Tezos: The Advanced and Institutional-Grade Blockchain of the Future

Tezos is a decentralized, open-source blockchain network that was launched in 2018. It represents a new evolution in blockchain technology, as it combines key innovations like on-chain governance, proof-of-stake consensus, and formal verification.

Tezos aims to provide a flexible, sustainable, and secure foundation for Web 3.0 applications. Its self-amending nature allows it to upgrade seamlessly over time without contentious hard forks. Tezos offers a platform to build everything from tokens and digital assets to decentralized finance and non-fungible tokens.

Origins of Tezos

Tezos was conceived in 2014 by Arthur Breitman, a French-American computer scientist and former Morgan Stanley quantitative analyst. Along with his wife Kathleen Breitman, they published two pioneering whitepapers laying out their vision for "a generic and self-amending crypto-ledger."

At the time, early blockchains like Bitcoin and Ethereum existed, but faced challenges in governance. Hard forks were required to upgrade, often leading to acrimonious splits in the community.

Tezos sought to solve this with a built-in governance mechanism for stakeholders to seamlessly upgrade the network. Arthur Breitman was inspired by e-governance systems used in places like Taiwan and Estonia. By translating such concepts to a blockchain, Tezos could continuously evolve with community input.

After publishing the whitepapers, the Breitmans incorporated a company in Delaware called Dynamic Ledger Solutions to develop the Tezos software. They also set up the Tezos Foundation in Switzerland to support the project under Swiss law.

To fund initial development, Tezos conducted one of the earliest initial coin offerings (ICOs) in July 2017. The fundraiser brought in 65,627 BTC and 361,122 ETH, worth around $232 million at the time. This provided multi-year runway to build out the technology.

In 2018, after extensive development, Tezos launched its genesis block and mainnet. With the ICO funds, the Breitmansalso launched the Tezos Foundation to provide support for the ecosystem long-term. While Arthur Breitman leads the technical development, the Tezos Foundation operates independently to grow the community.

Since its inception, Tezos has developed into one of the leading blockchains globally both in community involvement and institutional adoption. It represents the new generation of community-driven, self-upgrading decentralized networks.

Key Technical Innovations

Tezos implements several key technical innovations that provide critical advantages over earlier blockchains like Bitcoin and Ethereum:

On-Chain Governance: All aspects of Tezos can evolve through an on-chain governance mechanism. Token holders can propose, vote on, and adopt upgrades seamlessly.

Liquid Proof-of-Stake: Tezos uses a delegated proof-of-stake algorithm called Liquid PoS with formal security proofs. This encourages greater decentralization and security.

Formal Verification: Tezos facilitates formal verification of smart contracts to mathematically prove their correctness. This enhances security and trust substantially.

Michelson: Tezos features a new smart contract language called Michelson designed for security and formal verification.

These four pillars make Tezos perhaps the most advanced blockchain to date in terms of technical innovations. Each contribution aims to solve critical shortcomings in existing networks like Bitcoin, Ethereum, and others.

Together, they enable Tezos to upgrade efficiently, avoid contentious hard forks, provide stronger security guarantees, facilitate innovation, and drive adoption. These key innovations will be covered in more detail throughout the article.

Consensus Mechanism

One of the defining aspects of any blockchain is its consensus mechanism - the method by which transactions are validated and new blocks added to the chain. Early blockchains like Bitcoin use a proof-of-work (PoW) scheme, which relies on decentralized mining.

However, PoW has drawbacks in energy use, security risks from centralized mining pools, and scalability bottlenecks. Tezos was designed from scratch to utilize a different system known as proof-of-stake (PoS).

In PoS blockchains, validation is done through "staking" instead of mining. Network participants lock up their tokens as collateral in order to be selected to validate transactions and create new blocks. The more tokens staked, the greater the chance of being chosen.

This selection process is pseudo-random and based on the original Protocol Labs design called "Chain of Activity." Staking brings three key advantages:

Energy Efficiency

PoW mining consumes enormous amounts of electricity via computation. PoS is environmentally friendly by comparison since it relies only on locking up existing tokens.

Security

PoS encourages long-term alignment of interests rather than short-term profits from hardware investments. Staking disincentives attacks and builds value.

Scalability

PoS enables sharding more securely. Sharding parallelizes validation which increases throughput. This is harder to coordinate under PoW.

Tezos utilizes a delegated proof-of-stake (DPoS) model specifically. This means token holders can delegate staking rights to others, like in a representative democracy.

For example, those without technical resources or small holdings can delegate their tokens to professional validators who run the infrastructure. The latter group are known as "bakers" in Tezos terminology.

This allows for greater participation in consensus than pure PoS. Those who don't run nodes can still earn rewards on holdings through delegation.

Liquid Proof-of-Stake

The specific DPoS algorithm Tezos implements is called Liquid Proof-of-Stake. Originally proposed by a team led by Zamfir at the Tezos Foundation, Liquid PoS enhances security.

In Liquid PoS, bakers stake a security deposit to participate in block production and validation. However, if they act dishonestly their deposits can be confiscated. This is referred to as "slashing" conditions.

For example, if a baker signs two different blocks at the same block height, this double-signing is evidence of malicious behavior. As punishment, some or all of the baker's security deposit will be forfeited.

This mechanism aligns incentives properly - the system rewards honest participation but punishes malicious actions. Liquid PoS also prevents centralized delegate services as it limits how many user stakes each baker can accumulate.

Finally, bakers are pseudo-randomly selected to validate each block based on the number of rolls they have. This prevents collusion or predicting exactly who will validate next.

Together, these properties of Liquid PoS incentivize good actors and maximize decentralization. The "liquidity" refers to the fluid nature of stake delegation between bakers based on community preferences.

Formal Verification

A defining innovation of Tezos is its emphasis on formal verification for smart contracts. Formal verification uses mathematical proofs to ensure code executes properly and has no unexpected behaviors.

This provides a much higher degree of assurance than traditional testing methods. Bugs that might go uncaught with testing can be proven not to exist via formal verification.

Tezos facilitates formal verification of smart contracts through its Michelson development language. Michelson is designed to make code more amenable to formal proofs.

The functional style of Michelson makes the need for verification explicit. All possible outputs are represented as a function of the inputs. This makes mathematically proving correctness more straightforward compared to an imperative language.

Formal verification on Tezos takes place at the contract level. Developers can prove their smart contracts are bug-free before deploying them to the mainnet. For complex contracts that users will interact with, verification is essential.

Tezos also utilizes verification at the protocol level. As new protocol upgrades are proposed, the code can be verified to guarantee functionality. This prevents bugs in the base layer.

Together, Michelson and formal verification allow Tezos to provide stronger security assurances than any other blockchain. Developers have high confidence their smart contracts will work as intended.

Michelson Smart Contract Language

As mentioned, Tezos features its own native smart contract language known as Michelson. It was designed by Arthur Breitman specifically for use on Tezos.

The goals of Michelson were security, simplicity, and to facilitate formal verification. It uses a pure functional paradigm with no side effects or mutable state. This makes Michelson code more predictable and amenable to proofs.

Michelson is strongly typed with primitive data types like integers, strings, booleans, addresses. More complex data structures can also be defined. Multi-asset smart contracts are possible through pair types - an innovation adopted by other chains later.

For control flow, Michelson provides constructs like if/else statements, loops, and functions. There is purposefully no goto statement for more predictable execution.

Overall, the minimalist design of Michelson prevents many vulnerabilities and "footguns" found in languages like Solidity. There is no nested calling between contracts which limits reentrancy bugs.

On the other hand, the stark difference from mainstream languages presents a learning curve. Smart contract developers on Ethereum or other chains can't just copy and paste Solidity code into Tezos.

Efforts are underway to develop new languages that compile down to Michelson. These can open up smart contract development on Tezos to a wider audience of devs familiar with languages like JavaScript and Rust.

Some examples include:

- Fi - A contract-oriented language with syntax inspired by Rust
- Ligo - ML-style language with an OCaml-like syntax
- Archetype - Python-like language for Tezos contract development
- Granada - JavaScript-like syntax that compiles to Michelson

These languages allow developers to program in more familiar paradigms while the compiler handles producing secure Michelson bytecode under the hood.

Overall, Michelson represents a clean break from earlier languages like Solidity and Viper. While requiring adaption, Michelson sets Tezos smart contracts up for security and simplicity from a foundation level.

On-Chain Governance

One of the biggest differentiators for Tezos is its on-chain mechanism for self-governance and upgrades. Tezos stakeholders can propose, discuss, and adopt changes entirely on the blockchain itself.

This is facilitated through a four-stage voting process:

Proposal Suggest an amendment and activate the voting process. This puts up a bond that is forfeited if the proposal fails.

Testing Proposed amendments are coded into "mockup" clients on a test network for experimentation.

Exploration There is an open period for debate, critique, and refinement of proposals. Tezos bakers discuss and assess if it merits proceeding.

Promotion If approved after the exploration phase, the amendment is activated and implemented live on the main network.

This built-in governance allows Tezos to seamlessly adapt and upgrade itself over time without risky hard forks. It also aligns incentives - bakers have skin in the game to thoughtfully consider proposals.

Amendments can include things like:

Changing blockchain parameters like block size or gas limits
Updating the consensus mechanism
Implementing new cryptographic primitives
Enhancing smart contract functionality 
Adjusting economic parameters like inflation rate

The multifaceted governance process allows robust discussion and feedback before activating anything. There is also a testing period to prove amendments work as intended with minimal risk.

This on-chain mechanism is transparent to all token holders and stakeholders. There is no central foundation or company making unilateral decisions. Proposals bubble up from the community itself.

By embedding governance directly into the base protocol, Tezos avoids contentious hard forks that have plagued networks like Bitcoin and Ethereum. The community stays aligned and development can proceed fluidly.

Applications on Tezos

The advanced architecture of Tezos makes it well-suited for a diverse range of decentralized applications and use cases. Some examples include:

Payments and Digital Assets

Tezos supports both fungible (FA1.2) and non-fungible (FA2) token standards to issue custom digital assets. These can represent fiat currencies, commodities, securities, collectibles and more. Tezos has become a leading blockchain for launching NFT projects.

Decentralized Finance (DeFi)

Many DeFi primitives are in development on Tezos such as decentralized exchanges, lending protocols, derivatives, prediction markets, and more. Tezos offers a secure foundation for permissionless financial innovation.

Identity Systems

Users can create self-sovereign identities mapped to addresses and store verifiable claims and credentials on chain. This has applications from supply chain tracking to credentials management.

Gaming and Metaverse

Tezos is an ideal environment to deploy digital gaming assets like NFTs as well as backend mechanics. It offers scalability, low fees, and community-driven governance - all key for metaverse worlds.

Smart Contract Wallets

Advanced programmable wallets can implement participation rules, spending limits, group administration, and novel features. Tezos facilitates these through Michelson and formal verification.

Decentralized Autonomous Organizations (DAOs)

Tezos is built for decentralized governance from the ground up. This makes it a natural fit for deploying and managing DAOs and other crypto native organizations.

These demonstrate just a small sample of potential Tezos applications. More generically, Tezos offers a robust platform for tokenized assets, digital ownership, community governance, and business logic encapsulation.

The Tezos Foundation runs multiple grant programs to fund projects across these domains and more. There is strong momentum behind using Tezos for everything from DeFi to NFTs and the open metaverse.

Tokenomics 

The native utility token of the Tezos blockchain is called tez or XTZ. All operations on the network like transactions, deploying contracts, staking require XTZ. The initial supply at genesis was 763 million XTZ.

Like many proof-of-stake networks, the XTZ supply increases each year via an inflationary monetary policy. New tokens are minted as "block rewards" paid to bakers who participate in validation.

The current inflation rate is about 5.5% per year. This incentivizes staking early on before dilution increases. It ensures there is an adequate supply of tokens for validators.

In terms of distribution, the initial allocation of XTZ was as follows:

65.7% Sold in the 2017 ICO crowdfunding
8.25% Held by the Tezos Foundation
10% Held by Dynamic Ledger Solutions (Breitmans)
Remaining went to early contributors and developers

The ICO was one of the earliest and most successful ever completed. It brought widespread public attention to Tezos and funded ongoing development.

Today the Tezos Foundation remains a key steward of the project. As a Swiss non-profit, its purpose is to provide grants and support education that grows the Tezos ecosystem.

In addition to paying for gas, XTZ has several other utility functions:

Staking XTZ allows token holders to become bakers and earn block rewards
XTZ can be delegated to bakers to generate passive income while participating in consensus

Token holders receive governance rights to vote on network upgrades
More XTZ leads to greater influence in the proposal process

This multi-faceted utility incentivizes long-term holding and engagement rather than short-term speculation. The XTZ token aligns stakeholders to maintain a healthy, functional network.

Adoption and Ecosystem

Since launching its mainnet in 2018, Tezos has made impressive strides in adoption and ecosystem development. Some key highlights:

There are over 450 independent validators (bakers) securing the Tezos network as of early 2022. This makes it one of the most decentralized blockchains globally.

Several major multinational corporations have chosen to build on Tezos including Ubisoft, BNP Paribas, Red Bull Racing, Manchester United, and Societe Generale among others.

National governments are using Tezos for blockchain projects as well - including France's national postal service, the Swiss Federal Institute of Technology, and the United Arab Emirates.

NFT projects have flocked to Tezos given its low gas fees, strong community, and support for multiple token standards. Tezos has emerged as a top 3 NFT blockchain.

Decentralized finance protocols are proliferating on Tezos with over $1 billion in assets staked across DeFi platforms as of 2022. Popular projects include Crunchy Network, Youves, Plenty DeFi, and Quipuswap.

There are hundreds of assets and tokens built on Tezos from NFT collections to stablecoins, governance tokens, security tokens, collectibles, and more.

Grassroots community engagement is extremely strong with meetups happening worldwide. The Tezos ecosystem is driven by a wide base of contributors.

This impressive growth in just a few years speaks to the technical merits and alignment of incentives Tezos offers. Both enterprise and retail users are recognizing Tezos as an advanced platform for tokenized assets and applications.

If adoption continues or accelerates, Tezos appears poised to be a leading network for Web 3.0, DeFi, NFTs, and beyond. The built-in upgrade path allows it to scale elegantly over time as well.