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State of Tezos Q2 2023

Validated Project

Key Insights

  • Tezos is making significant progress in its rollup infrastructure roadmap, with the introduction of WASM rollups and an EVM-compatible rollup on testnet. Multiple teams have committed to building rollups, and core developers announced a strategic shift to hybrid optimistic/zk rollups.
  • The 14th network upgrade, Nairobi, is now live, offering notable improvements such as increased TPS, new rollup functionality, and enhanced attestations.
  • Tezos core developers unveiled the Data Availability Layer (DAL), which will operate in parallel with Tezos Layer-1. Leveraging Tezos validators, the DAL ensures data availability while scaling bandwidth and storage capacity.
  • DeFi is experiencing growing traction on Tezos, with the TVL nearly doubling in the past year. Several new DeFi protocols are nearing launch including novel DEXs, lending protocols, and perps protocols.
  • Tezos introduced the Tezos Ecosystem DAO, aimed at managing and distributing XTZ to support community initiatives. This DAO fosters community participation and contributes to the growth of the Tezos ecosystem.

Primer on Tezos

Tezos is a Liquid Proof-of-Stake (LPoS) blockchain network that relies on low power consumption and energy-efficient consensus. It combines on-chain governance with self-amending functionality to implement forkless network upgrades and manage future changes. Tezos supports multiple smart contract languages, has a robust NFT ecosystem, and continues to scale through EVM- and WASM-compatible rollups and data availability layer improvements.

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Key Metrics

Financial Overview

Market Capitalization and Revenue

Tezos experienced a strong Q1 2023, with market capitalization surging from $0.66 billion to $1.03 billion (+55%), outperforming the broader market by 9%. However, in Q2, Tezos retraced some of the gains from Q1, witnessing a 30% QoQ drop and ending the quarter with a market capitalization of $0.72 billion. The majority of the decline followed the SEC’s complaints against Binance and Coinbase.

In contrast, the total crypto market capitalization during Q2 increased by 2%. The increase was primarily driven by BTC and Ethereum, which saw a 7% and 6% rise, respectively, propelled by the introduction of Bitcoin Spot ETFs.

Tezos' revenue, measured by total gas fees spent (excluding storage costs), experienced a decrease of 82% QoQ in Q2. This decline was primarily influenced by a 79% decrease in the average transaction fee. The reduction in the average transaction fee was attributed to the decline of the XTZ price and a slowdown in NFT front-running bidding activities.

XTZ Token

Tezos` native token (XTZ) serves various functions within the network, including being a medium of exchange, payment for gas fees, staking, delegation, validator rewards, and governance.

XTZ has a fixed annual inflation rate of 42 million XTZ (4.4% with a total supply of 965 million XTZ). Before the Mumbai upgrade, Tezos had 30-second block times and rewarded 40 XTZ per block. However, the upgrade reduced block times to 15 seconds and halved block rewards to maintain the annual inflation rate. Over time, the inflation rate becomes a smaller percentage of the circulating supply.

Tezos has implemented burn mechanisms through actions like creating new accounts or smart contracts, allocating additional smart contract storage, and imposing penalties on misbehaving validators. The burn rate remains minimal, with less than 1% of tokens burned annually. As of the end of Q2, there were 965 million XTZ in circulation, with the total supply fully vested.

Stakers on Tezos currently earn an annual staking yield of 6.4%, translating to a real yield of 1.7%.

Network Overview

Usage

Tezos account-related metrics showed moderation in Q2 2023, following strong performance in Q4 2022 and Q1 2023. The total number of active accounts decreased by 20% QoQ, from 307,000 to 247,000. Similarly, the total number of new accounts decreased by 16% QoQ, from 72,000 to 61,000. However, these figures remain consistent with the averages over the past year.

Usage on the Tezos crypto network is measured through the analysis of smart contract calls and transactions. Smart contract calls represent user-initiated requests to interact with smart contracts, while transactions involve the transfer of tokens.

During Q2, Tezos displayed consistent usage levels when compared to previous quarters. Tezos recorded an average of 53,000 daily smart contract calls, representing a 7% decrease from the previous quarter. Additionally, there was an average of 41,000 daily transactions, indicating a 1% decline QoQ. NFTs remain the key driver of activity on Tezos, while DeFi applications continue to see greater adoption.

The Mumbai upgrade, launched in March, marked a significant milestone for Tezos. This upgrade introduced Smart Contract Optimistic Rollups (SCORUs), which enhance the network's capabilities. SCORUs enable increased throughput, support for new execution environments, and improve scalability, security, and functionality. These advancements are expected to foster greater activity on the Tezos network.

Development

The Mumbai upgrade also has significant implications for Tezos' development. It introduces a new method of developing decentralized applications on Tezos using any language that compiles to WASM, including Rust, C/C++, Go, and Python. Additionally, Tezos has plans to further support the Ethereum Virtual Machine (EVM) in the future. With the launch of Mumbai and its supporting developer applications and Smart Contract Optimistic Rollup functionality, the Tezos ecosystem is expected to attract more developers.

Tezos new contract deployments were flat in Q2. Additionally, Tezos was ranked thirteenth in developer activity through the first half of 2023 according to Electric Capital, boasting 111 full-time developers and 294 total developers.

Protocol Upgrades

Mumbai Upgrade

The Mumbai upgrade on March 29 was highly anticipated. The upgrade included:

Smart Rollups play a crucial role in Tezos' scaling plan and are essential to achieving the target of 1 million transactions per second. However, Smart Rollups offer more than just scaling. They provide a new method of developing decentralized applications on Tezos, using any language that compiles to WASM, including Rust, C/C++, Go, and Python.

Nairobi Upgrade

The Nairobi upgrade, activated on Tezos mainnet on June 23, 2023, introduces several notable features:

Data Availability Layer

The introduction of Smart Rollups in the Mumbai upgrade marked a significant advancement in Tezos' scalability potential. As Tezos continues to pursue its goal of achieving millions of transactions per second, the development of a robust data availability solution becomes crucial. To address this challenge, Tezos core developers are working on a protocol-level solution called the Data Availability Layer (DAL).

The DAL will run in parallel with the Tezos Layer-1 as an independent peer-to-peer network. It will leverage Tezos bakers and guarantee data availability while significantly scaling bandwidth and storage capacity. The DAL is currently in development, with an early version available on the Mondaynet testnet, and is expected to be activated through a protocol upgrade in early 2024.

Rollups

Tezos has been making significant advancements in its rollup infrastructure roadmap. The network has successfully implemented WASM rollups, and teams such as Baking Bad and Plenty are actively involved in rollup development.

In addition to WASM rollups, Tezos has introduced an EVM-compatible Smart Rollup on the Ghostnet testnet. This rollup enables the deployment and execution of Ethereum smart contracts on the Tezos network. The rollup can be accessed through the Octez software suite and is currently in the alpha stage of development.

Looking ahead, Tezos has announced a strategic shift in its rollup roadmap. Instead of pursuing separate optimistic and validity rollup solutions, the network aims to combine these approaches into a hybrid model. This hybrid optimistic/ZK-rollup will leverage the strengths of both methods, allowing for gradual integration of zero-knowledge technology.

Ecosystem Overview

Leading Protocols

Tezos top protocols by active addresses in Q2 2023 were led by NFT marketplaces, with objkt leading the pack with an average of 8,000 active users per week. Following closely behind are Hic et Nunc (Hen) and fxhash, both averaging around 3,000 users per week. Fxhash announced fxhash 2.0, which launched on Ethereum and offers artists enhanced functionality.

In addition to NFT marketplaces, Plenty Network and QuipuSwap continued as prominent protocols. Both are decentralized exchanges (DEXs) that experienced increased adoption throughout the year. Plenty Network announced the upcoming launch of Plenty V3, introducing a concentrated liquidity model similar to Uniswap V3. They also launched the Plenty rollup on the Tezos testnet, one of the first new rollups following recent Tezos upgrades. Teia also deserves mention as a notable protocol in the Tezos ecosystem.

NFTs

NFTs have played a significant role in driving activity on the Tezos network. Despite the challenging market conditions during the 2022 bear market, NFTs on Tezos experienced consistent growth in volume. However, in Q2 2023, there was a notable decline in NFT activity on Tezos, marking the lowest level in two years. This decline mirrored the trend in the broader NFT market.

Despite the decline, Tezos remained active in the NFT space with a series of announcements and partnerships. Focused.art is nearing its mainnet launch, Billy partnered with Hellfest festival, the annual Tezos NFT Summit took place in New York, and Manchester United expanded its NFT exhibit.

In the music realm, Grammy-winning group TLC partnered with SongVest and Oneof to offer fractionalized royalties through Tezos. Additionally, DNS.xyz revealed plans to launch a social platform on Tezos, aiming to revolutionize the music experience and enhance connections between musicians and fans. Noteworthy features of the platform include a smart wallet, DNS Tezos domains, a media player for NFTs, and native buy/sell functionality for NFTs.

Gaming

Tezos gaming remained steady in Q2 2023, with 1,100 active users and 86,000 gaming smart contract calls. Despite the lack of growth, the Tezos gaming sector continues to see significant developments and partnerships.

Notable developments in the gaming sector Tezos and GoLive Games unveiling plans for India's first NFT cricket strategy game called Cricket Stars, and SalsaDAO launching a video poker game called VPoker on their rollup Project OxideTezotopia, a popular game, initiated beta testing for its mobile application. The introduction of ORB3's platform aimed to empower game developers with Web3 capabilities, and The Six Dragons integrated the ORB3 platform. Additionally, Crossroads: Myth was announced as an interactive world offering diverse campaigns, game types, and player-focused tokenomics.

These developments build upon Tezos' previous collaborations with industry leaders such as Unity and Ubisoft.

TVL

Tezos Total Value Locked (TVL) has demonstrated resilience and growth on the Tezos network. In Q1 2023, TVL experienced a significant 76% QoQ increase, surging from $52 million to $92 million. In Q2, TVL experienced a minor decline, reaching $88 million by the end of the quarter.

Youves and Sirius continued to dominate Tezos TVL in Q2 2023. Youves, the leading protocol by TVL, accounted for 54% of the total TVL with $47 million. It outlined strategic visions to redefine roles, enhance accessibility, simplify the user experience, and improve tokenomics.

Securing the second place in TVL was Sirius with $20 million, representing 23% of the TVL. Meanwhile, Kord.Fi emerged as the biggest gainer, growing 359% to $5 million TVL. Kord.Fi, a lending and leveraged farming protocol built on Liquidity Baking, relaunched in Q2 2023 and has been experiencing consistent growth. The protocol has ambitious plans, including introducing perpetual contracts, supporting NFTs, and leveraging Tezos rollups.

Q2 also witnessed notable protocol announcements. Marigold, a significant contributor to the Tezos ecosystem, introduced a novel DEX BatcherMavryk Finance announced the public beta launch of their lending protocol on the testnet, and Altme revealed a privacy-preserving compliance solution.

Stablecoins

Tezos had a total stablecoin market capitalization of $54 million as of the end of Q2. The dominant stablecoin on the network is native-USDT, representing 68% of the total Tezos stablecoin market with $37 million. Youves' uUSD follows as the second most popular stablecoin with a market capitalization of $12 million. The stablecoin market on Tezos remained relatively unchanged QoQ.

Additional Highlights

  • Mailchain integrated Tezos into their communication platform.
  • Electis, a Tezos-based voting solution, partnered with the King’s College London Blockchain Society to launch a new Tezos-based Web3 voting platform for the society's committee elections.
  • Winterthur, the sixth largest city in Switzerland, has announced the EulachGold project, a Tezos-based token with a 1:1 value ratio to the Swiss Franc. The project, launched on the Ecoo App, enables users to purchase goods from participating shops in the pilot project.
  • MVL, a Tezos-based mobility platform, successfully completed its mobility project with the Tezos foundation. The MVL Foundation has generated 64,000 driver passports.
  • Uconomy, a platform that allows anyone with a device to bring blockchain technology offline, was announced.
  • DNS announced the waitlist for their Tezos-based social platform.
  • Madfish announced TKEY, a token to enhance the development and adoption of the Temple wallet.
  • DAO creation platform Homebase announced feature-updates including off-chain polling and the simplified creation of DAO governance tokens.

Decentralization and Staking Overview

Validators

Tezos uses a Liquid Proof-of-Stake (LPoS) consensus mechanism. Liquid PoS consensus differs from Delegated Proof-of-Stake (DPoS) consensus because delegators can participate in consensus without conceding custody of their tokens. As a result, the delegated stake is completely liquid. The Tezos network benefits from having a large percentage of staked tokens liquid because the liquid tokens can be reused.

Validators on Tezos are called bakers and require a minimum of 6,000 XTZ ($4,620 at the end of Q2’23) to participate in Tezos’ consensus. Validators are allocated block publishing rights based on their total stake and are required to post roughly 8.25% of their XTZ delegations. Tezos uses inflationary block rewards, 42 million XTZ annually, as well as transaction fees to incentivize validators and delegators to participate in consensus.

Over the past year, Tezos has maintained consistent validator activity. Tezos ended Q2 with 418 active validators with a total stake of 115 million XTZ.

Tezos' validator stake distribution remains aligned with industry norms. Coinbase is the largest validator, holding a 15% share, followed by Everstake (6%), PoSDog (5%) stakefish (3%), and Kraken (3%). Additionally, Tezos' validator set is globally diverse.

Delegators

After a continuous growth streak spanning eight quarters, the number of active delegators on Tezos finally experienced a decline. By the end of Q2, there were 184,000 active delegators, representing a 3% decrease compared to the previous quarter, with a total active delegator stake of 565 million XTZ.

Stake

As of the end of Q2 2023, there were 965 million XTZ in circulation, with the total supply fully vested. Out of the total supply, 680 million XTZ (71%) was staked. Of the staked XTZ, 565 million (83%) comes from delegators, while validators self-staked 115 million XTZ (17%). The percentage of supply staked has remained consistently around 70%, indicating a long-term commitment to the network by stakeholders. Tezos has a high staking rate relative to other base layer protocols.

Governance

Tezos is a self-amending blockchain that removes the need to hardfork by employing on-chain governance for protocol upgrades. Users delegate their XTZ to validators who participate in stake-weighted voting; therefore, validators are responsible for both consensus and governance. The self-amendment governance process is split into five periods totaling approximately 2 months and 10 days.

To further bolster governance, Tezos established the Tezos Ecosystem DAO to manage and distribute XTZ in support of community initiatives. It involves five organizations as multi-sig holders and utilizes sales of NFTs on Objkt.com as a source of funding. Applications for funding can be submitted through Tezos Agora for consideration and immediate execution if approved by the participating ecosystem teams.

Closing Summary

Tezos demonstrated resilience and growth during the first half of 2023, with significant progress in various aspects of its ecosystem.

The network's financial and protocol fundamentals remained robust, and the Mumbai and Nairobi upgrades introduced crucial features to enhance scalability, smart contract functionality, and gas efficiency. Tezos' development community continues to expand, and the introduction of WASM-Smart Rollups and EVM-compatible Smart Rollups further bolsters its appeal to developers.

Tezos' ecosystem experienced mixed activity. NFTs and gaming have been relatively flat, while DeFi continues to see increased activity. In terms of decentralization and staking, Tezos has a globally distributed validator set with a high staking rate relative to other base layer protocols.

Looking ahead, Tezos' strategic shift in its rollup roadmap, continued developments in the Data Availability Layer, and the anticipated activation of the Hybrid Optimistic/ZK Rollup hold promise for further growth and innovation on the network.

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This report was commissioned by Tezos Foundation. All content was produced independently by the author(s) and does not necessarily reflect the opinions of Messari, Inc. or the organization that requested the report. The commissioning organization does not influence editorial decision or content. Author(s) may hold cryptocurrencies named in this report. This report is meant for informational purposes only. It is not meant to serve as investment advice. You should conduct your own research, and consult an independent financial, tax, or legal advisor before making any investment decisions. Past performance of any asset is not indicative of future results. Please see our Terms of Service for more information.

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