Like other Layer-1 blockchains that came after Bitcoin and Ethereum, the Tezos (XTZ) network was developed in 2018 specifically to address recurring issues such as network congestion and high transaction costs. This meant utilizing a Proof-of-Stake (PoS) protocol as opposed to the Proof-of-Work consensus used by Bitcoin and the pre-Merge Ethereum. But in addition to this, Tezos worked around the idea of being a “self-evolving” blockchain that could adapt easily to a rapidly changing industry.
Adaptability after all, is not a key strength of earlier legacy blockchains. Bitcoin, despite being the most popular cryptocurrency, is only one of the few remaining networks that still use a PoW consensus. Furthermore, its rigidity has led to its community splitting off into other networks such as Bitcoin Cash (BCH) and “revisions” to its code resulting in Litecoin (LTC) –all to meet the demands of users. Meanwhile, Ethereum too has branched off to produce Ethereum Classic (ETC) and has only recently adopted a PoS protocol.
For the developers of Tezos, an efficient blockchain should be able to amend and upgrade itself without having to go through a hard fork, which can be detrimental to the growth of a network since forks can split a blockchain’s community and impact its market. This is why Tezos’ main feature is its open and robust on-chain governance, allowing all of its stakeholders to vote on network proposals for its continuous improvement, all while preserving the community’s integrity.
How does Tezos work and what is the XTZ token for?
Similar to Ethereum, Tezos has smart contract functionality and is secured by its staking process which in its community is termed as “baking”. To be a “baker”, a user must stake at least 8,000 XTZ. The term is derived reputedly from the network founders, Arthur Breitman and Kathleen Breitman (who happen to be French) and their love of baking.
Baking grants governance rights to bakers and the privilege to vote on amendments and changes to the Tezos protocol, after which they also earn network rewards for their participation. Proposals that receive the majority vote are dry-run on the network’s testnet and can be fully implemented immediately within 48 hours of a successful test run.
Users who don’t want to become bakers can still participate by delegating their tokens to a baker of their choice. Tezos’ baking mechanism is also termed as a “liquid PoS system”, allowing delegators to switch bakers at any time and support a baker who is more aligned with their voting preference.
XTZ has no set maximum supply. Upon its launch, XTZ had an initial allocation of approximately 763 million tokens of which 79.59% of tokens were reserved for its initial coin offering (ICO) participants. Meanwhile, 10% each went to the Tezos Foundation and Dynamic Ledger Solutions (DLS). The final 0.41% was allocated to early backers and contractors.
As the token that powers the Tezos network, a small amount of XTZ tokens are burned for processing smart contract transactions. However, Tezos also currently maintains a 4.87% annual inflation rate to its supply.
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