An Optimistic Take on Tezos
I’m Charlie- I studied STS at Stanford and graduated in June 2017. In September 2015 I had hip surgery due to a torn labrum from playing water polo and swimming. This was a blessing in disguise as I embarked down the proverbial “crypto rabbit hole” while fixed to the couch for three weeks recovering. Since then, I have become intrigued with thinking about crypto protocols in terms of their socio-political implications; and I’m passionate about how they are enabling us to reimagine governance, business, sovereignty, and more. Lately, I have been particularly interested in Tezos- a blockchain project tainted by lawsuits and negative media coverage. I recently brought up Tezos to a friend who said, “isn’t that a super controversial project? I don’t know much about it, but I would stay away from it if I were you.” Although the Tezos project has experienced some dark times, my take is that many who knock it are not fully informed on what the protocol offers.
Tezos is fascinating to me because it enables new and unique forms of governance, social coordination, and protocol evolution. It is a self-amending blockchain featuring on-chain governance, Turing complete smart contracts, formal verification, and a Proof-of-Stake consensus mechanism, among other things. The initial protocol is intended to be as generic as possible, leaving it up to the stakeholders, the true owners of the network, to determine future implementations and upgrades. In this post, I will begin by describing the characteristics presented above and hope to provide an objective and high-level introduction to the protocol. Next, I will share how I view Tezos and why I am optimistic about its future. For a more in-depth and technical explanation of Tezos, check out the white paper here.
Self-Amendment & On-Chain Governance
The most powerful feature of Tezos is that it supports “meta upgrades.” Self-amendment allows the protocol to change its rules without having to fork the network. This is important because the suggestion or expectation of a fork can result in community and developer stagnation, alter stakeholder incentives, and disrupt the network effect that gives a blockchain value. There are several safeguards in place to ensure that proposed changes are sensible and safely instituted. The entire process from proposal to adoption takes approximately three months and is divided into four quarters. These four quarters make up an “election cycle.”
Protocol amendments are suggested in the first quarter, and stakeholders may approve any number of proposals. In the second quarter, the proposal with the highest approval is voted on by stakeholders. A stakeholder’s vote is proportional to the amount of Tezos tokens, “tez,” he/she owns. Stakeholders may cast a vote for, against, or explicitly abstain. Explicitly abstaining is an important action as these votes count towards the quorum. The initial quorum is set to 80% but constantly adjusts to reflect average voter participation.
The third quarter of the election cycle begins when the quorum is reached, at which point the proposed protocol enters a test network. After approximately three weeks on the testnet, stakeholders participate in a final confirmation vote, marking the start of the fourth quarter. If the quorum is met a second time, then the protocol in the test network is automatically promoted to the main network, thereby giving Tezos its “self-amending” feature. This procedure allows for the protocol to innovate and evolve sans a network fork. Additionally, amendments can include payment to individuals or groups that improve the protocol. This funding mechanism incentivizes robust development and decentralizes the maintenance of the network.
The election cycle is an example of on-chain governance. Governance in Tezos is similar to a liquid democracy, also referred to as a delegative democracy, in that all stakeholders can either vote on protocol decisions themselves or delegate their voting power to others who are better suited to do so. For most blockchain projects right now, protocol decisions are made and executed off of the blockchain (“off-chain”), whereas Tezos does so on the blockchain. Almost all aspects of the protocol are subject to amendment, including the election cycle itself. For example, “Proof of Constitutionality” could be implemented; this would require all future amendments to meet specific properties. Along the lines of self-amendment, Tezos allows anyone to create self-executing (automated) smart contracts.
Smart Contracts & Formal Verification
Like Ethereum, DFINITY, Qtum, and a number of other blockchains, Tezos offers a Turing complete smart contracting platform. Tez are used to pay for the computational resources needed to execute these contracts, just like ether on Ethereum. Michelson and SmartPy, which compiles to Michelson, are two programming languages for creating smart contracts on Tezos. The protocol itself is written in OCaml. OCaml, Michelson, and SmartPy more easily facilitate formal verification. Formal verification allows developers to conclusively prove that certain error states are impossible. Using formal verification can increase the security of a smart contract by mathematically proving the correctness of its code, a much-needed tool for avoiding costly bugs and contentious debates within a community (thereby damaging a network effect). Smart contract security is vital, but network security is paramount.
Proof-of-Stake
Proof-of-Stake (PoS) is the consensus mechanism of Tezos and is divided into two parts, producing blocks and signing blocks. Tezos’ PoS algorithm differs from other PoS algorithms in that anyone can participate if they want to. After a block producer creates a new block, block signers verify the block and add it to the blockchain if it is valid. Both block producers and block signers are randomly selected several days before a block is actually created, at which point they provide a security deposit.
By providing a security deposit denominated in tez, stakeholders participating in the consensus process can earn rewards for good behavior and can be penalized for bad behavior. When behavior is honest and the network maintains stability, the security deposit is returned and the participant is rewarded with more tez through inflation. When behavior is malicious, the actor can lose the deposit and forfeit the reward. Inflation here is nominal as any stakeholder can avoid diluting their holdings by taking part. Only stakeholders who do not participate become diluted.
The consensus mechanism of Tezos is more complex than what is described here; see the white paper for full specifications.
How I View Tezos
Blockchains are similar to biological organisms in the sense that they mutate and evolve through forking much like how genetic mutations allow the best-suited organisms to evolve through natural selection. Natural selection is the opposite of artificial selection, in which evolution is subject to human choice. Over a long enough period, natural selection exerts its dominance in determining which organisms survive. Crypto is in the inevitable phase of artificial selection as it is in its infancy. However, time will tell which blockchains are the strongest and why.
The blockchain ecosystem will see many new players over the next 5, 10, and 20+ years. One of the benefits of crypto-mania is that it has captured the attention of top-tier academics, engineers, and entrepreneurs. This concentration of talent and the experimentation that follows will accelerate innovation and the evolutionary process. As these developments are made and we identify the traits that make blockchains most superior, Tezos stakeholders can efficiently mutate the protocol and adapt to the ever-changing set of surroundings. However, this evolutionary mechanism is not what differentiates Tezos from other blockchains. What makes it special is the procedure for choosing which traits to adopt or remove and that it evolves while preserving the network effects that give it value.
When a blockchain needs to update and a fork is proposed, who decides what is best for the network? Carrying out a successful fork can become just as much, if not more, of a social issue as a technical one. If stakeholders cannot effectively organize and reach an agreement, development will stagnate, and the inability to improve the protocol will hurt the network. As blockchains scale, those that have an efficient and economical mechanism for coordinating social consensus will gain an advantage in implementing innovation and surviving. Tezos’ network effects will be better protected because the election cycle systematically coordinates consensus. If/when more efficient mechanisms for coordinating social consensus are discovered, they can be added to the protocol just like any other feature.
Tezos’ on-chain governance establishes a transparent, efficient, and decentralized digital commonwealth. By putting governance on the blockchain, coordination and execution costs are reduced, and evolution can occur at a faster pace. It is ironic that the controversy surrounding the Tezos project was caused by unsuccessful off-chain coordination. We should use this experience as a case study to highlight the need for on-chain mechanisms that can transcend inefficient and antiquated forms of governance.
Tezos is fascinating to me because it takes a novel approach to blockchain governance, organization, and protocol evolution. Much like the internet revolution, the crypto revolution will generate powerful systems that disrupt many parts of society; business, privacy, sovereignty, money, and governance are several aspects being reimagined and reconfigured. Some, if not most, of the innovations that will give rise to such systems have not yet been made. Through self-amendment and on-chain governance, Tezos can dynamically and efficiently adapt to implement these innovations. To quote The Sovereign Individual, “Institutions of government that emerged in the modern period reflect the megapolitical conditions of one or more centuries ago. The Information Age will require new mechanisms of representation to avoid chronic dysfunction and even social collapse.” The social, political, economic, and cultural paradigm shift that blockchain technology and crypto protocols are fueling is going to re-engineer infrastructures of society that are meant for the present-day and future. Tezos offers a compelling protocol to help us get there.
*In no way should this post be considered investment advice. All opinions are my own.
