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Tezos

By Victor & Grayson
May 11, 2020

Disclaimer

The following review is not financial advice. Coin Grades’ ratings and letter assignments reflect the technical and practical viability of these cryptocurrencies in the eyes of the Coin Grades team. As always, we encourage you to do your own thorough research from multiple sources before choosing to invest in any cryptocurrency. The Coin Grades team was not compensated for this review. At the time of writing, no members of the Coin Grades team hold XTZ in their personal investment portfolios.



Overview

The concept for Tezos was first introduced in 2014, through a “position paper” and a standard whitepaper. The Switzerland-based founding company is called Dynamic Ledger Solutions. Often with blockchain projects, there will be a “nonprofit” foundation set up to fundraise for the founders. The Tezos Foundation (nonprofit) raised $232 Million through a record-breaking ICO during the cryptocurrency boom in 2017. A squabble developed between the head of the nonprofit, Johann Gevers, and the founders, Arthur and Kathleen Breitmann. Gevers refused to hand over the raised money to the company. After numerous delays and management issues, the blockchain itself finally launched in September, 2019 and moved away from Tezos. Tezos is a “new decentralized blockchain that governs itself by establishing a true digital commonwealth,” according to their own terms. It aims to be a more democratic cryptocurrency, where holders are able to have a say in network adjustments, while also receiving rewards for participating (owning XTZ). Tezos is a self-developing blockchain, which combines a democratic organic process with the “global computer” model of Tezos. This means that unlike most other cryptocurrencies, Tezos does not need a “fork” of the network code to upgrade. Needless to say, this makes Tezos an interesting and somewhat attractive experiment.


Decentralization

Since Tezos prides itself on being democratic, it has attracted a large amount of small time stakeholders in the network. Tezos operates by a unique “Liquid Proof of Stake” model, according to Blockgeeks. In proof of stake, validators get rewards for correctly adding a new block to the chain. In many modern proof of stake chains, there is a fixed amount of delegates responsible for network consensus. Tezos operates more democratically, where any stakeholder can vote for a delegate who will decide on network changes for them. What makes things even more fluid is that if a person is unhappy with the change the delegate voted for, they can take back their vote and make the vote themselves. This process is called “Liquid Democracy.” Liquid Democracy allows people to control the level at which they allow others to make decisions for them. This promotes equality and decentralization.


Security

Security always depends largely on one’s preservation of their private keys. However, Tezos is interesting here. Each major stakeholder in the network is called a “Baker.” Bakers have the option of delegating their baking rights to others without losing token ownership. This is significant. This allows for consistency and mutability within the network. Additionally, the Tezos programming languages (OCaml and Michelson) are more easily read by humans, which lowers the risk of bugs and breaches. OCaml is the original coding language, while the smart contract is coded using Michelson. Both of these are Functional Programming Languages. Without going into the more complex mathematics, Functional languages are simply more precise than the other kind of programming language (Imperative). This should make Tezos rather secure.


Speed & Scalability

Due to its Liquid Proof of Stake model, Tezos has the ability to be quite scalable, given that users can choose to have decisions made on their behalf by delegates. This helps streamline the validation process. However, the Tezos network hasn’t yet been tested or adopted to a level where we can really observe changes being made to the network that offer higher scalability. As a relatively new blockchain, we cannot say to what degree Tezos is scalable, as it would need to be observed being put to more use.

Tezos is not the fastest cryptocurrency out there, but it hasn’t been tested quite enough to make a solid judgment here. A possible reason for its slowish processing speed is its extreme decentralization. It might take a longer time to reach consensus/validate new blocks onto the chain.


Energy Consumption

Due to its high level of decentralization, Tezos should be one of most energy-efficient blockchains out there. While somewhat slow to process transactions, it makes up for this in its decentralization, security over time, and energy consumption. The blockchain itself isn’t heavily trafficked at this point, however, so it’s difficult to determine the reality of this metric until adoption increases.


Community

Tezos boasts a strong community for how relatively new it is. In 2019, Tezos became very popular for its generous staking rewards, where individuals can earn around 5% ‘interest’ on their Tezos per annum. The addition of Tezos to Coinbase also helped propel Tezos into the forefront. Currently Tezos has a strong community presence on Reddit and Twitter. However, the community remains divided over the current disputes amongst the founders and developers for Tezos as mentioned in the overview.


Team

Tezos is unique in its decentralization, even in terms of development. There are Tezos developers and projects all over the world. There is no “head” of Tezos, or one main spokesperson. This may be a problem moving forward, since there is no clear development team. This is in contrast with projects like Tezos where Vitalik Buterin still maintains a lot of influence over organizing updates. However, the Tezos Foundation, which helps promote Tezos with grants and partnerships, does have a team, though it’s not particularly diverse. Community members may prefer a bit more transparency, particularly from the foundation and its use of the original ICO funds, which were quite bountiful.


Adoption

Tezos is marketed as the most usable blockchain for Security Token Offerings (STO’s). This does make sense, considering Tezos favors long term stability and certainty. The chain, although constantly changing, will always remain the same Tezos chain. This means entities looking to digitize their assets won’t need to worry about a blockchain split where now their assets have doubled. The STO market has been slow to gain traction, but many investors are optimistic. There are, however, STO-centered blockchains that already have seen more official adoption than Tezos, and are valued far lower. This could be a reason to be skeptical, although Tezos’s unique protocol may eventually make it more attractive industry-wide. They also have significant funding, which have improved recognition and survivability. There are a number of projects being discussed by the various Tezos developers around the world, but so far nothing extremely concrete has come out of it. It’s possible that Tezos’s extremely decentralized model doesn’t provide enough clarity for those who want to use the chain for their purposes.


Liquidity

Tezos is available on Coinbase in most locations, including the Coinbase app, which is mostly used by retail investors. This makes Tezos quite liquid, even though the blockchain hasn’t been around for that long. This gives it a leg up on many of its competitors and provides easy access to retail traders. Volume has been pretty decent since it was added to Coinbase as well, and fairly consistent on Binance.


Potential

XTZ has been one of the best performers within the cryptocurrency market over the last year. Since early 2019, XTZ price has risen from below $0.40 to over $3.50 in early 2020. Outperforming nearly every other crypto asset, Tezos has climbed into the top 10 by market cap. This is quite significant, as it shows that people within the cryptocurrency market have placed heavy bets on it, particularly after it migrated to its own blockchain in September, 2019. Holding onto those gains is impressive as well. However, the fact that it only has one STO project in the works and not much adoption to show could mean that it’s overvalued compared to other assets in the market. Time will tell whether or not the chain becomes more widely used. Its unique protocol and highly democratic nature set it apart from other blockchains and give it a lot of potential.

Summary

Tezos has completely turned around their disastrous 2017-2018 and successfully launched their own incredibly unique blockchain. There are a number of reasons to like Tezos, but there are also some reasons to remain skeptical. While radical decentralization and liquid democracy can be a good thing for the technology, it might not be so good for making partnerships and fostering adoption. While some will see this as a great marketing point, others will see it as worrisome that a majority of voters can potentially destroy real world value. The same millenia old criticism of democracy as “mob rule” may still apply here. When disagreements arose over the Tezos Foundation’s handling of ICO funds, some members of the community stated that they should vote to delete them from the blockchain. While mostly a joke and highly unrealistic, the mere possibility of that may scare developers away.

The Tezos blockchain is built to evolve organically, but it won’t mean anything if it’s not being used to solve real world problems. Stakeholders do receive rewards for owning XTZ, so perhaps value will continue to increase over time as more people become interested in Tezos. After all, owners can receive 5% rewards yearly. There is not really an incentive to spend the token, and in this sense, it’s a cross between a store of value and a global, self-moderating computer. It remains to be seen whether or not XTZ starts to see more use, or if their technology is just an interesting experiment.

In all, Tezos has very quickly become a favorite in the crypto space. Its unique democratic model and generous staking rewards have drawn a lot of attention. The fact that it can evolve naturally without forks solves a major problem that cryptos have nowadays. The developer community is growing, and many in the space have started to state that Tezos is the best competitor to Tezos. While the potential is there, more adoption has yet to be seen. Tezos has a massive developer base, and Tezos currently has a long way to go to catch up.

Coin Grade


B-

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XTZ/USD Price Chart




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