Tezos Guide

Tezos: A low-energy, self-amending platform

• Launch date: 30 June 2018

• Daily transactions: ~5m over last 30 days according to Tezos block explorer, TzKT

   

Tezos at a Glance

• Smart Rollups went live on Mainnet when Mumbai activated, a crucial milestone in for scalability.

• Demonstrations showed that Tezos can support – and surpass – the 1M TPS throughput benchmark.

• Nairobi increased overall performance on Tezos Layer 1, reducing gas costs for common operations and enabling faster propagation of consensus operations.

Key Figures

Protocol Mechanism 

Tezos is secured by their consensus mechanism Liquid Proof-of-Stake (LPoS). This means that the Bakers who validate the next block are chosen based on their stake. A Baker is incentivised to act in good faith (validate correctly) by putting up collateral (stake) as a security deposit. If they act in bad faith (double-endorse or double-bake) then their stake is removed or reduced depending on the extent of their crime. Endorsers cancel the baking and are rewarded for their good work.

History 

Key milestones

• The Athens update, in 2019, included reducing the roll size from 10,000 tez to 8,000 tez. This made it more accessible to stake and receive rewards from validating the chain which made it more attractive to be a stakeholder.

• The Carthage update, in 2020, update increased the gas limit per block and per operation by 30%, which is an important part of scaling the network.

• The Edo upgrade, in 2021, uses a cryptographic technique called Zero-Knowledge Proofs (ZK-Proofs) for enhanced privacy.

• The Kathmandu update, in 2022, prepared the protocol for Smart Contract Optimistic Rollups which is another important step to scalability, as well as improving randomness with VDFs which are an important construct protocol consensus.

• The Mumbai upgrade, in 2023, fully activated years worth of research into smart rollups, and improved the developer experience by allowing anyone to deploy decentralised WebAssembly applications.

What's next/ future upgrades 

• In 2024, the Oxford 2 upgrade, is an improvement from the original proposal that failed to pass governance votes. This version introduces private smart rollups, giving developers the choice between permissioned or permissionless environments and products.

• Data-availability solutions continued their development, with Data Availability Committees almost finalised, and the Data Availability Layer getting closer and closer to Tezos Mainnet.

• Etherlink, an EVM-compatible rollup, is available on Tezos Ghostnet as it gets ready for Mainnet deployment.

CoinShares’ Analysis

Tezos initially stood out for its energy-efficient, liquid proof-of-stake blockchain that established itself as a technology leader in its field. Low gas fees also made it highly appealing to artists and organisations interested in creating digital assets like NFTs. Ubisoft and LVMH are notable participants in the network, as well. However, Tezos still seems to be a laggard in the DeFi space, as native TVL is very low compared to peers, and seems artificial given the volatility seen on DeFi Llama, which suggests DeFi interest may be underwhelming in real terms.

Strengths

• One of the problems Tezos tried to solve when looking at competitors such as Bitcoin and Ethereum was the potential for communities to split off in different directions. Governing and implementing changes in a decentralised fashion is hard to do, as seen from forks such as Bitcoin Cash and Ethereum Classic. But Tezos has turned this problem into a strength, resulting in different protocol architecture, greatly assisting developers that know how to, and have the ability to, ship upgrades regularly. This is different in the case of Ethereum, for example, which has forked every upgrade and requires much slower growth of technical development.

• The most recent upgrade, Nairobi, mid-way through 2023, increases the speed of execution and consensus via an 8x increase in on-chain operations per second, helped by an improved gas model and faster propogation.

   

Weaknesses 

• A large trade-off is that the protocol never ossifies and lacks token value accrual. It could be argued that is the exact reason for token value accrual, but an additional approach could be to implement more ways to burn XTZ.

Opportunities  

• Tezos taking a different approach in design early on was a bold move and likely a factor as to why Tezos lagged in adopting the major DeFi applications. Largely divorcing themselves from the Ethereum Virtual Machine still has a hangover effect. But innovations such as Smart Optimistic Rollups, part of the Mumbai upgrade activated in March, are further evidence of championing different architecture, which should continue to pay off.

Threats 

• Unlike other blockchains, Tezos rollups have no token, no multi-signature and no ‘progressive decentralisation’. The plethora of benefits notably includes enhancing the network’s capabilities by increasing throughput and supporting new execution environments. Thereby boosting blockchain development and encouraging the migration of applications from other networks, especially Ethereum and similar blockchains, to Tezos.