If you would like to view the full recording of the live State of Livepeer Q3 call, you can find it on our YouTube channel. You can also read the full Quarterly Report by Nicholas Garcia here.
Nicholas Garcia (0:41): Alright we should be live here. Thanks everyone for tuning in today. This is the Tezos Q3 2022 analyst call. I know it’s a little late but better late than never. Today we’re going to be talking about all things Tezos. First before we get into it let’s do some introductions. My name is Nick Garcia, I’m an analyst with Massari and I specialize in base layer protocols.
Arthur Breitman (1:08): My name is Arthur, I’m a Co-Founder of Tezos and an early architect of the protocol.
Nicholas Garcia (1:14): Fantastic so let me share my screen here so we can look at the report. So again this is the Tezos Q3 2022 analyst call we’re going to be talking about all things Tezos. Arthur could you please provide a high level overview of is what Tezos, what makes it unique, and how it compares to other base layer protocols today?
Arthur Breitman (1:37): Of course, so Tezos is a piece of software. That’s the most important thing to understand: it’s an open source piece of software that powers a network. The Tezos network and in that network what people do they create a ledger using a blockchain and on that ledger they can create assets, transfer assets, create smart contracts, so it’s generally speaking a smart contract platform. What makes it unique is it’s controlled by its users and by its participants. There’s no roadmap set by developers, what happens on the network is what is decided by the the validators of the of the network so it has a governance model where people can vote on upgrades and as a result it’s also a very dynamic protocol it’s a protocol that has upgraded around 12 times I think but by now we’re about to have proposal for M. So M is a certain letter so yes, 12 upgrades and that’s been a journey that started in 2014 for the creation of the first the first idea and the first papers and I launched in 2018 and since then Tezos has been a pioneer of proof of stake, has been a pioneer of smart contract safety, and is now becoming I would say a pioneer in scaling.
Nicholas Garcia (2:57): Yeah totally agree, I think that’s one of the things that makes Tezos unique right is the ability to have this like forkless upgrade ability in this self-amending functionality which allows a network to continually evolve and that was built into the network from the beginning which kind of avoids all that technical debt and some of the stresses you see in other networks so appreciate the overview Arthur. Let’s move down here to the financial section, so what we’re looking at here is the financial overview of the Tezos network. Feel free to check out the report if you want to dive into it. Let’s jump here to the XTZ token so Arthur if you don’t mind could you please provide an overview of XTZ is, its role in the network, and here we’re looking at some supply and demand metrics so minting and burning so if you could just talk about Tez/XTZ please.
Arthur Breitman (3:50): Yes so XTZ is a token is a ticket you might want to use if you have a captain software test is a cryptocurrency that underpins the business network or another way to look at it is a Tezos network used to support XTZ as a cryptocurrency it’s a classical cryptocurrency so with the usual features: payments, store of value, but it can also be used to pay for transactions on the business network and storage of data and that is being used in particular for smart contract applications. It’s also the economic incentives for decentralized valuation of the network so it’s a proof of stake system so people can take some stake and become bigger and create blocks. There’s a hybrid system for the proof of stake system in Tezos which is that in order to create blocks you need to stake but in order to get the rights to create a block you don’t. So anyone who all tests can get the right to create a block but then that right is oftentimes delegated to someone who has actually put up a stake which we call bigger so that’s been known as a liquid group of stake model which combines both some sort of civil resistance and also economic incentives for the security of the network.
Nicholas Garcia (5:11) Got it okay so that’s the main thing. XTZ has a 4.5% on average annualized inflation rate with no maximum supply, correct?
Arthur Breitman (5:20) Yeah that’s right but I don’t like to think of it so much as in inflation. It’s inflation in the sense that there’s more tokens being created every year but the reward you get from the blocks which are being created are today above 4.5% because not everyone is is delegating not everyone is exercising their rights to create blocks and as a result the net effect which would be the reward you get from from staking minus inflation is actually means that on the net it’s actually deflationary.
Nicholas Garcia (5:55) Got it yeah it’s not positive for the stakers. Got it, and then real quick moving back up to this financial overview table here so there’s about 932 million XTZ in circulation at the end of Q3. I’m more looking at about one percent of new tokens come into circulation per quarter. So let’s go down here to the network overview section. So let’s look at the Tezos account activity okay so it’s been dropping a little bit but I think this is what you’re seeing across the general crypto markets, right? At the bear market all things FTX related did not really help so can you talk about accounts on Tezos right I know the majority of the activities happening NFTs and we’ll get to that but there’s been some slowdown. Any idea why?
Arthur Breitman (6:45): It’s still down but it’s still going up so when you look at this is the number of new accounts are still being created and a lot of new users joining the Tezos chain. For the slowdown I think like you said we’re in the bear market there’s a lot less interest out there for cryptocurrency projects so fewer people are looking at it than before but they’re still there’s still growth in the Tezos ecosystem today. And the other thing that I find quite interesting is that a lot of the activity that we have, has been extremely resilient to the bear market because, predominantly I would say, a lot of smart contract activity and account creation activity has been related to art marketplaces on Tezos and these are in the art business they’re not in the crypto business and so as a result they’re not that directly affected by the winter.
Nicholas Garcia (7:37): Exactly yeah and I have some language in here. So when creating an account there’s like a small one-time fee right which is helpful in reducing some of the clutter and some of the noise that you’ll see in these other ecosystems where people will just create new accounts to inflate the number so that kind of disincentivizes that creation. And then like you said like if someone acquires an NFT for the first time but didn’t create account because they’re interested in the art that may not appear so although it’s somewhat going down here it’s not necessarily fully encompassing of everything that’s happening it’s not here. Yeah total cleared accounts also dropped which is a net positive there as well. Let’s hear to network activity okay so what we’re looking at here is smart contract calls and transactions. So the way Tezos calculates network activity is looking at both smart contract calls and transactions and despite the account metrics somewhat slowing down these metrics have actually held up fairly well and are actually increasing in some cases so can you talk about the network activity, Arthur?
Arthur Breitman (8:49): Yeah, absolutely. So network activity is like like you mentioned like smart contract calls, I think is an interesting one to to measure because not that there’s no legitimate cases for the big transactions like saying like payments are quite important but transactions can be dominated by transactions to and from exchanges. So by focusing on smart contract calls you have a better idea of actual usage of the network. And yes like you mentioned it’s held up fairly well and part of it is because a lot of the use cases on the Tezos network are not really driven by speculation and as a result are less sensitive to hypes and manias and despair.
Nicholas Garcia (9:33): Got it. Yeah and then let’s talk a little bit here I got a paragraph here we talk about the Transaction Optimistic Rollups the TORUs so could you explain that I know I’m not necessarily too much has been going on with that but that’s kind of a precursor to what’s to come with the SCORUs, the Smart Contract Optimistic Rollups which are scheduled to come out if not in the L upgrade and the M upgrade so can you talk about the TORUs and then kind of highlight what to expect with the SCORUs.
Arthur Breitman (10:01): Yes, the TORUs was one experiments to do, ie optimistic rollups focused specifically on transactions and nothing else. And it was really a learning experience for a lot of the core developers working on onTezos and a stepstone to smart rollups they’ve been called TORUs in the past and I think now they they want to rename them to smart rollups which is better than SCORUs as a name, I think. So the smart rollups are coming in M which will be proposed I think sometime in January. So not much activity with SCORUs I think because largely the blocks are still not full on Tezos. There’s also not a pressing need for extra throughput. On the other hand I think what score would do is that they don’t just increase the throughput a bit, they increase it massively and so I think that opens for new type of new type of applications so it’s not just “hey let’s get a little more space in our blocks or even a lot more spare boxes” let’s get so much throughput so that the type of application that you might even consider building is itself different.
Nicholas Garcia (11:07): Got it and is the idea still to introduce WebAssembly as the initial execution environment?
Arthur Breitman (11:14): That’s absolutely right. Yes so it means that any application you can write in WASM can run as a smart roll-up on the Tezos chain. So you could take a Polkadot parachain written in WASM for example, and run that as a roll-up on the Tezos chain.
Nicholas Garcia (11:34): Got it, so we can expect WASM to be the first execution environment on the upcoming Smart Contract Optimistic Rollups.
Arthur Breitman (11:41): Yes.
Nicholas Garcia (11:42): So that’s a high level look at the Tezos network. Let’s dive in a little more into the Tezos ecosystem and then the developer side of things. So this section this ecosystem and dev overview section is like a subsection of the section we just saw so how are all of those high level numbers being made. As we mentioned NFTs have been the predominant driver of activity on the Tezos network and as we can see here, despite the bear, and despite everything happening Tezos NFT volume has continued to rise okay when denominated XTZ. Can you talk about the resiliency of the NFT ecosystem on Tezos.
Arthur Breitman (12:28): I think it’s because it is driven by I think a lot of applications are driven by fundamentals. Fundamentally people are going to keep creating digital art. Digital life is everywhere today. It would be silly to imagine that it’s going to disappear as a medium and the alternative right now for unusual art is that it’s either going to be on the blockchain or it’s going to be on the corporate database. I don’t think the latter makes more sense which leaves it former and there are not many blockchain out there which are have decentralization, cheap fees, and so Tezos has become the place to be for artists and collectors and that’s not something that’s very sensitive to all the severe capital or or FTX seediness.
Nicholas Garcia (13:18): Yeah totally, it’s been very resilient it’s encouraging to see so let’s jump down…
Arthur Breitman (12:23): It feels terrible in the bull market where everything is frosty but when you’re in their markets the fact that the applications are resilient are very…
Nicholas Garcia (13:32): Yeah it’s almost more encouraging some levels of growth in a bear versus higher levels of growth in a bull. So jumping down here so where is the NFT activity happening. It’s happening on these NFT marketplaces the largest of which is in Object or Objkt. So and then I gotta hear a little note within the chart that 75% of activity is happening in the top four marketplaces so you can see those here on the right legend. So can you talk us through the top marketplaces right what makes them unique what makes them different how have they been able to attract users.
Arthur Breitman (14:15): I mean object.com I think is a generic marketplace like any NFT in the Tezos Network you’re going to find on objkt.com and it has a benefit of being extremely, extremely good UIs like it’s really a pleasure to use the features are great if you’ve been used to OpenSea, I recommend trying objkt.com to see what’s an actual NFT marketplace can be like, it is a lot better. fxhash is a more specialized marketplace they are specifically focused on the generative arts that is created through the fxhash platform. And then we have Hic et Nunc for example. I would say mostly the old NFT smart contracts which were used by the Hic et Nunc platform with a lot of the activity is actually happening in the front-end on Teia or on objkt.com or all these other platforms.
Nicholas Garcia (15:13): Awesome yeah so those are some of the leading NFT marketplaces on Tezos. So let’s jump down here into that NFT volume. So I’ve got here on this visual the NFT sales volume has continued to increase and if we look at it on a year-over-year basis it’s up 42% versus the peak of the 2021 bull market which is very impressive, but active Traders have been somewhat going down. So what I think of when I see this is that the users who are on the network are really…they’re doing a lot of activity but the quantity of people have gone down. So is that an accurate observation is that kind of what you’re seeing from your side of things.
Arthur Breitman (15:56): Yeah I think having an absolute small number of very active users has been a characteristic of most blockchain applications not just in the Tezos ecosystem but broadly. Part of it I would say is is because of the way applications they are designed and and because it limits to just killing that we’re seeing. Most software out there today that’s not an application that blockchain has far more users but also far less value per users in terms of activity.
Nicholas Garcia (16:28): Yeah great point, great point. That is kind of the general thing you see across all networks. And then yeah look highlighted for the the viewers that there are some major notable partnerships right and we’ve got ManU, Oracle, Red Bull McLaren, Gap, Ubisoft and these are just to name a few. These are some big name partnerships with some legacy brands that are choosing to work with Tezos so that’s encouraging as well. Alright let’s drop down here so there’s also a DeFi component to the Tezos ecosystem right and the DeFi component is obviously not as large as the NFT component and relative to competitors it’s small but nonetheless it’s a part of the ecosystem and it’s something that I believe you guys are focusing on so can you talk to me about the Tezos DeFi ecosystem. What are some of the leading protocols? What is the plan to continue growing this part of the ecosystem? Anything encouraging?
Arthur Breitman (17:26): Yeah so the first is like to address the biggest piece of that of pie, Liquidity Banking. That’s actually part of the Tezos protocol. So part of the Tezos protocol a small fraction very, very small fraction of every block goes to subsidize a pool between a wrapped version of Bitcoin and XTZ and it’s the experiment at the protocol level to have some inflation funding around liquidity that’s quite interesting. In terms of the DeFi protocols themselves use is an interesting one they have synthetic assets so they create a synthetic version of USD and they’re also used as a lending platform and they have a few other products swaps and such. Plenty DeFi also similar, they have pools they have farms and different type of different type of DeFi primitives and a really good I think they put a lot of work in having stellar UX it’s for trying out. QuipuSwap is probably one of the oldest swap platform on Tezos so they’ve had a lot of experience building it and it’s one of the most used. We’re also seeing protocols coming such as Three Routes that are DEX aggregators. So that you don’t necessarily have to know all these different Define protocols on this awesome can use them directly. Kolibri is a stable coin so we have all of this ecosystem in DeFi which has been smaller like you said like like on many other platform but very resilient and growing.
Nicholas Garcia (19:02): Yeah totally okay awesome thanks for that detailed overview of what’s happening in the ecosystem and the DeFi ecosystem. Alright last thing on the ecosystem and dev section. So now let’s look at the devs so it’s difficult to measure developer activity but in a in a more accurate metric right is the deployment of smart contracts. So what we’re seeing here is that Tezos developer activity has increased as new by the release of new smart contracts essentially so that it actually set an all-time high in Q3 so can you talk about how Tezos developer ecosystem is going? The release of new smart contracts. I’m sure the WASM upgrade is going to be really important right into bringing in new devs so can you talk about that?
Arthur Breitman (19:50): Yeah, no I I agree that I think smart rollups are going to bring a lot of developers. I’m not sure what caused this spike I would say that’s probably around around March of 2022 there was a conscious decision among all of the entities working in the Tezos ecosystem to try to turn a lot of marketing and adoption work towards developers so there’ll be the big push in terms of hackathon, hacker houses, and developer outreach and not maybe those fruits may be bearing in the numbers as we see today.
Nicholas Garcia (20:26): Awesome it’s got to be one of the more encouraging things right I mean it’s such a nascent industry. Dev activity is one of the the the best leading indicators of things to come. So let’s jump down. Let’s start looking at the decentralization and staking of the network. Tezos has at the end of Q3, 417 active validators about 112 million in XTZ staked. You can see some of the numbers here in detail, well 75% of the total supply is staked which is actually relatively High versus other ecosystems and then a Nakamoto of five. So can you walk us through how does the validator process work? Where are these validators located? How does it work to stake? I know we touched on it earlier but if we can touch on it again.
Arthur Breitman (21:14): So one thing to understand is that there’s staking and staking right onontop the Tezos network. In many proof of stake systems the concept is that you stake some coins and then you receive the rights to create blocks and then you create those blocks. That’s most how most staking works. That’s not how it works on Tezos. You own some coins and then you receive the right to create blocks and then if you want to actually exercise that right to create a block you need to stake. You need to stake something so the 75% figures is the people who are actually making use of that right to create blocks either directly or by delegating it to someone who actually puts a stake the benefit of that is that you don’t want to have too much that is staked on the network because otherwise you need to pay a high interest rate right for for everyone to be staked. You will need to have a lot of inflation to to justify that so that would be expensive but on the other hand you don’t want to have too small of a group of people who receives the right to create blocks because you lose some civil resistance properties. So the way this is done in the Tezos network is to say everyone who owes a token receives the right to produce a block but then the economic security is kind of decoupled from that so that’s the innovation in liquid products they can I think it’s why the Tezos chain has managed to say relatively decentralized in terms of validators.
Nicholas Garcia (22:38): Got it okay yeah thanks for walking us through the process here. So let’s just kind of look into the visuals right so we can get a better understanding. So validator activity measured by the number of validators in the active validator stake has been very consistent and then I’ve got here in the subheader that the Ithaca upgrade introduced multiple validator improvements.
Arthur Breitman (23:00): Yeah I mean every upgrade, I think there’s an attempt to make life easier for the validators.
Nicholas Garcia (23:09): Right here I got in the notes that validators are present in 40 countries right with the U.S, Switzerland, and France having the largest presences and that’s also valuable right and important because should something go wrong the level of decentralization across the globe is important to keeping the network.
Arthur Breitman (23:25): Of course geopolitical decentralization is important.
Nicholas Garcia (23:33): Here I’ve got another note that the minimum requirement to run a validator used to be 8,000 XTZ and now it is 6,000 so that’s also helped in increasing the value.
Arthur Breitman (23:44): I think it’s something like that but to be honest like if I look at the amount of money 36,000 to the release of the the requirement is like you need to have a machine and you need to be willing to run the validator that’s probably today the the bigger yeah the technical side of it. And and this number is going to keep coming down as well.
Nicholas Garcia (24:04): Okay nice good to know all right and then on the flip side of that right the delegator count and the stake has continued to increase which was encouraging. I mean people generally when people stake they are long-term bullish on the network and as you can see here we’ve had a 9% on average quarter over quarter increase in the number of active delegators and then at a roughly 2% increase in the delegator stake so that’s another encouraging metric. Finally we touch on it again the percentage of total supplied stake has been relatively consistent but very high and then of that total stake right 80% is coming from delegators and the remaining 20% from validators.
Arthur Breitman (23:47): I’m surprised by this graph. Actually, I would have thought over time it would climb higher than this but it’s the reason by the way that Tezos is actually like on a net deflationary is because this number is not 100%.
Nicholas Garcia (25:06): Got it okay so that’s it for the quantitative side of things let’s talk to the qualitative side of things so we mentioned earlier that Tezos has this self amending functionality where it can implement these forkless on-chain upgrades. In September the Kathmandu upgrade which was I believe the 11th protocol upgrade took place and that one I see you can see mentioned here had some pipeline block validation and some other improvements to the network. So Arthur if you don’t mind could you talk about some of the recent upgrades and some of the importance to it, Tenderbake maybe one worth mentioning. And then what to expect moving forward. We got the L upgrade which I think was supposed to introduce smart contract rollups but it’s no longer I think that was pushed to the m upgrade so can we talk about some of the previous ones and then look forward to the future ones.
Arthur Breitman (26:00): Absolutely all right so I’ll go very briefly. A big improvement on the consensus algorithm and it will pave the way for a reduction in latency Jakarta that was first foray into rollups was a transaction of domestic rollups and a bunch of other improvements. Kathmandu which is the current version of the protocol so that one has pipeline block validation to pipeline block validation it’s quite a technical topic but essentially it’s it’s tied to latency reduction and improving the peer-to-peer network so we can propagate block by checking that they’re valid without actually applying the blog and trying to compute the outcome of transactions. Verifiable that they function that’s a really cool piece of cryptography so it improves the randomness on Tezos. Tezos has been using game theoretical type of randomness generation in the past I think it was a the first to launch with something like this and now we have verifiability function so they’re a trick in cryptography to produce random numbers in a verifiable manner. Events in smart contracts that’s a feature that had been required by developers for a long time. Lima has just been approved just like a few days ago. It has a final vote and it’s going to activate in about two weeks. And sorry so Lima did not include a smart contract with the Optimistic roll-up But it includes more more pipelining some and a lot of improvements for stakers so in particulars they’ll be able to use a different key for creating blocks and for spending the fund on their on their account which will help them rotate keys. And so the M upgrade which is will be proposed after after the activation of Lima or probably early next year is going to include a Smart Contract Optimistic crawl up in WASM so that’s that’s a big deal and really looking forward to that one and we’ll stay in the mountain between Kathmandu and Lima high altitude.
Nicholas Garcia (28:08): Totally I know the whole Tezos Community is looking forward to the Smart Contract Rollups coming online so speaking of those here’s a little comparison of it right so today the transaction rollups are live right and as we mentioned they’re purposely simplistic. They’re kind of used as like to help the network adjust the Smart Contract Rollups will be a huge upgrade to the network. Bringing significant amounts of new functionality and you can see here on this table what some of those upgrades are going to be.
Arthur Breitman (28:38): First I said something stupid Lima is actually by sea level it’s not in the and he’s like I somehow imagine so just scratch that we’re not staying in the mountain we’re climbing down the mountain to Lima. Alright transaction Smart Contract Rollups. So transaction of two basic rollups do just transactions their simplified version of rollups if you need to have a lot of transactions maybe like trading applications they work fine if you want to do something more general you don’t want to use a Smart Rollup and I think the the tools will end up being deprecated they had a sunset connecting to them from from the beginning so they’re not being deprecated for the smart follow-ups which are very very general.
Nicholas Garcia (29:19): That’s kind of the trend and the difference there. I kind of skipped over but when we started at the start of 2022 Nomadic Labs, which is a core contributor who has a fantastic blog I like to reference often, announced that 2022 is the year of scaling Tezos and undoubtedly Tezos has followed that right I mean we’ve had Ithaca, Jakarta, Kathmandu, I think Lima is going to be go live by the end of 2022. So what is that four upgrades in one year I mean that’s that’s impressive for a network. Alright so here we are at the closing summary, I think we’ve talked through everything Arthur. We talked about the kind of the finances of the network and the test token. We talked about how the network has been resilient despite the bear market and a lot of that resiliency is being driven by the NFT sector. We talked about how staking has actually increased right which is a sign of bullish participants in the network and then yeah we just talked about some of the scaling of the network so is there anything else you want to touch on before we wrap up anything to look forward to anything that’s catching your attention?
Arthur Breitman (30:27): Absolutely so you said Nomatic Labs had said that 2022 was the year of scaling for Tezos that scaling is finally shipping in M so that’s tremendously exciting so what is 2023 going to be about? And I want to say it’s going to be about user experience and for and developer experience in particular so that includes improvements in latency for instance but also in tooling and in development environments.
Nicholas Garcia (30:55): Awesome you heard it here first Tezos community you can look to some nice improvements in 2023 and continue continued scaling of the network. Alright Arthur I thought this was fantastic again thanks for taking part in the second Tezos and Massari analyst call. We’ll hold another one of these after Q4. We’ll talk about the L upgrade and any other things happening in the ecosystem. To the Tezos community thanks for tuning in. Check out the Q4 Tezos report when it comes out!
