When Satoshi released the Bitcoin protocols, he set a hard limit in the money supply at 21M coins. These coins are mined at anticipated intervals until they are gone, at which point the supply is what it is and the total value of the blockchain floats on the perceived utility of the network.
The idea of the Proof of Work mechanism is pretty simple: Have the miners use their computational power to solve cryptographically hard puzzles. And, reward the miners who were able to solve those puzzles.
Ethereum took a similar mining convention as Bitcoin (called Proof of Work) but front-ended coin distribution with an Initial Coin Offering (ICO). The ICO was also uncapped, and raised about $18M USD during its 2 month period.
With Tezos, the founders took the uncapped, time bounded model of the Ethereum ICO and eliminating the mining concepts found in BTC and ETH. Tezos instead proposes a “Proof of Stake” model, and will inflate the money supply annually by approximately 5%, paid out to coin holders who stake their claim.
Tezos is envisioned to eliminate the flaws in Bitcoin and Ethereum that hold them back from becoming dominant distributed ledgers. The mechanics of governance in Tezos are all about community rights and responsibilities. This is a blockchain that is being built for the long haul to create an optimal architecture for governing.
The best developers I know have strong opinions that are weakly held. They will tell you exactly why the are right and their idea will change the world. But when contrary logic emerges, they refactor their approach. I have a feeling that the Tezos team subscribes to this view point as well. They’ve restructured their code and revised their plans when necessary. This strikes me as a team that grasps the variables that matter and are unafraid to relentlessly refactor.
Tezos aims to be the blockchain that has the best on-chain reward system in the crypto space. The network will not only reward users for maintaining consensus but also offer a proper process through which stakeholders can govern the project protocol and implement upcoming innovations.
According to the team, Tezos’ goal is a very straightforward one: it aims to create a blockchain capable of incorporating new innovations without risking a hard fork that could potentially divide its community (as it happened on multiple occasions with various projects).
Also, Tezos relies on a far less power-hungry algorithm. Even though it still relies on a Proof-of-Stake consensus algorithm, its far less power-consuming than other similar algorithms.
Alright, so how does this exactly work?
- Developers independently submit proposals for protocol upgrades and request for compensation for their work.
- The request for compensation makes sure that the developers have a strong economic incentive to contribute to the ecosystem
- The proposal goes through a testing period wherein the community tests the protocol and criticizes it for possible improvements.
- After repeated testing, the Tezos token holders can then vote on whether the proposal should be approved or not.
- Once a legitimate upgrade is decided on, a “hot swap” occurs on the protocol, which initiates the new version of the protocol.
Because of this system, the protocol upgrades passively in a decentralized manner. Each and every protocol upgradation goes through multiple testing periods and gets relevant feedback from the community. This makes sure that whatever improvement happens has the stamp of approval from the majority of the community. This prevents any chance of a community-splitting hard fork.
Tezos is a liquid proof of stake system that requires one to stake a certain number of Tezos token to participate in the consensus over the blockchain. The process of staking Tezos tokens (XTZ) is called baking. Token holders aka “bakers” can delegate their validation rights to other token holders without transferring ownership.
You find and add blocks to the Tezos blockchain through a process called “baking.” This is how it works:
- Bakers get block publishing rights based on their stake.
- Each block is baked by a random baker and then notarized by 32 other random bakers.
- If the block is good to go then the block gets added to the blockchain.
- The successful baker gets a block reward and can charge transaction fees for all the transactions inside the block.
As we have said before, token holders have the option of delegating their baking rights to other holders without letting go the ownership of their tokens. Upon the completion of the baking process, the baker will share their rewards with the rest of the delegates.
The native coin on the Tezos blockchain are called XTZ. Use a certified hardware wallet, like Ledger Nano S and Ledger Nano X. Here is a video on how delegation works with Ledger Live. We recommend StakeNow. (read why)
With over $2.643 billion worth of Security Token Offerings (STO’s) announced to be taken place on the Tezos protocol, it is clear that among every other protocol, Tezos has been substantially leading the way in the STO issuance space.
Why are they choosing to conduct STO’s on Tezos and not Ethereum for instance?
Essentially, prior to sending $1 billion over the blockchain, one can run a formal test to simulate the transaction and ensure it will execute smoothly. The kind of smart contract language Tezos has built allows one the discipline to mathematically prove a contract (off-chain, during its development) before putting it on-chain.
Within the Tezos client software, it includes a formally-verified multi-signature contract. This allows for cold-storage deployment and management of smart contracts for the highest level of security.
Having a lot of STO’s on Tezos will likely lead to a high volume of trading transactions, which means a high amount of fees generated for bakers. If STO’s eventually go mainstream, it would beg the notion why would anyone prefer to keep their money in a bank and earn minimal interest on their dollar when they can transfer it to real-estate and have the same liquidity as cash.