Tezos ICO teardown
Boom or bust in the new blockchain Gold rush. Is it really Gold? Gold is my last name. How long will you read this sentence before realizing I’m just doing this to say Gold again. Gold.
This is a non technical overview. I try to make dry subjects funny. If someone writes a technical tear down. I’ll link to it. Make it technical. Make it sexy. You sexy ;).
Full disclosure: I hold some Tezos tokens.
For all those interesting in buying. All key info is here
This article was written quickly and will be updated…………………………
Update 1-June 29th, 2017: links for fundraiser details and Bitcoin Suisse AG added. This is important because they did a really shitty job of explaining how to participate in the ICO. Bitcoin Suisse AG can be used to buy the tokens with Straight cash unless you’re American. You American, You fucked.
Tezos is an interesting new cryptocurrency that is intending to solve the problems that exist today with cryptocurrencies (written as “crypto” going forward) and to “future proof” and thereby stabilize what is a very unstable marketplace for those cryptos.
Tezos’ (Greek for smart contract…SIMMA DOWN Arthur) most important focus is to solve the “Governance” problem with crypto.
(Update): No translations of the word Tezos seem to mean smart contract. This was taken from a video interview.
Governance
Basically, in any given lifecycle of a product you end up with unforeseen problems along the way that you need to fix. Example: You’ve identified a problem that affects the entire crypto network- Say the system gets hacked. This impacts all the stakeholders in the network. This problem needs to be fixed or people can abandon the network to find something better, or it creates an incentive to fork your crypto which make the crypto in question vulnerable to obsolescence. In software, when you run into a roadblock like this you write new code and update your application to fix the problem. In a decentralized network you need all the stakeholders in the network to agree.
Therein likes the problem, in order to get the stakeholders to agree you need a very reliable, mostly impregnable method of creating referenda on those software updates. A majority, supermajority, via board or rounds of voting etc. need to agree that the proposed decision is smart and then poof update! I won’t get into the elaborate nature of the governance system they are proposing except to say that it’s elaborate and seems like it’s could likely fulfill the intent — Creating a future proof cryptocurrency that can adapt to innovations as needed. In theory, this could be massively impactful in solving system-wide problems and preventing splits in stakeholder groups.
They make a point of mentioning that the voting component itself can be changed. This is both good and bad. If something ever bad happens someone could break the governance system by changing the voting mechanics. No system is perfect but again they do try and take into account the obvious ways that the system could be gamed and has tools to prevent it. More on this later.
As an aside, these are relatively complex concepts and the writers of the white paper knowing this, should have really tried and to keep things as simple to understand as possible. They did not do this well. I’m not sure why they made the decision to do this. It’s important to describe complex things simply. After all, who the fuck uses “endogenous” in common parlance and who the fuck knows what that means. If you’re trying to make this appealing to as large an audience as possible don’t make people look up concepts or words that are in your white paper. If you have to, provide definitions. Enough with the endogenous already. Okay? OK. This is directed at the authors but also to a friend of mine who uses the word endogenous and no one ever understands what he’s saying and they never say so because they don’t want to look stupid. Ugh. Rant complete.
A final thought on this notion of governance. Future proofing is an incredible advantage over the current systems. If there is a constant push / pull of politics in a system that is unregulated, regulating changes to programming with a robust mechanism that everyone understands would be a powerful addition to the cryptocurrency world. Crypto is still finding it’s feet and there is certainly room for innovation in these systems.
Obsolescence should be avoided
Meaning, it’s great if you can innovate on the same platform bad if you have to migrate away from platform to get that innovation at least to a point.
Proof of Stake
Tezos will operate on a proof of stake model and their argument is that it’s much more difficult to control 51% of a currency than 51% of hashing power. This refers to Bitcoin’s and other currencies proof of work model — miners and the large concentrations of hashing control and related issues by miners. In principle, this makes sense that it would be more difficult to game and is one of the protections against corruption.
This also speaks to the misalignment of incentives or interests between miners and stakeholders. When in doubt trust that people will be selfish. Miners do not represent all stakeholders and therein lies the problem. There are all sorts of bad scenarios you can imagine as a result I won’t get into those. Just yuuuse the gooog. This explanation really doesn’t do the full explanation justice and I encourage you visit page 6 of the overview.
Allocation of coins at fundraising
The allocation is smartly defined. It gives, benefits in a seemingly fair way and also driven by a time value of when funding has been provided. The earlier you were in. The more you get for your money. More risk, more reward. Fair.
The most important part of the allocation is what goes to the foundation and what goes to “Dynamic ledger solutions” (corporate name for Tezos — Also very unoriginal). 10% of total coins are going to go to the foundation. 10% of the coins are going to Dynamic ledger solutions. These numbers are not a transfer but separate. In total, entities controlled by Dynamic ledger solutions will own 20% of the coins. You can make an argument that the foundation has a variety of parties to act as checks and balances but it’s still worth noting. This is especially true, since collusion features so prominently in the white paper. Could there be collusion between the foundation participants and the owners of DLS. The foundation will be purchasing DLS and that is how the owners of DLS will be receiving 10% of all tokens. Cha-Ching Arthur and Kathleen. It should be noted that the 10% of tokens vest over a 4 year period. It’s explained that this is happening under a regulatory authority “The Swiss Supervisory authority for foundations”. This whole thing is happenning in Switzerland this is both good and bad. Good, because Switzerland has a very strong body of laws. Bad, because it’s fucking Switzerland home of all the banks that use to hide everyone’s money. Also, what the hell does the Swiss supervisory for foundations know and understand about the blockchain and crypto?
Fundraiser- Uncapped
They are not capping the fundraiser. There are those who think this is a terrible idea because organizations that raise enormous amounts of capital then have pressure to spend it and the track record of companies who raise too much too early isn’t great. The benefit is intended that more people get to participate in the ICO.
Smart Contracts
Direct quote: “Tezos uses powerful technology uniquely suited to the rigorous, specific requirements necessary to enforce smart contracts on a public ledger. It facilitates making those contracts subject to formal verification, a process used in aerospace, medicine, and other industries that need to ensure that code works as intended — thus obviating the need for later correction — before it is uploaded to the blockchain.” It uses Ocaml and Coq to do this formal verification.
Dissent — Governance
One question that is not clear from the white paper is how fast this process of governance takes in order to yield a result and how they are going to prevent massive stakeholders from controlling the entire system. In that scenario you’re not actually dealing with a strong majority of interest but instead an oligopoly of control. Bad news. Bad news bears yo. While it is harder to control 51% of a currency, 51 being as exemplar, It is still possible. For instance, it stands to reason that a stakeholder who owns lots Tezos crypto coins engage in larger amounts of transactions which makes them seem like more important stakeholders. So if someone continues to buy a large number of the coins than they could imbalance the governance model in the network.
Dissent — Speed
While governance about rule changes is important what’s not mentioned is how they are going to make sure the network does not slow down in times of “high volume”. It almost seems omitted from any of the documentation, which is concerning. By the time, the documentation was made available events relating to “Congestion” have already occurred and obviously the documentation could have been updated. You’d think they would have spent more time dealing with this issue and explaining the various mechanisms that will ensure the system is always fast and won’t buckle under some of the pressures we’re seeing Ethereum suffering due to ICO sales.
Development stage
The product is claimed to have been in development for over 2 years at this time and that the crypto could launch in as early as 4 months and be tradable on exchanges.
Dissent — The involved parties
There are a variety of entities involved in this ICO. DLS, Swiss Gov, Bitcoin Suisse AG , Barnes Legal, MME— (An exchange where you can buy Tezzies with Fiat currency). On Bitcoin Suisse AG it is made clear that they do not accept US customers. This should ring an alarm bell because they claim this is because of fear of regulatory authorities in the United States and the risk associated with taking money from Americans. This does speak negatively on the future of how the SEC and perhaps other regulatory bodies in America will regulate ICOs. Bad news bears again. Bad news bears.
Tim Draper
Tim Draper- Billionaire VC is supposedly backing this project. He is an early supporter of crypto and blockchain. His involvement in the Bancor ICO certainly raised it’s profile and credibility. Bancor raised $144M. It was the largest ICO ever. While Tim Draper is certainly richer than I am, it’s unclear if this is a good thing or a bad thing but the crowd likely believes this is a major plus.
Early Backers
Wall street and the like are all over this one but not with that much cash. At a very early stage DLS raised a small amount of money. 610K from Hedge funds, High net worth and syndicate of high net worth. It’s listed as “10 entities”
Team
The Team is made up of a set of very accomplished individuals. Arthur use to work at Goldman Sachs in High frequency trading and was a VP at Morgan Stanley. Kathleen worked at Bridgewater Associates the world’s largest hedge fund founded by Ray Dalio and Accenture. It is concerning that the founders are married. Or maybe it isn’t. There are a number of successful husband and wife teams but no data is available to compare at scale in terms of successful vs. unsuccessful and so many other things could play into the success that the data could be incidental anyway. Beware! There are a number of other team members. Seems like a lot of people involved with the the company at such an early stage and statistically that’s bad but is it really? Unknown. Zooko Wilcox the leader of Zcash is an advisor. Arthur Breitman was also an advisor to Zcash.
Conclusion
Tezos could solve real problems in the crypto world. Does it mean that there will be no more additional crypto currencies after it. No of course not but it may mean that a lot of the cryptos that come after it will also have a governance model that will allow for self-innovation or amendment as the Tezos team refers to it.
While arthur and Kathleen are getting paid early. It takes a while for them to get the money. Conceivably, the foundation could yank the money if they misbehave. Oh, behave!
The concepts are complex and it’s not clear to me if the stakeholders will understand the governance model well enough when they have to make decisions to feel comfortable voting or to vote predictably. There is so much open to interpretation it is definitely a risky play. If someone has $1000 to blow on something speculative. You could do worse than a lot of the other products that have been launched via ICO. If you lose the money you won’t be sad . This is not investment advice.
