What is Tezos? (XTZ) How It Works? Complete Guides 2024

Tezos XTZ set out in 2014 to create what it called a “self-amending blockchain.” Complex in implementation, at its core, the concept was simple: Tezos would allow anyone who owned its XTZ cryptocurrency to vote on possible changes to its rules, and once decided, the software would automatically update to ensure the changes were made. 

By using this system, Tezos aimed to reduce the chances its blockchain might fork, creating two separate cryptocurrencies with two distinct prices. 

Yet, the idea that a cryptocurrency could upgrade itself within its own software had wider implications starting a conversation around what would be termed “blockchain governance.” 

The arrival of Tezos would alter blockchain taxonomy, effectively separating crypto assets into two camps, those with “off-chain governance” and those with “on-chain governance.”

To make its system work, Tezos users were allowed to vote through a process called “baking,” in which they agreed to lock XTZ they owned in special contracts. Users could either become bakers or delegate XTZ to other bakers to win newly minted XTZ from the protocol. 

For this novel design, Tezos was able to raise record-setting levels of funding in 2017 before launching its live blockchain to the public in 2018. 

For more regular updates from the Tezos team, you can bookmark the Tezos Medium blog, which includes tips and tutorials on the network and its evolving technology. 

How does Tezos work?

The Tezos blockchain enables many features common to cryptocurrencies.

Developers can use its software to run custom programming logic (smart contracts) and design new programs (decentralized applications) meant to replicate products and services. 

Yet, its voting features required a different design.

More specifically, the Tezos blockchain would be broken into two parts:

• Shell – The code that amends itself based on user voting, it is also responsible for interpreting transactions and administrative operations
• Protocol – The code responsible for sending proposals to the shell for review. 
• The Tezos LPoS Blockchain

Tezos is a public, open-source blockchain platform designed to facilitate the execution of smart contracts and serve as a foundation for various decentralized applications (dApps). Here’s a deeper dive into how Tezos functions:

Core Components:

• Proof-of-Stake (PoS) Consensus Mechanism: Unlike Bitcoin’s Proof-of-Work (PoW) system, Tezos utilizes a Proof-of-Stake (PoS) consensus mechanism to secure the network. In PoS, validators are chosen based on the amount of XTZ (Tezos’ native token) they hold, incentivizing users to hold onto their tokens and participate in network security.
• On-Chain Governance: A key feature of Tezos is its on-chain governance mechanism. XTZ token holders have the power to vote on proposed upgrades and modifications to the Tezos protocol. This ensures the network can evolve and adapt over time without the need for a hard fork (a permanent split in the blockchain).
• Smart Contract Language: Tezos utilizes a custom smart contract language called Michelson. Michelson is designed to be secure and formally verifiable, aiming to minimize the risk of bugs and vulnerabilities in smart contracts.

Transaction Processing:

1. Transaction Submission: Users submit transactions to the Tezos network.
2. Block Baking: Validators, also called bakers in Tezos, propose new blocks containing the submitted transactions. Bakers are chosen based on their stake (amount of XTZ held).
3. Block Endorsement: Other validators, called endorsers, review the proposed blocks and endorse them if they are valid. This endorsement process helps ensure the integrity of the transactions within the block.
4. Chain Finalization: Once a sufficient number of validators endorse a block, it becomes part of the Tezos blockchain.

Benefits of Tezos:

• Security: The PoS mechanism and emphasis on code security through Michelson contribute to a secure environment for smart contract execution.
• Upgradability: On-chain governance allows the Tezos network to evolve and adapt through community voting, avoiding the disruption of hard forks.
• Scalability: Tezos is designed to be scalable, meaning it can handle an increasing number of transactions without compromising performance. This is achieved through techniques like block size adjustments.

Things to Consider:

• Complexity: Tezos’s on-chain governance and focus on code security can add some complexity to the network compared to simpler blockchains.
• Competition: Tezos faces competition from other smart contract platforms like Ethereum and Solana. The success of Tezos will depend on its ability to attract developers and users to its ecosystem.

Overall, Tezos offers a unique approach to blockchain technology with its emphasis on security, upgradability, and community governance. While it faces challenges in a competitive landscape, Tezos positions itself as a promising platform for smart contracts and decentralized applications.

The Tezos LPoS Blockchain

To keep its network in sync, Tezos uses a variation on classic proof-of-stake (PoS) consensus called liquid proof-of-stake (LPoS). 

Similar to traditional PoS mechanisms, LPoS is an algorithm used by computers running the Tezos software to secure the network, validate transactions and distribute newly minted XTZ.

In order for the participants (“nodes”) to participate in governance, they need to stake XTZ in a process Tezos calls “baking.” To become a baker, a node needs 8,000 XTZ (also called a roll). 

Users can also delegate their tokens to other bakers, allocating votes to other users so they can earn XTZ rewards on its live blockchain.

Bakers are incentivized to perform honestly, because users have the flexibility to easily switch between the bakers they delegate XTZ to, depending on their voting preferences.

Tezos Upgrades

Bakers take part in the governance of the blockchain by voting on proposed code changes. 
The voting process consists of four distinct voting periods, each separated by roughly 23 days.

• The Proposal Period – Any baker can submit a proposal to amend or upgrade the Tezos blockchain. Proposals with the most votes move on to the next period.
• The Exploration Vote Period – Proposals that reach a super-majority (80% of votes in favor of the proposal) move on to the next period
• The Testing Period – The proposal then moves to a temporary test chain (48-hour fork) curated to verify if the change works and is safe for the network to adopt. 
• The Promotion Vote Period – Bakers vote to determine if the proposal will be implemented. Proposals go through if the vote reaches a super-majority in favor. 

Bakers can also attach invoices to their proposals. If the proposal is approved after all four voting periods, the protocol will mint the specified amount in the invoice and pay it to the baker. 

Who created Tezos?

The Tezos blockchain was created by husband and wife Arthur and Kathleen Breitman in 2014 through the Dynamic Ledger Solutions, a startup they founded to develop Tezos.

The Tezos team held an initial coin offering (ICO) in July 2017, raising the equivalent of $232 million (66,000 BTC and 361,000 ETH), the largest ever ICO at the time. Following the ICO, the Tezos Foundation, based out of Switzerland, was created to launch the protocol.

The foundation also committed to purchasing Dynamic Ledger Solutions, including all intellectual property rights to the Tezos blockchain, per the ICO agreement.

Why does XTZ have value?

The XTZ cryptocurrency plays a key role in maintaining and operating the Tezos network, and can be used for holding, spending, sending or baking. 

By owning and baking XTZ, users gain the ability to vote on network upgrades, with each vote being proportional to the amount of XTZ cryptocurrency they bake. 

Tezos rewards participants with XTZ based on how many tokens they are baking, with the bakers receiving a small percentage of the reward allocated to those who delegate their XTZ.

The value of XTZ, the native token of the Tezos blockchain, stems from its utility within the Tezos network and its potential applications. Here’s a breakdown of the key factors that contribute to XTZ’s value:

Essential for Network Operations:

• Staking: XTZ plays a crucial role in securing the Tezos network through a Proof-of-Stake (PoS) consensus mechanism. Users who hold XTZ can delegate their tokens to validators (called bakers) who verify transactions and maintain network security. In return for staking their XTZ, validators receive rewards in the form of newly minted XTZ tokens. This staking process incentivizes users to hold onto XTZ and contribute to network security, creating demand for the token.
• Governance: XTZ token holders have voting rights within the Tezos network. They can participate in on-chain governance proposals to decide on upgrades, modifications, and the future direction of the Tezos protocol. This governance right associated with holding XTZ grants token holders a say in the network’s evolution.
• Transaction Fees: XTZ is used to pay transaction fees on the Tezos network. Users require XTZ to cover the computational costs associated with processing their transactions, smart contract interactions, and deployments. As the Tezos network sees more activity, the demand for XTZ to pay these fees could increase.

Potential Use Cases:

• Smart Contract Development: Tezos is a platform for building and deploying smart contracts. Developers may require XTZ to cover the costs associated with smart contract development and deployment on the Tezos blockchain. Increased adoption of Tezos for smart contracts could raise the demand for XTZ.
• dApp Usage: Decentralized applications (dApps) built on Tezos may require XTZ for various purposes within their functionalities. This could involve using XTZ for in-app purchases, interacting with features, or governance within dApps themselves. Widespread use of Tezos-based dApps could drive demand for XTZ.

Overall Utility and Scarcity:

• Limited Supply: There’s a capped maximum supply of XTZ tokens, creating scarcity. This limited supply, coupled with the various use cases mentioned above, can influence the value of XTZ.

Investment Potential:

• Growth of the Tezos Network: The success and adoption of the Tezos network for smart contracts, dApps, and other functionalities can directly impact the value of XTZ. If Tezos attracts a large user base and establishes itself as a prominent platform for blockchain applications, the demand for XTZ to participate within this ecosystem could rise.

Important Considerations:

• Market Volatility: The value of XTZ, like most cryptocurrencies, is still relatively volatile and speculative. The factors mentioned above contribute to its value, but there are also inherent risks. The success of the Tezos network and the overall cryptocurrency market are uncertain.

In conclusion, the value of XTZ is primarily driven by its utility within the Tezos network. Staking, governance participation, transaction fees, and potential future use cases in smart contracts and dApps all contribute to the demand for XTZ. However, the value of XTZ is also influenced by broader factors like the growth of the Tezos network and the overall cryptocurrency market. As with any investment, careful consideration of these factors and the inherent risks involved is crucial.

Why use Tezos?

Users may find Tezos appealing based on its novel voting features. 

The Tezos blockchain might also be interesting to developers looking to launch decentralized applications. To date, there are a variety of projects that have been built on the platform. Some examples include tzBTC, a decentralized finance application aiming to tokenize bitcoin, and Tezsure, a decentralized insurance marketplace.

Investors may also seek to buy XTZ and add it to their portfolio should they believe the market will one day favor staking blockchains where participants can more easily earn cryptocurrency. 

Kraken acts as a baker for clients willing to lock their XTZ in one of our staking wallets. Clients who stake XTZ with Kraken will receive a 6% annual return, paid out twice weekly. 

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