Although Ethereum is still the top blockchain for smart contracts and a dominant platform, there have been many other alternatives. Lots of these alternative chains have been quite vocal about their status as an “Ethereum killer”, while others have stayed quiet, keeping their heads down and focusing on growth rather than media attention.
Tezos, an open source and environmentally-friendly cryptocurrency, is one of those to keep an eye on. The company was founded four years ago, and until recent times has managed to remain under the radar. It has worked hard over the last four years to build out its software and attract partners.
It has been a hard-earned investment. Tezos is now one of the most popular DeFi companies in the world. Tezos had little to no value in its DeFi portfolio back in the summer 2020. Its popularity has grown exponentially, reaching an all time high of $217 million TVL in October 2021. There are now more than 100 dApps that run on the blockchain.
Tezos could attribute much of its success to its unique consensus mechanism. This is not only different than the Proof-of-Work (PoW), but it also sets itself apart from other blockchains that use the Proof-of-Stake method.
Tezos relies on what’s called a Liquid Proof-of-Stake (LPoS) consensus mechanism that not only solves the problem of high energy consumption that afflicts Bitcoin and its PoW algorithm but is also superior to standard PoS systems in many ways.
What exactly is POS?
The PoS mechanism was first detailed in a paper by the researcher Sunny King back in 2012, when the energy problems of Bitcoin’s PoW first became apparent. Instead of using powerful computer hardware to solve math problems, PoS encourages token owners to invest their crypto to validate blocks through a semi-random process. PoS is a network that votes for validators to add new blocks. In return, they get rewards.
PoS is a better alternative to PoW. The first and most important is that it’s less computationally intensive, translating to lower energy costs and a cleaner environment. The second is that it’s more decentralized. PoW networks are designed to encourage miners investing in high-end computing hardware. The more efficient their operation, the greater the number of Bitcoins they can mine. However, this creates a huge barrier to entry that results in mining power becoming concentrated in very few hands. On the other hand, PoS doesn’t incentivize validators to pool their resources, meaning there are more of them.
These days a whole bunch of variations of the PoS mechanism have emerged, but the most widespread model is the The delegated proof-of-stake (DPoS) that’s employed by Cardano, Lisk, Ark, Tron, Steem and EOS, to name a few examples.
Delegated Proof-of-Stake
A DPoS architecture gives everyone in the network the right to vote on new blockchain blocks. However, there are a limited number of delegates. The network users determine which of those delegates will validate the next block using a democratic voting process, where users’ votes are weighted according to the number of tokens staked in crypto wallets. The voting process for delegate validation is continuous. If necessary, the network can replace incompetent or inactive delegate by a validator.
This forces delegates to behave themselves because if they don’t have the backing of network stakeholders they won’t be chosen and won’t earn any rewards. Approved delegates will share the production rights to new blocks equally amongst themselves. Stakeholders receive a portion of the delegate’s block production earnings, in return for backing them, in proportion to the amount of tokens they staked.
Proponents say that DPoS’s stake-weighted voting system ensures that the network is democratic. In addition, there’s a fairly low threshold to participate in the staking process. DPoS has another advantage: it is able to quickly reach consensus. This means that blocks can be processed quicker and transactions can be completed per second. DPoS, however, isn’t perfect. There are many design flaws.
One of the biggest concerns with DPoS is that it’s easy to organize an attack against the network. The network is at risk from a 51% attack because of its limited numbers of delegates. If delegates join forces to create cartels, it could also fall victim to this attack. This not only makes it less secure but also decentralizes the network. Another key problem is referred to as “the rich get richer”, and has to do with the fact that voters’ strength is related to how many tokens they hold. The danger is that those who own lots of tokens – so-called “whales” – will have too great an influence over the network.
DPoS is also susceptible to user apathy. The system won’t work properly if there aren’t many users who stay connected to it.
The Liquid Proof Of Stake
Tezos, who recognized the shortcomings of DPoS, began to improve the system, and eventually came up with LPoS. The main difference between LPoS & DPoS lies in the fact that network users can delegate voting rights to anyone they wish. Every token holder can delegate voting rights to validators, who are known as “bakers”, with no token lock-up period. Token holders can also vote for bakers by keeping custody of $XTZ tokens, which is an additional incentive.
A second big difference with Tezos’ LPoS is that it has a dynamic number of validator nodes, as opposed to the fixed number in DPoS systems. Tezos is capable of supporting up to 80,000 validators as opposed to 20-40 in most DPoS systems.
What does this mean? LPoS offers users a great deal of freedom in how they join the network. Individuals who hold a large number of tokens can easily become block validators by staking their own tokens with no need for anyone’s approval. Even if you have less $XTZ, it is possible to still participate by supporting larger token holders or by joining forces with other people in your position.
Why Tezos Is Winning
Proponents of Tezos argue that its LPoS system creates a more representative democracy, as it’s possible for users to change their vote and support a different validator at any time. Tezos users have the right to make decisions about how the network works. If, for example, someone has made a proposal to change the network in some way, each user in favor can choose to back a baker that supports the upgrade, while those not in favor can choose to support a baker that’s voting against the change. A voter on a DPoS network, however, would need to keep their money locked up for at least 72 hours.
Tezos users have a lower entry barrier. Because LPoS doesn’t require massive amounts of computer hardware, users can create a new node without any significant investment. Hardware costs for setting up Tron’s node are estimated to be around $40,000. Another option is to spend around $4800 per month renting the hardware via Amazon Web Services. For Tezos though, all that’s required is a modern laptop and whatever the electricity costs of running that machine are. Tezos is far less decentralized than other networks because anyone can join.
Tezos has one last advantage: it does not charge any fees. While the idea of not paying any fees sounds nice, it’s bad for security. EOS was a famous victim of a distributed attack on denial-of-service in 2019. This meant that multiple users were tricked into performing useless transactions. They did it to disrupt the network, increasing congestion and making the CPU-time cost on the network go up by more than 100,000% in the span of four hours.
Tezos implements a low fee structure that’s designed to avoid these kinds of incidents. Typical transaction costs on Tezos are around $0.0004 – low enough not to bother users, but also expensive enough to make launching DDoS attacks uneconomical.
Judging by Tezos’ rising adoption over the last couple of years, it’s clear that its unique network architecture has struck a chord with the crypto community. Tezos has the right mix of democratic governance, strong security and easy accessibility, which makes it the perfect blockchain for growing numbers decentralized applications that share the same values.