Tezos is a smart contract platform used to issue new digital assets and create decentralized applications (dapps). The project gained notoriety as one of the first blockchain-based projects to implement a proof-of-stake (PoS) consensus algorithm over a proof-of-work (PoW) algorithm used by Bitcoin.
So what makes Tezos different?
Overview of Tezos
Tezos was founded in August 2014 by Arthur and Kathleen Breitman, who published a position paper under the pseudonym L.M. Goodman. The Breitmans followed up the position paper with the official Tezos white paper, which highlighted the platform’s functionality using its native cryptocurrency, XTZ. According to the white paper, XTZ enables Tezos’s smart contract functionality and gives holders the opportunity to participate in on-chain governance.
XTZ is an inflationary asset with a fixed issuance rate of around 5.51% and an uncapped token supply. By inflationary, more XTZ is generated over time due to its PoS consensus mechanism. PoS consensus mechanisms reward users (known as validators) for confirming transactions and fine validators for acting maliciously. Both fines and rewards are paid in XTZ, which makes the token supply increase over time.
Due to the open-source nature of the platform, Tezos is decentralized from any single entity and developed by the community. To best support the community, the Tezos Foundation was created following the XTZ token launch in 2017. The Tezos Foundation is responsible for supervising the platform’s development and ensuring its long-term success. Through community development and support from the Tezos Foundation, Tezos has developed into a unique blockchain that functions similarly but works differently from other PoS blockchains.
What makes Tezos different?
What makes Tezos different from other blockchains can be briefly summarized by three main points:
- Energy efficiency: Tezos has an annual carbon footprint approximately equivalent to that of 17 world citizens.
- Baking rewards: Tezos implements a variation of PoS called liquid staking that lets participants bake, not stake, their XTZ for rewards. Baking is the process Tezos uses to add new blocks of transactions to its blockchain.
- Forkless upgrades: Tezos can upgrade without the need for a fork, leaving developers and users uninterrupted. A fork occurs whenever there is a change to the current status quo of a specific blockchain.
Let’s dive into each of these bullets in more detail.
One way the Tezos blockchain is different is its reduced energy consumption and low carbon footprint. Using a PoS consensus algorithm means it is already using less energy than the computer-driven PoW on blockchains such as Bitcoin.
According to an independent report conducted by PwC, Tezos transactions consume approximately 2.5g of carbon dioxide (CO2) per transaction, while Ethereum currently consumes around 79.67kg of CO2 per transaction. Put differently, the Tezos network has approximately the same carbon footprint as 17 people, while Ethereum has a carbon footprint close to the entire country of Ireland. Tezos developers are continuing to bring the platform’s energy consumption down even lower and say the blockchain has already increased its transaction efficiency by over 70% since the platform launched, despite a growing ecosystem.
Many DeFi protocols, decentralized exchanges (DEX), dapps and other projects are working on the Tezos blockchain. Non-fungible tokens (NFT), in particular, have become increasingly popular on the Tezos platform thanks to its low carbon footprint. Existing platforms including Rarible have integrated Tezos NFTs, while new projects like the music NFT platform OneOf have built on Tezos.
Tezos validates transactions through a process known as baking rather than staking. Staking is typically how PoS-based blockchains verify transactions on the network. Baking on Tezos reaches the same result by, among other ways, letting XTZ holders delegate their tokens to so-called bakers. Delegating XTZ to bakers enables on-chain governance and validation rewards without needing the minimum 8,000 tokens (known as 1 "roll") to do so.
The delegation structure behind Tezo’s baking system is unique from traditional PoS consensus, but also from delegated proof-of-stake (DPoS) blockchains like EOS or Tron. Under traditional DPoS consensus, delegation is required for the blockchain to reach consensus. With Tezos, delegation is often the most convenient way to participate in the ecosystem, but it is not a requirement for consensus. This distinction has led the Tezos community to distinguish the platform’s consensus from DPoS by referring to it as liquid staking.
In April, Tezos released its Tenderbake upgrade, which enabled faster transactions and decentralized applications. Three months later, Tezos announced the launch of Jakarta, the blockchain's 10th major protocol upgrade. The Tenderbake, Jakarta and other upgrades prior were able to be implemented without the need for a fork.
Forkless upgrades set Tezos apart from other blockchains because of its ability to self-upgrade and eliminate disruption for Tezos users. When major upgrades are required on other blockchains, like Ethereum, a hard fork is required for the features to be implemented. A hard fork essentially splits a blockchain into two different versions, making the older one invalid. Developers and node operators are required to transition over to the new fork or risk losing funds or being left behind. With Tezos, the transition to a new upgrade is seamless, allowing bakers and developers to continue working without disruption.
For an upgrade to happen on the Tezos blockchain, a proposal must first be presented to the community and voted on. If the proposal passes the on-chain governance, the upgrade will then be tested on a separate blockchain to ensure its success. Once the upgrade is considered to be stable on the testnet, the upgrade is then seamlessly switched over to the main Tezos blockchain.