Teasing Out Tezos: A Beginner’s Guide to the Tezos Blockchain

Decentralized governance has long been a hot topic in web3, but Tezos (XTZ) brought blockchain-based voting to the forefront of crypto’s consciousness. With its distinctive staking protocols and “self-amending” software, Tezos was one of the earliest chains to introduce novel onchain governance solutions, helping inspire future chains and protocols to add democratic features to their software designs. 

Although Tezos is best known for its role in blockchain governance, it has many other features that continue to attract traders and developers.

Tezos’ history

Arthur and Kathleen Breitman—who previously worked at Goldman Sachs and Accenture, respectively—introduced the idea for Tezos in a whitepaper published in 2014. After developing the technology behind Tezos through the company Dynamic Ledger Solutions, the Tezos team hosted one of the largest initial coin offerings (ICOs) in the history of crypto in 2017, raising a total of $232 million within two weeks. 

The nonprofit Tezos Foundation later took control over the development and organization of this blockchain, and Tezos formally launched in 2018. Since then, it has undergone multiple upgrades using its self-amending governance procedures, and it continues to welcome third-party developers to deploy decentralized applications (dApps) in fields such as decentralized finance (DeFi), GameFi, and non-fungible token (NFT) trading. 

How does Tezos work? 

At its base layer, Tezos uses a special type of Proof-of-Stake (PoS) consensus algorithm known as “Liquid Proof-of-Stake” (LPoS). Like other PoS blockchains, computers (aka nodes) on the Tezos blockchain lock (or “stake”) the native cryptocurrency onchain to validate transactions and receive crypto rewards for securing the network. The “liquid” part of Tezos’ PoS model means nodes can withdraw their XTZ coins anytime rather than waiting for a lockup period. 

Tezos’ LPoS consensus algorithm ties in with its distinctive “self-amending” governance procedures. Nodes that stake XTZ can propose upgrades to Tezos’ software, review the potential updates, and vote on them with XTZ. If there’s supermajority support for a proposal, it moves through the testing phase to check its technical viability before final adoption. This onchain governance procedure allows Tezos to naturally evolve and avoid contentious network splits known as “hard forks.”    

Similar to PoS blockchains like Ethereum (ETH) and Solana (SOL), Tezos welcomes third-party developers to use its software infrastructure to build dApps with “smart contract” commands. These smart contracts recognize “if/then” statements and execute their pre-programmed instructions without centralized intermediaries. One distinction with Tezos’ smart contract model is its reliance on a custom-built, mathematically precise coding language called Michelson. 

Tezos FAQs 

What is “baking” on Tezos? 

In the Tezos community, the terms “baking” and “staking” are synonymous. Validator nodes on the blockchain are also often known as “bakers.”

What is the XTZ coin? 

XTZ is Tezos’ native cryptocurrency, and it’s used to pay gas fees, validate transactions, and vote on governance proposals in the Tezos ecosystem. XTZ is a fungible cryptocurrency, meaning the price of each Tezos coin is 1:1 and is divisible on the crypto market. To find the current market price of Tezos, traders refer to a real-time Tezos price chart on crypto exchanges or price aggregator websites.   

Can anyone become a Tezos validator? 

Tezos has a minimum staking requirement of 6,000 XTZ to validate blocks and receive rewards. However, traders with less than 6,000 XTZ can “delegate” a portion of their cryptocurrency to a validator node to receive partial rewards in their crypto wallet. 

Note: Delegators don’t receive voting rights on the Tezos blockchain and are subject to penalties if validator nodes engage in misconduct.  

Disclosures

The content of this article (the “Article”) is provided for general informational purposes only. Reference to any specific strategy, technique, product, service, or entity does not constitute an endorsement or recommendation by dYdX Trading Inc., or any affiliate, agent, or representative thereof (“dYdX”). Use of strategies, techniques, products or services referenced in this Article may involve material risks, including the risk of financial losses arising from the volatility, operational loss, or nonconsensual liquidation of digital assets.  The content of this Article does not constitute, and should not be considered, construed, or relied upon as, financial advice, legal advice, tax advice, investment advice, or advice of any other nature; and the content of this Article is not an offer, solicitation or call to action to make any investment, or purchase any crypto asset, of any kind.  dYdX makes no representation, assurance or guarantee as to the accuracy, completeness, timeliness, suitability, or validity of any information in this Article or any third-party website that may be linked to it.  You are solely responsible for conducting independent research, performing due diligence, and/or seeking advice from a professional advisor prior to taking any financial, tax, legal, or investment action.

You may only use the dYdX Services in compliance with the dYdX Terms of Use available here, including the geographic restrictions therein.

Any applicable sponsorship in connection with this Article will be disclosed, and any reference to a sponsor in this Article is for disclosure purposes, or informational in nature, and in any event is not a call to action to make an investment, acquire a service or product, or purchase crypto assets.  This Article does not offer the purchase or sale of any financial instruments or related services.

By accessing this Article and taking any action in connection with the information contained in this Article, you agree that dYdX is not responsible, directly or indirectly, for any errors, omissions, or delays related to this Article, or any damage, injury, or loss incurred in connection with use of or reliance on the content of this Article, including any specific strategy, technique, product, service, or entity that may be referenced in the Article.