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Tezos (XTZ) – the second largest ICO in history

Tezos (XTZ) claims to be a third generation blockchain platform for smart contracts and decentralized applications (dApps) with a better governing system.

The founders of Tezos, Arthur Breitman and his wife Kathleen Breitman, started working on the project in 2014, but their initial coin offering (ICO) was launched on July 1, 2017. In just two weeks, the uncapped sale raised 66,000 Bitcoins and 361,000 Ethers, worth about $232 million at the time. As of July 2018, this is the second largest public token sale in history, only behind Filecoin, which raised $257 million.

Internal conflicts

However, shortly after the ICO, a serious problem regarding who is in control of the Tezos project put the investors in unpleasant and painful situation. The launch of the network was delayed multiple times due to the continuing conflict.

At the beginning of 2017, the Breitmans helped create a foundation based in Zug, Switzerland, in order to conduct the ICO. Under Swiss law, the newly created Tezos Foundation has to be independent. The Foundation is in control of all raised funds, while the company of the Breitmans, Dynamic Ledger Solutions, owns the source code.

The board of the foundation consists of three members, but the main controversy was between its former president, Johann Gevers, and the co-founders of Tezos. According to Wall Street Journal reports, the conflict began in September 2017 when Gevers created a compensation contract for himself, which many investors saw as an inadequate deployment of resources.

In October, the Breitmans’ lawyer sent a letter to the other members of the foundation, accusing Gevers of “self-dealing, self-promotion and conflicts of interest” and calling for his prompt dismissal. However, Gevers refused to step down.

This internal fighting resulted in multiple delays of the launch of the network. In addition, several class lawsuits were filed against the project on behalf of contributors, accusing Tezos for selling unregistered securities.

Eventually, the infighting was resolved and in February all three board members of the Tezos Foundation, including Gevers, were replaced. Nevertheless, the negative consequences and the lack of trust in the project remain to this day in many people. In order to restore the community trust, Tezos Foundation announced on July 23, 2018 that the international professional services giant PricewaterhouseCoopers Switzerland (PwC) will conduct an external audit of its finances and operations.

Meanwhile, after months of delaying, on June 30, 2018, Tezos launched a beta version of its mainnet. A genesis block was proposed, which is now the seed of the beta network. It is anticipated that a mainnet launch will follow in the third quarter of 2018.

Tezos is bidding to be better than Ethereum

Arthur Breitman, the co-founder of Tezos, was an early Bitcoin adopter, but he came to believe BTC and other cryptocurrencies had some flaws in their blockchains, so he tried to come up with something better. Tezos claims it has a number of notable enhancements over Bitcoin (BTC) and Ethereum (ETH) – its main competitor.

Self-amending cryptographic ledger

Tezos proclaims to be a self-amending cryptographic ledger. This means that Tezos is designed to allow a smooth evolution of the blockchain rather than having a hard fork. Unlike Bitcoin and Ethereum, Tezos’ vision is that hard forks shouldn’t be a standard way to upgrade the system over time. That’s why the core value proposition of XTZ is to be a self-governing project.

If you have a stake in Tezos, you can participate in governing the protocol. The process is called On-Chain Governance. It allows the coin holders to vote for future implementations.

Developers are able to independently submit a proposal for protocol upgrade and include a request for compensation for their work. After that, the coin holders vote for whether or not to approve the proposal.

This structure is similar to the governance model of Dash (DASH) and has been invented in order to support independent developers that contribute to the protocol rather than having them work for free or rely on donations and sponsorships.

Smart contracts & formal verification

In addition to this self-governing system, Tezos also supports smart contracts, which makes it a sort of hybrid between Dash and Ethereum.

Tezos’ smart contract programming language is called Michelson and, similarly to Ethereum’s Solidity, it is created specifically for writing smart contracts on Tezos. It is a functional language that facilitates formal verifications.

Formal verifications basically allow developers to mathematically prove the correctness of their smart contract code and that some properties of the contract will be maintained. However, this doesn’t mean that the code is 100% correct and won’t have bugs.

Think of formal verifications like having auto correct when texting. It is a useful function, but if you don’t know how to write and you don’t pay enough attention you may end up sending “I’m ok, just finished masturbating” instead of “just finished meditating”.

Delegated Proof-of-Stake

Tezos uses Delegated Proof-of-Stake (DPoS) as a consensus mechanism. Users deposit a certain amount of coins in order to guarantee that they will take good decisions for the network. If they try to cheat, they will lose their staked funds.

It is called delegated Proof-of-Stake because people who don’t want to participate in the consensus protocol can delegate their rights to other users to represent them. Those representatives are called ‘bakers’ and they are the ones who validate transactions and create blocks.

Tezos’ main competitors

Tezos’ ambition is to become a top choice for a smart contract platform. Claiming to be a third generation cryptocurrency, we could highlight other self-proclaimed third generation blockchain platforms like Cardano and EOS as its main competitors.

However, all of these projects are still sitting in the shadow of their big brother Ethereum. Ethereum is the only project that works on scale. With some notable limitations, but the network is live and running, while Tezos, Cardano and EOS have huge ambitions, but they haven’t proven yet that their technology can solve most of Ethereum’s problems. As they all claim they will.

Tezos contributors waited for one year to receive their coins

Tezos coins are called Tezzies and the ICO contributors waited about a year to get them. So, once they got a possibility to sell them, many of them didn’t hesitate. On July 2, 2018, Gate.io announced it would support two XTZ trading pairs. Then, in a matter of four days, the price of one Tezzie dropped from $4.15 to $1.10, which is the current all-time low of XTZ.

Prior to launching the Tezos betanet, the coins didn’t exist, but users of HitBTC could trade XTZ Futures. What does that mean? Well, the exchange bought a lot of Tezzies during the ICO and since October 2, 2017, it started offering IOUs. What is an IOU?

Basically, HitBTC promised that anyone who buys these XTZ IOUs will receive an equal amount of real XTZ for them, once the Tezos network is launched and HitBTC receives its tokens. Of course, if the exchange went bankrupt before Tezos coins were created, all IOU traders would receive just a cold shower.

The all-time high of this highly speculative IOUs was reached on December 17, 2017, when the price of 1 XTZ IOU reached $12.

As of the end of July 2018, 1 XTZ is trading for $2.10, the circulation supply is 607,489,041 Tezzies, the total supply is 763,306,930 XTZ, and the market capitalization of Tezos is $1.269 billion. This places it at number 17 of all cryptocurrencies, ranked by market capitalization.

What Tezos taught us?

Tezos may be considered as a proof that market sentiment is maybe the most important factor that influences the price of a cryptocurrency in the short term. Probably more important than the product and the technology itself.

XTZ was one of the most hyped projects in crypto and that’s why it raised the ridiculous amount of $232 million during its ICO. I highly doubt that most of the contributors researched in detail what is the core value proposition of Tezos and how it will differ in this highly competitive space.

The following problems with the infights, the delays of the network, and the lawsuits against Tezos should serve as an example that you should be very careful before you decide to invest in a project. The fact that many influencers on Crypto Twitter or a vast majority of users on Reddit feel that “a project will be huge and go to the moon” is never a good reason to invest.

Always try to figure out what problem a cryptocurrency tries to solve and whether its solution is better than the already existing ones.

Tezos is entering the battle for domination among the platforms for building decentralized applications and claiming to be a better governed cryptocurrency. It is really hard to predict who will win this fight, especially when most of the favorites right now haven’t launched their mainnets yet. Including Tezos.

“Trust is earned when actions meet words,” a wise man once said.

One year after the ICO of Tezos and after all the problems and unkept promises that lead to many disappointed investors, I personally don’t see a significant reason to believe that Tezos will be on top of smart contract platforms.

Disclaimer: The views and opinions expressed by the contributor in this text should not be considered financial or investment advice, neither treated as an expression of Cryptovest’s view. Neither the author nor the publication takes any responsibility or liability for any investments, profits or losses you may incur as a result of this information.

Cryptocurrency trading and investing is risky and market participants are advised to always conduct a thorough research.