A self-amending blockchain was what Tezos sought to create when it was founded in 2014. While its implementation was complex, Tezos’ concept was surprisingly simple: People who owned its cryptocurrency XTZ could vote about possible changes to its rules, and the software would update to implement the changes once the vote was taken.
By creating a system like this, Tezos hoped to prevent its blockchain from forking, making two distinct currencies with two different values. Despite this, the idea of cryptocurrencies upgrading themselves created a debate around what was referred to as blockchain governance. As a result of Tezos’s arrival, blockchain taxonomy may be rearranged, dividing crypto assets into two camps, those governed off-chain and those governed on-chain.
In order for the Tezos network to work, users had to agree to lock their XTZ into special contracts known as baking. By delegating XTZ to the baker, new XTZ can be earned or purchased with XTZ. A record amount of funding was raised by the Tezos team in 2017 in order to make the live blockchain available to the public in 2018. You can always learn a great deal about Tezos on their website as well.
How does Tezos work?
Many of the features common to cryptocurrencies are enabled by Tezos’ blockchain. The software can be used to run custom programming logic (smart contracts) and implement new programs (decentralized applications) aimed at replicating products and services. The voting feature required a different approach.
Tezos’ blockchain would be split into two parts:
- Shell – The code that interprets transactions and manages administrative operations as well as amending itself based on user votes
- Protocol – The code responsible for submitting proposals to the shell.
It uses a variant of classic proof-of-stake (PoS) consensus known as liquid proof-of-stake (LPoS) to maintain network synchronization.
Similar to traditional PoS mechanisms, LPoS is an algorithm used to secure Tezos network, validate transactions, and distribute newly minted XTZ by computers running Tezos software. Participants nodes must stake XTZ in a process called baking in order to participate in governance. To become a baker, a node needs 8,000 XTZ also called a roll.
On the live blockchain, users can also delegate their tokens to other bakers, allocating votes to them so they can earn XTZ rewards. Due to the ability to easily switch between the bakers they delegate XTZ to, users are incentivized to perform honestly.
What is the overall value proposition for Tezos?
The XTZ cryptocurrency plays a key role in maintaining and operating the Tezos network, and can be used for holding, spending, sending or baking.
The ability to vote on network upgrades is granted to users who own and bake XTZ, with each vote being proportional to how much they own.
Tezos rewards participants with XTZ based on how many tokens they bake, with bakers receiving a small portion of the reward reserved for the participants who delegate XTZ.