Exclusive: Tezos co-Founder Opines on Tokenized Securities, Future of Crypto, and Why He’s Not a Fan of ICOs

Tezos’ fund-raising raised successfully a record-setting $232 million in 2017. It’s is an open-source project and among the best-known blockchains.

Tezos describes itself as “a self-amending blockchain” capable of representing any other protocol. Only time will tell if this is the case, as the protocol has received so far just one upgrade since launching its mainnet.

We recently had the chance to speak with Tezos co-Founder and CTO of Dynamic Ledger Solutions Arthur Breitman. Tokenized securities, the future of Tezos and crypto, and what Arthur thinks about ICOs (spoiler: he doesn’t like most of them) are just a few of the topics covered in Breitman’s exclusive conversation with CryptoPotato.

Tezos’ Point of View

Asked to describe Tezos in simple terms, Breitman alludes to two of the most famous cryptocurrencies, Bitcoin and Ethereum. “Bitcoin was the very first cryptocurrency or digital money, coming out ten years ago. Ethereum showed that not only could you create a digital currency, but you could make it much more programmable. Instead of just deciding, I pay you and you pay me, you could make conditional payments: I pay you if this condition happens, and so on. However, the way these networks tend to innovate is by attempting to coordinate on changes. Once in a while, they try to all get together and change their computer code at the same time.”

breitman-minArthur Breitman. Image: GitHub

Breitman compares Ethereum’s protocol changes to Dagen H, which was the day that traffic in Sweden switched sides of the road back in 1967. “They were driving on the left side of the road, and they all decided to start driving on the right side of the road. And so, one day at midnight, everyone switched over. It was well-planned, very well-coordinated, but that’s the thing: doing this takes a whole lot of coordination, and two things can happen. Either no one can reliably manage this level of coordination – in which case innovation may grind to a halt – or someone can reliably do so, in which case you risk gravitating towards a centralized system.”

On Tezos’ evolution, Breitman states, “One of Tezos’ most salient aspects is that the protocol can evolve. One important consideration when designing a decentralized protocol is that it has to follow a set of rules. Some of these rules you don’t really want to touch, because people are not going to trust the system if the rules are changing arbitrarily, but some you might want to tune because they don’t overwhelmingly affect the semantic of the system: they mostly have to do with how well it works. An example of the above could be the block size (which led to the Bitcoin Cash fork). The problem is how do you allow a system to upgrade itself without the need for this external coordination. That’s what Tezos tries to do.”

How does a Tezos protocol change work? According to Breitman, there are currently four phases. “In the first phase, one out of several protocols is picked through approval voting. In the second phase, a vote is held to decide whether to test the protocol. The third phase is a cool down. It’s like, ‘Let’s take a month to review everything, make sure there’s no problem.’ And then after this cool-down period, you have a final confirmation vote.”

Tezos’ only protocol change so far was Athens. The change itself wasn’t significant, though it reduced the minimum amount required for baking (holding) from 10,000 XTZ to 8,000 and increased the gas limit. However, it served as proof that Tezos’ governance model worked.

A Fun fact: Tezos is naming its protocol upgrades in alphabetical order, so the first was Athens (“A”), and the second upgrade is called Babylon (“B”).

Too Good to be True?

If the above makes you nervous, you’re not the only one. If you give Tezos’ bakers the right to change the protocol, they could theoretically end up compromising the Tezos blockchain. “I think it’s hard because you’re going to have a hard time convincing bakers to vote for a harmful proposal,” Breitman explains. “First, bakers are personally bonded. Second, the voting threshold is 80% (of bakers, which currently comprise 10-12% of the stake in the network), so this is not a simple 51% majority.”

acropolis-67579_640-minAthens. Tezos first-ever protocol upgrade

“Bakers own their bond, but they also own the relationship with their delegates… so it’s not enough to have a bond. Even if a baker owned 10% of the stake, for example, it would still need to attract delegation, which is not easy. Attracting delegation is somewhat Sybil resistant, and that’s combined with the incentives inherent in holding a bond.”

Breitman maintains that there would be no point in harming the network: “If it’s an awful proposal, people will end up forking. So, you’ve basically convinced a lot of people to do something evil, and then they’re forked out, they lose their bond, and they’ve not materially harmed the network.”

Tokenized Securities

Many see the future of cryptocurrencies in the tokenization of assets or tokenized securities. Tezos is one of the leaders in this area, with two recent interesting partnerships to note. The first involved Brazil’s fifth-largest bank, BTG Pactual, which plans to issue $1 billion worth of security tokens (STOs) on the Tezos blockchain. The second partnership was with Elevated Returns, which aims to tokenize $1 billion worth of real estate.

Despite the excitement, the two projects haven’t launched yet. “The only token on Tezos right now is Tez (as of writing this, XTZ is trading for $1.05).” The state of regulation is also of note: “I’m sure that’s a big topic for issuers, especially if they want access to global markets as they need to comply with the regulations of all the different countries in which they are seeking to be present.”

Breitman believes there is a future in STOs but he remarks: “Even if I own such a token, I still have to trust that the issuer is going to honor the contractual claim it represents, in stark contrast with cryptocurrencies which do not represent a claim on anything.”

The $232 Million Raised Wasn’t About Funding

“The Tezos foundation didn’t raise money because it somehow ‘needed’ it,” says Breitman. “A proof-of-stake protocol needs some form of initial allocation of coins”, a fundraiser is one way to propose such an allocation and, as a side effect, one has the benefit of funding public goods like scientific research of open-source software. This is also why ‘caps’ don’t really make sense.”

Not a Fan of ICOs

“I personally am not a fan of most ICOs, very few have made any sense.” That’s quite surprising to hear from the man behind one of the biggest fundraisings of 2017.

“Many ICOs were like, ‘Hey, I’m going to launch this service, and then this token will be the money that we will use these’ That was the pitch in a zillion cases, and it just doesn’t make sense. You don’t want money for X, and money for Y, and money for Z. You want one form of payment, as broadly accepted as possible: not have money for each application. I never bought into the whole appcoin model.”

“I think a big part of the backlash is that most of these products didn’t make any sense at all. People focus on ICO as a structure, but it’s really not about the structure. It’s about the fact that the economics didn’t make any sense.”

Breitman also talks about the proof-of-burn issuance model. This method of issuance was introduced way before Ethereum’s ERC-20 contracts were commonly used to raise money. “Isn’t it a bit weird to burn the money?” Breitman wonders.  “Let’s see. You could use proof-of-work, and have whoever burns the most coal determine who gets what, or you could decide to just burn money created by burning coal or, God forbid, you could base it on donations to a nonprofit.”

On Cryptocurrencies and Adoption

On the matter of why cryptocurrencies aren’t yet seeing mass adoption, Breitman says, “I think they solve a critical problem for some people but, right now, they don’t solve a problem for most people.” “The back ends are fairly well developed. Right now, it’s the rest of the stack that’s lacking.”

Asked about the adoption of security tokens: “In this instance, the hard part is not really putting things on a blockchain, but properly interfacing with existing real-world institutions. Once this integration is more developed, these should become useful to more people.”

Publication date: 
09/24/2019 - 14:21

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