One of the most polarizing cryptocurrency platforms, Tezos has been in the spotlight ever since its then record $232 million ICO. Since then, Tezos has gone through a litany of problems from class-action lawsuits by disgruntled ICO participants to a power struggle between the intellectual property owners of the Tezos source code, Arthur and Kathleen Breitman, and the former president and board member Johann Gevers.
The controversy surrounding the platform has recently calmed down to a more typical level in the cryptocurrency space, and the Tezos Foundation even recently launched their Betanet, almost a year after their record ICO. With so much coverage of its high-profile history alone, the actual concept and technology underlying Tezos has seemingly been overlooked by many outside the Tezos community.
Now that the dust seems to have settled, it begs the question, what exactly is Tezos and how did we get here?
A Remarkably Bizarre History
Tezos is the brainchild of Arthur Breitman, a computer scientist and former applied financial quant, who published a white paper and a position paper in August 2014 under the pseudonym “L.M. Goodman”. Subsequently, Breitman went on to register a company called Dynamic Ledger Solutions, Inc in Delaware the following year, becoming the chief executive and absorbing the intellectual property ownership of the Tezos source code into the company.
Arthur and his wife Kathleen, a former employee of Bridgewater Associates and R3, decided to conduct an ICO in order to raise funds for building the Tezos platform after unsuccessfully attracting significant investing through traditional mediums. Tezos is designed to be a “self-amending”, permissionless, distributed, and peer-to-peer network based on smart contracts. The emphasis of the platform is on providing a decentralized democracy utilizing proof of stake consensus to allow all stakeholders to participate in an on-chain governance protocol where the users control the direction of the network.
The Tezos ICO subsequently raised $232 million in July 2017 and the Breitmans established the Tezos Foundation in Zug, Switzerland. The Breitmans asked Johann Gevers to become the president of the foundation which was supposed to then absorb Arthur’s company DLS and with it the intellectual rights to the Tezos source-code.
Things didn’t pan out according to plan and a rift developed between the Breitmans and Gevers. Essentially, as the president of the Tezos Foundation (and also a board member), Gevers had control of the funds raised from the ICO and a disagreement ensued over some associates Gevers brought on board to help run the Tezos Foundation.
Arthur Breitman, Image from Oslo Freedom Forum
The tokens from the ICO were supposed to be delivered to the contributors and the blockchain released under a free software license, however, the release kept getting delayed which raised the concerns of the contributors. Further, the Breitmans attempted to remove Gevers from the board, which led to a very public fallout not only between the Breitmans and Gevers, but also within the Tezos community and Arthur’s firm DLS.
DLS soon became the target of several class-action lawsuits claiming that Tezos’ tokens (Tezzies) should be considered securities and registered with the SEC in order to be legally sold to investors. The attempt to retrieve refunds for contributors part of the lawsuit did not come to fruition as the SEC memorably denied a Freedom of Information act request by the community for fears that it may compromise future enforcement activities.
Eventually, Gevers and the board of the Tezos Foundation voluntarily stepped down in February 2018, and were replaced by two Tezos community members who had supported the Breitmans, Michael Mauny and Ryan Jesperson. The extensive details of the whole debacle can be found in Wired’s piece released last month.
Updates from the Tezos Foundation for the following next few months were scarce and the community remained anxious. Then, last month the Tezos Foundation announced that KYC/AML would be required from the contributors to their ICO from the prior year. The announcement received a bitter response from the community and was seen as the last straw in a long history of issues for many.
As mentioned earlier, the Tezos Betanet was launched a few weeks later and the first wave of tokens finally released. Not surprisingly, there was a large sell-off on the few exchanges it is currently available (Gate.io & HitBTC). For those that held onto their tokens, it seems that the Tezos project has finally launched and the long-awaited promises of its platform are set to unfold.
What is Tezos and How Does It Work?
Tezos is a permissionless, distributed, and self-amending platform utilizing smart contracts that focuses on providing a unique on-chain governance mechanism and a few noticeable improvements over similar platforms such as Ethereum. The focus of the platform is on a modular design with trivial on-chain protocol upgrading through an optimized Proof of Stake consensus model where all stakeholders may participate in the governance structure.
The Network Shell
Tezos enables its unique governance and self-amending capabilities through leveraging a network shell. To understand how the Network Shell works we need to break down a typical blockchain protocol into 3 primary and distinct sub-protocols.
- The Network Protocol
- The Transaction Protocol
- The Consensus Protocol
The network protocol is typically referred to as the “gossip” protocol and is how transactions are broadcast across the network between nodes. This protocol also includes downloading the blockchain, discovering peers, and broadcasting blocks to the network. At the general protocol level, the network protocol usually consists of the most innovation and development activity.
The transaction protocol is defined by a cryptocurrency’s scripting language and in the case of Bitcoin is better known as the Unspent Transaction Output Model (UTXO). Using Bitcoin as an example, this protocol consists of everything from the creation of Bitcoin during mining to the utilization of digital signatures for transaction verification. A fork of the transaction protocol is commonly referred to as a “soft fork”, and are usually not very contentious (at least compared to a hard fork).
The consensus protocol is probably the most significant as it articulates the model for reaching consensus of the state of the blockchain across all the nodes in the network. Bitcoin uses Proof of Work as its consensus model, however, Tezos uses an optimized form of Proof of Stake. This protocol is vital to the sustainability and authenticity of the blockchain as it prevents double-spending and makes the blockchain immutable. A fork of the consensus protocol is a “hard fork” and they are easily the most contentious. Hard forks tend to divide cryptocurrency communities with more high-profile cases (Bitcoin/Bitcoin Cash) and is a problem that Tezos fundamentally aims to solve with its design.
The network shell of Tezos combines the transaction and consensus protocols into what they call the “blockchain protocol”. The blockchain protocol is effectively a consistent set of concurrent mutations to the global state of the blockchain where the blocks of the blockchain are defined as the operators acting on the state of the chain. Therefore, the blockchain protocol becomes introspective, allowing blocks to act on the protocol itself. This has important ramifications as it allows for the self-amending ability of the platform where stakeholders can vote directly on protocol upgrades to the system.
The network shell acts as an interface between the network protocol and the blockchain protocol (transaction and consensus protocols). In doing so, it is the network shell’s responsibility to maintain the best chain known to the client. Tezos is written in OCaml and the network shell is capable of recognizing 3 objects.
Modules in OCaml can be used to directly mutate (amend) the existing protocol. Also, the network shell, importantly, functions as the deterrent of the network from DDoS attacks. The most prominent feature of the Tezos platform is the ability to implement protocols that are capable of amending themselves. This happens at the protocol level, but on the surface is popularly known as its on-chain governance feature.
The governance of the Tezos platform rests entirely with the stakeholders. All stakeholders have the ability to participate in the governance of the protocol and they vote on proposed protocol upgrades issued by developers who can attach invoices to their proposed upgrades for them to be compensated if their proposal is accepted.
While the initial voting mechanism is pre-defined, the governance process can even change the voting mechanism itself as the network progresses. There are many conditions that can trigger a protocol change, most notably a simple stakeholder vote.
However, much more complex triggers can be implemented through the governance process such as proving constitutionality of new amendments in regards to widely accepted amendments that are considered to be core tenets of the platform and voted as so by the stakeholders.
Smart Contracts & Formal Verification
Another important feature of Tezos is its use of formal mathematical verifications of programs in order to prove their security while mitigating against prevalence of bugs in contract code. The use of formal verification in conjunction with OCaml as the programming language is a refreshing improvement in smart contract logic, which has led to a number of hacks including the DAO exploit and Parity wallet hack.
Proof of Stake Consensus & Baking
Tezos’ Proof of Stake implementation is an optimized combination of several concepts including Slasher, Chain of Activity, and Proof of Burn. Rather than mining, Tezos uses what they refer to as “Baking”. In baking, block creation is performed by the stakeholders who, rather than performing PoW to solve a computationally difficult puzzle, obtain the right when a Tezos token (Tezzie) that they own is randomly selected to create a block.
Everyone is not required to participate in the baking process though, as it may seem from this model. Users who do not wish to participate can simply delegate their tokens to others for baking. Bakers are warned a few weeks prior to when they need to actually bake, where they make the requisite token security deposit (known as a “bond), which is actually a dynamic deposit that changes based upon a number of blocks that a delegate is set to create.
Bakers receive block rewards for acting honestly (successfully creating a propagating a valid block) and are punished for acting dishonestly (attempting double spends, propagating blocks on different branches). Tezos employs some other intricacies in this process such as rolls and bake endorsing. Bake endorsing is when a stakeholder is asked to be a witness that they saw a block and verified its validity. Rolls are groups of tokens that are aggregated at the delegate level and represent a proportional correlation between baking power and the amount of tokens delegated to them.
In order to bake, at least 8GB of RAM and a reliable Internet connection are advised. Additionally, you need to own some Tezos tokens and you can find more resources on how to participate in the Tezos network and community on their website.
Despite a certifiably contentious beginning, Tezos has now launched their Beta and offers some promising innovations, especially in governance. Governance of blockchain networks is among one of the most arduous tasks to take on as it is a completely novel field that consists of creating sustainable and fair governance mechanisms for vast networks of decentralized users.
Today, many blockchains claim to be the great solution to the problems facing the earlier networks like Bitcoin and Ethereum, and while they may provide some unique innovations out of the box, there verifiable sustainability, security, and practical application have yet to be fully realized. Perhaps with a governance mechanism designed to allow the platform to autonomously evolve, Tezos can provide a new model for on-chain governance of scalable, decentralized networks.