where delegating comes in. Delegating allows users to delegate their coins to a baker. So, coin holders can “lend” their coins to a baker and with that the baker will have a higher probability of selection. The baker can then share the revenue with the coin holder. 

*Note here that the baker cannot spend the XTZ that is delegated to them, and bakers cannot run away with other people’s XTZ. Furthermore, some groups have started offering rates for their baking services. Many of these services charge a 10~20% fee on rewards obtained from delegated baking. If you would like to find out more about the different baking services, check out this URL: https://mytezosbaker.com/.

3. Fork Choice Rule

The last important concept about the Tezos consensus algorithm is the Fork Choice Rule. This protocol helps to decide which chain fork is “correct”. In the Bitcoin system, the “correct” fork is decided via the longest chain in the canonical one. While for Tezos, the “correct” fork is based on the number of bakers that endorsed the block. Bakers have the responsibility of creating blocks but also the responsibility of endorsing blocks. At every block height, they select 32 rolls randomly to endorse a block, and the block that has the most endorsements will then be chosen as the canonical one. 

If a baker endorses a block that eventually becomes a canonical block, they will get a reward via XTZ. So this will incentivize bakers to endorse the block that they believe others will endorse. Similarly, in the context of baking, endorsing requires bakers to stake 64 XTZ per endorsement. This helps to prevent the problem of Nothing-at-Stake.

So Do Transactions with Tether have Finality?

Tezos transactions do not have finality. With current Tezos protocol, 30 confirmations (~roughly 30 minutes) is they consider as a good estimation for a transaction to be considered as final. Especially since this digital currency uses a chain-based POS consensus algorithm, there is the possibility of a chain reorganization. Therefore, users must wait a number of confirmations to be confident that the transactions will not be reversed.

How Do You Buy Tezos?

Tezos like all other cryptocurrencies can be bought at an exchange. These include: Binance, gate.io, Huobi, and HitBTC. You can also purchase Tezos via OTC, let us know if you are interested!

How to Store Tezos?

By holding the Tezos token, users can interact with their blockchain. There are many hardware and software wallets that allow users to store Tezos. Software wallets include Galleon Wallet, AirGap, Kukai, Zengo, while Hardware Wallets include the two well known, Ledger and Trezor. So if you want to learn more about the storage of cryptocurrencies, feel free to check out this article on storing your cryptocurrency.

Tezos vs Ethereum

Having developed after the Ethereum platform, Tezos definitely has many advantages when compared to Ethereum. The faster transaction speed and blocktime is what allows the platform to be so successful. In addition, the consensus algorithm with Tezos is also more developer allowing . Despite all that, Ethereum is still the home to the majority of tokens in the crypto space. It will be interesting to see what this cryptocurrency will develop into in the future, hence the platform still has a lot of potential for success.

The Future of Tezos

The future of Tezos seems promising as the team continues to look to improve key features of their platform in terms of privacy, consensus, scalability, smart contracts, and governance. Furthermore, the platform has several projects underway and it will be interesting to see how these different projects play out on the Tezos platform. To learn more about what their team has planned for its future, check out this link: https://learn.tqtezos.com/files/future.html#intro.

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