Bake the Chain: How Tezos Is Innovating Formal Governance and Blockchain Scalability

The Tezos network is an open-source blockchain made for smart contracts, NFTs, and DeFi. The Tezos blockchain uses tez as its native coin and has a proof-of-stake (PoS) consensus mechanism with built-in governance. This means staking tez allows users to vote on changes to the Tezos protocol in addition to validating the blockchain. Tezos is a secure and speedy smart contract blockchain that aims to be innovative and never hard fork. 

Tez crypto

Tez staking

On the Tezos blockchain, validators are called 'bakers,' and they're required to bake (stake) a 'roll' of 6,000 tez—worth around $10,000 as of writing. In regular terms, validators must stake a minimum amount of tez to be able to secure the blockchain, but this minimum isn't required to delegate tez to a validator. Bakers and delegators are rewarded with around 3% APR for staking their tez, but only bakers can vote in Tezos governance.

There are numerous protocols deployed on the Tezos blockchain, and many are NFT marketplaces. The best Tezos NFT marketplaces like objkt.com and fxhash have become huge destinations for NFTs that handle millions of dollars in volume thanks to fast transactions and lower fees compared to Ethereum. Tezos also uses its own smart contract language, so you won't find most of its exclusive DeFi protocols on other chains like Polygon or Harmony.

Tezos NFT

Tezos is one of the fastest growing NFT ecosystems as five of its top ten decentralized applications (dapps) are NFT marketplaces by number of users. The top five Tezos NFT marketplaces have had a combined volume of over $17 million over the past 30 days according to Dapp Radar at the time of writing. That means Tezos NFT marketplaces have had over double the trading volume that OpenSea had on the Polygon blockchain over the same period, making it a platform worthy of consideration if you sell or own NFTs.

Bakers' voting power is proportional to the size of their roll, which equals the number of tez they staked plus the tez delegated to them. Through governance, bakers have the authority to propose new blocks, submit governance proposals, and vote on those proposals—such as ones to lower the minimum staking requirement. Tezos's comprehensive proposal and voting system enables the network to continuously iterate without the risk of splitting network consensus. 

Tezos proposals

The Tezos proposal process is structured in five stages where every proposal is voted on multiple times with a waiting period between each vote. First, bakers submit proposals for changes to the Tezos network's code or parameters and then select which proposal to nominate for voting in the next stage—sort of like a primary election. Proposals with at least 5% approval proceed to the voting stage.

Tezos governance operates similarly to a DAO (decentralized autonomous organization) where bakers are its members, and they can vote on changes to implement to the blockchain. These changes are called amendments, and they're often used to introduce fixes, upgrades, and new features to the Tezos blockchain. Each update to the Tezos protocol is named after a city, with the three most recent being Hangzhou, Ithaca, and Jakarta.

Liquidity Baking

Granada was the fourth-latest upgrade to Tezos, and it introduced a unique feature called liquidity baking. Liquidity baking takes some of the newly minted tez issued every block and deposits it into a liquidity pool—containing tzBTC (Tezos network bridged Bitcoin)—similar to the ones on Uniswap. This helps boost the liquidity of tez so that it's easier and cheaper to trade for other cryptos on the blockchain. The Jakarta update implemented a liquidity baking toggle vote to enable bakers to activate or deactivate liquidity baking.

Tenderbake

Another major Tezos update was Ithica which introduced a new PoS consensus mechanism called Tenderbake—an adaption of Cosmos's Tendermint. The goal of implementing Tenderbake was to hasten Tezos transactions with faster finality while boosting blockchain security with byzantine-fault tolerance. Put simply, this helps the blockchain stay in sync while reducing vulnerability to DDOS attacks or systemic failures.

Tezos transaction optimistic rollups (TORU)

The latest upgrade to Tezos was Jakarta, and it aimed to scale the Tezos blockchain by introducing optimistic rollups. A rollup is a layer-2 scaling solution that uses cryptographic proofs to make blockchain transactions quicker and cheaper. Tezos is developing a built-in scaling solution that uses a ticketing system to easily transfer assets to and from layer-2.

Transaction optimistic rollups, or TORU, is an experimental scaling feature to optimize Tezos transactions by processing them off the blockchain. This can reduce transaction fees and promote network decentralization, but TORUs aren't compatible with smart contracts yet. This means TORUs won't work with Tezos NFTs until smart contract optimistic rollups, or SCORU, are developed.

Tezos has broken ground in innovating blockchain technology, and tez is one of the top proof of stake cryptos. Tezos has one of the most successful self-governance infrastructures of any blockchain and is quickly expanding into the NFT space, but there are things holding it back. The main issues affecting Tezos have to do with crucial things like development, adoption, and the tez market.

Development

One of Tezos's biggest obstacles is that it uses its own coding language. While the Michelson language used by Tezos has beneficial features like formal verification, the problem is that there are few developers familiar with it and a lack of developer tooling for Tezos. This makes it harder to foster a dedicated community of Tezos developers that can deploy new NFT marketplaces and other dapps to the blockchain. 

Documentation

Blockchains need a comprehensive documentation library to both help developers and increase adoption by educating new users. There is some content to teach people what Tezos is and how it works, but this is scattered and very disorganized. While there are secondary sources committed to helping build an understanding of Tezos, there's a lack of up-to-date information regarding recent Tezos developments and a central point of access to that information.

Tezos market

Poor documentation and weak developer support have stunted Tezos's growth and made tez less pervasive than it could be. Crypto investors find it hard to buy into things they don't understand, and that's arguably Tezos's biggest issue. Despite being highly accessible, tez suffers from a lack of liquidity relative to similarly-sized cryptocurrencies. In fact, this is Tezos co-founder Arthur Breitman's exact rationale behind implementing liquidity baking.

This lack of liquidity, largely due to shallow order book depth, could seriously hurt the tez price when large quantities are sold by whales, the Tezos Foundation, or the Tezos founders. Tez recently reached its final vesting cliff in April 2022, which means this supply could be dumped on the market by Tezos insiders. This is exacerbated by the high number of large institutional Tezos bakers like the Tezos Foundation, Coinbase, and other crypto exchanges collecting—and possibly selling—a majority of tez staking rewards.

While this shows how Tezos is still somewhat centralized, the bigger concern is the implications this could have on the price of tez. It may seem suspicious how the liquidity baking toggle was implemented right after the tez allocated to insiders had finished vesting because the liquidity guarantee it provided made it ideal for offloading tez into BTC. Though anyone can speculate on the motivation behind this timing, we can observe that the tez price has steadily declined since October—long before the broader crypto market crash.