What is Tezos?

1. What is Tezos?

Tezos is a multifunctional decentralized blockchain platform with smart contracts and the ability to create tokens and decentralized applications.

2. Who invented Tezos and when?

The creator of Tezos is Arthur Breitman, son of the famous French playwright, writer and actor Jean-Claude Dere. Arthur Breitman studied applied mathematics, computer science and physics at the Ecole Polytechnique in Paris before moving to the U.S., where he studied financial mathematics at New York University. He worked at investment banks Goldman Sachs and Morgan Stanley and at Google X and Waymo.

For several years, Breitman co-organized seminars and meetings of anarcho-capitalists in New York City. Members of this movement positioned themselves as “radical libertarians advocating unrestrained capital growth, intensive technological progress and a high standard of living in the capitalist system,” as well as a rejection of confrontation with the state.

At another meeting of anarcho-capitalists in 2010, Breitman met Kathleen McCaffrey, an American student from New Jersey. Arthur and Kathleen married in 2013. After graduating from Cornell University, Kathleen worked at hedge fund Bridgewater Associates, Accenture, and R3 CEV, a distributed database company. From the beginning of Tezos’ development, Kathleen helped her husband work on the project.

In August 2014, Arthur Breitman, under the pseudonym “L. M. Goodman” published a memorandum on Tezos, and in September 2014 published a white paper on the project. The pseudonym L. M. Goodman is an allusion to Newsweek journalist Leah McGrath Goodman, who rose to fame after she attributed the authorship of bitcoin to Japanese American Dorian Prentice Satoshi Nakamoto.

In the memo and white paper, the Breitmans pointed out bitcoin’s weaknesses, such as its inability to provide a more inclusive management system and create new tokens, predicted that many tokens will appear in the near future, and presented its own blockchain solution: the world’s first “self-perpetuating” cryptocurrency, Tezos.

The cryptocurrency’s name was generated by Breitman’s algorithm, which searched for names of unclaimed domains pronounced in English.

3. How has Tezos evolved?

In 2015, the Breitmans founded Dynamic Ledger Solutions (DLS) to write the source code for Tezos. At the time, Breitman was a financial mathematician at Morgan Stanley, a bank holding company. Not wanting to lose his job, he chose not to disclose his involvement in the project (he left the bank in April 2016).

While registering the company in the United States, Breitman concealed his involvement in “other business activities” in violation of Financial Institutions Regulatory Agency (FINRA) rules. Because of this, in April 2018, FINRA fined Breitman $20,000 and barred him from dealing with broker-dealers for two years.

In 2016, DLS released the source code for the project. In February 2017, the protocol’s alpha network was launched based on the source code.

Because Swiss law allows independent foundations to support open source software platforms in the public interest, the non-profit Tezos Foundation was registered in Zug. The Breitmans asked Johann Gevers, a South African entrepreneur and founder of the Swiss fintech company Monetas, to serve as president of the foundation.

The fund was given control of the project’s crowdsale proceeds, with Breitman’s company DLS controlling the intellectual property.

At the end of the ICO, the Breitmans planned to sell DLS to Tezos Foundation, after which control of the Tezos source code was to be in the hands of fund managers. However, by the time the ICO was scheduled to start in May 2017, the project began to run out of funds. Kathleen Breitman turned to venture capitalist Tim Draper, who invested $1.5 million through Draper Associates and received a minority stake in DLS.

On July 1, 2017, the Tezos ICO kicked off: in two weeks, 32,000 users purchased approximately 607.8 million XTZ tokens created and distributed when the Tezos network created the genesis block at the launch of the beta. Organizers raised about $232 million in bitcoin and Ethereum (though they planned to raise a maximum of $20 million).

According to official data on the Tezos Foundation website, tokens were distributed as follows:

  • ICO participants: ~88.43% (607,489,040.89 XTZ);
  • Early sponsors and contractors: ~ 0.46% (3,156,502.85 XTZ);
  • Tezos Foundation and Dynamic Ledger Solution, Inc. (DLS).

The agreement with investors defined the funds raised as “non-refundable donations” rather than “venture capital investment.” The company warned investors that the token issuance might not happen.

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As Gevers claimed in October 2017, the foundation’s contract with the Breitmans stipulated that if the sale of DLS to the foundation did not take place within the “stipulated time frame,” the Tezos Foundation would receive it for free. Gevers, however, was unable to show reporters a copy of the agreement. If the company was successful, within three months of the sale, DLS shareholders (the Breitmans and Tim Draper) were to receive 8.5% ($19.7 million) of the crowdsale funds and 10% of all Tezos tokens issued. But the deal didn’t go through because there was a conflict between the Breitmans and Gevers.

According to Gevers’ version, the disagreement erupted because the spouses opposed the foundation’s decision to hire certain people. DLS retained control of the foundation’s “domains, Web sites and e-mail servers,” he said.

As a result, work on the project and the expansion of the development staff was extremely slow, and XTZ tokens were not distributed to investors as scheduled. Angry investors filed several class action lawsuits against the fund and DLS. In mid-February 2018, Gevers and some members of the Tezos Foundation board of directors resigned their positions. Work on the protocol resumed thereafter, and the Tezos Foundation launched a beta version of the platform in June 2018 and the main network in September 2018.

On May 29, 2019, there was an update to the Tezos protocol called Athens A. Athens A involved several backward-compatible changes. The first protocol change raised the gas limit in order to increase computational capacity and network throughput. The number of tokens needed to gain baker status also decreased, from 10,000 XTZ to 8,000 XTZ.

On October 18, 2019, the Babylon 2.0 update was activated, which changed the networks’ consensus algorithm, smart contract functionality and governance mechanism. The development of smart contracts has been simplified, the reward system for bakers (network validators) has changed, encouraging them to participate as much as possible in block approvals, and it has become easier to delegate XTZ coins to bakers. Previously, users created special KT1 addresses for this purpose. After the update, funds can be delegated from the main address.

In March 2020 Tezos holders voted to update Carthage 2.0, designed to optimize the code and solve a number of problems. In particular, the update will increase the gas limit per block and operation by 30%, giving developers the ability to run more complex applications.

4. How are Tezos tokens issued?

Tezos’ native blockchain token is tez, the stock ticker is HTZ.

Tezos uses an inflationary model: annual inflation should be around 5.5%. XTZ tokens are issued as new blocks are created, some tokens may be destroyed as a penalty for bad behavior by validators.

Another issuance option is when a baker proposes a protocol update, he can charge XTZ. If this update is successfully accepted, the originator receives this amount as a result of an additional issuance.

XTZ tokens can be used as follows:

  • As a reward for participating in the creation and approval of new blocks (direct participation or delegating tokens).
  • As votes in a decentralized management system.
  • As a payment instrument for value transfer.
  • To pay for gas (Gas), a unit of value to pay commissions. Gas is used not only for normal transactions, but also in interaction with smart contracts, for the work of decentralized applications.

Individual projects (e.g. Ethereum) face the problem of high inflation caused by unlimited issuance, but within the Tezos onchain management system, users can propose changes to the issuance model, which are accepted with the support of most users.

5. What is the consensus mechanism in Tezos?

Tezos operates on the Liquid Proof-of-Stake (LPoS) consensus mechanism. Because the algorithm uses a process called delegation, Tezos is sometimes mistakenly thought to operate based on Delegated Proof-of-Stake (DPoS), like TRON and EOS. In the past, some official project documents used the name “Proof-of-Stake with delegation”. In the LPoS algorithm, new blocks are created by a randomly selected participant (delegate), and 32 other randomly selected participants approve it.

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The process of creating new blocks is not called mining, but “baking. Accordingly, miners are called “bakers” or “bakers.

As in the Proof-of-Stake consensus mechanism, the rights to create new blocks are distributed among delegates depending on the size of their bet in tokens.

In order to speed up the delegate selection process, XTZ tokens are aggregated into rolls, each containing 8,000 XTZ. The number of rolls determines the weight of the delegate’s vote.

Since not all users of the network are interested in tokenization, participants can delegate their tokens to other participants without transferring ownership: the recipient of the tokens is not allowed to spend them. Delegated tokens become part of the delegate’s bid (steak). Delegation of tokens means the transfer of consensus rights and voting rights within the network management system.

Two categories of delegates are selected to create new blocks from among the delegates who wish to participate in the process:

  • Block Creators (Bakers), one participant for each block who creates and signs a new block. Each validator is randomly assigned a priority per block. Priorities go from 0. If a priority 0 baker misses his block for any reason, the right to create it goes to the next one.
  • Confirmation nodes are thirty-two delegates for each new block, who confirm that they have seen and failed a new block.

Delegates are rewarded for creating new blocks:

  • 1.25 XTZ to confirming nodes.
  • 40 XTZ + commissions to the block creator (baker).

If the block is not confirmed with 0 priority, the amount of reward to confirming nodes is 0.833333 XTZ, and 0.1875 XTZ * [number of confirming nodes] to the baker. The reward for creating a block with priority 0 also decreases if the number of confirming nodes < 32 and is 1.25 * [number of confirming nodes]. The total reward for creating a new block is no more than 80 XTZ.

A security deposit is used to improve network security and reduce the likelihood of delegate malfeasance. The guarantee deposit for creating a new block is 512 XTZ, for confirmation – 64 XTZ.

Blocks are aggregated into cycles, each containing 4096 blocks. The guarantee deposit is frozen for the “preserved_cycles” time, which is equal to five cycles in the past and is at least 14 days, 5 hours and 20 minutes. Under the current network parameters, a delegate wishing to potentially participate in the creation of new blocks must keep about 8.25% of the total number of tokens in deposit (that is, must own 8.25% of the tokens delegated to him).

If a participant notices the delegate’s bad behavior (e.g., attempting to create two blocks at the same height) and provides evidence of violations, he receives half of the security deposit as a reward, the other half is burned.

Reward payments to users who delegate tokens are not made automatically, but manually. The conditions of public delegates, such as commission, minimum threshold, and payout schedule, can vary. There are no such restrictions in the Tezos protocol itself, so users must find this information on third-party resources.

6. What is the architecture of Tezos?

The Tezos platform is written in the functional OCaml programming language. The Michelson programming language is used to write smart contracts. Like OCaml, Michelson is a highly typed language optimized for writing full Turing-type smartcontracts, which provide formal verification of the system (checking the program code against a certain algorithm, which allows detecting inconsistencies with specifications).

The illustration below shows a schematic of the Tezos architecture:

  • The protocol (shown in green) is responsible for interpreting transactions and performing other administrative operations.
  • The protocol detects blocks with errors.
  • The protocol knows that only one main branch of the blockchain exists, starting with the genesis block, and does not foresee that nodes can offer alternative chains.
  • The shell (shown in blue) is aware of the possibility of multiple chains and is responsible for selecting offers from block creators (bakers).
  • The shell selects and loads alternative chains into the protocol, which checks them for errors and assigns an absolute score.
  • The shell then chooses the valid chain with the highest score-this part of the shell is called the validator.
  • The shell contains a p2p layer, a disk block storage system, operations to transfer blockchain data to new nodes, and a versioned registry state.
  • The RPC (Remote Procedure Call, shown in yellow) layer supports the JSON format and the HTTP protocol, through which third-party clients execute queries and analyze node state.
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One of the key features of Tezos is the protocol’s ability to evolve. It is realized because two functions are implemented in the protocol, which allows you to install a new version of the protocol into a test or main network.

Proposals for improvement of the network can be made through the control system. The proposals can contain code that is first installed in the test network and then transferred to the main network after sufficient verification.

The ability to change the protocol according to user requests helps minimize the number of forks and mitigates the threat of a community split.

Tezos has two types of accounts:

  • A smart contract – an account that can contain a smart contract code or token. The address of such an account starts with KT.
  • Implicit account/Manager – an account that does not execute code and can act as a manager for other accounts. It can be used for normal storage, delegation, and backing. This type of account address starts with TZ.

7. How is the Tezos network managed in a decentralized manner?

Tezos is managed through an online voting system, which takes place in four stages:

Proposal Period.

Within the period, delegates can make up to twenty proposals. When a delegate submits a proposal, they automatically vote for it. At the end of the period, votes and motions are counted, and the leading motion moves on to the next period.

Testing Vote period

Within this period, delegates can vote on one motion. If it is overwhelmingly supported, it moves on to the next period; if there are not enough votes, the system returns to the motion period.

Delegates can vote “for,” “against,” and “abstain.” A majority vote is the case when the “for” vote is more than 80% of the “for” + “against” votes. The participation rate is calculated as all votes received/the possible number of votes.

The quorum starts at 80% of the votes and then is updated during each vote using the formula newQ = oldQ * 8/10 + participation * 2/10, where:

  • newQ is the new quorum value;
  • oldQ is the old quorum value;
  • participation is the participation coefficient.

Testing Period

During this period the offer is tested for efficiency and correctness. The Tezos test network runs a fork of 48 hours, during which the proposal is tested.

Promotion Vote Period

During this period, delegates can cast one vote each for or against the proposal that has passed the test period. If a quorum is reached, the proposal is activated in the main network. Otherwise, it moves on to the proposal period.

Each period lasts about three weeks, the full cycle takes about three months.

8. What else do you need to know about Tezos?

  • In December 2018, the lead developers of Tezos founded Nomadic Labs, a research and development company for the Tezos protocol. The company has thirty-plus specialists, including Benjamin Cana, Grégoire Henri, and Pierre Chambard, the leading Tezos architects who previously worked with OCamlPro. Nomadic Labs regularly publishes progress reports.
  • The tezosprojects website features projects developing solutions for the Tezos ecosystem.
  • The Tezos Foundation supports a grant program for projects within the Tezos ecosystem. Projects that apply go through several stages of selection. Read more at ForkLog.
  • A second version of the white paper has been published on the official website of the project, presenting the changes in the implementation of the platform as compared to the original plans.
  • The developers section of the official site of the project contains all the technical documentation describing the features of the platform.
  • The news section of the Tezos Foundation site contains weekly reviews of the project’s development.
  • Working groups are created on important integration issues, such as the working group on wallets, in which Arthur Breitman participates.
  • The third-party project Paradigm Fund regularly publishes reviews of developments in the Tezos ecosystem on the Medium blog.

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