What does XTZ mean? How does XTZ's on-chain governance work?

XTZ, also known as Tezos, is a blockchain platform that facilitates smart contracts and decentralized applications. The native cryptocurrency of the Tezos network, XTZ, plays a crucial role in the ecosystem, serving both as a means of transaction and a governance token. In this article, we will explore the meaning of XTZ and delve into the intricacies of its on-chain governance system.

What is XTZ?

XTZ is the native cryptocurrency of the Tezos blockchain. It is used to pay for transaction fees and to participate in the network's governance process. When users want to execute smart contracts or transfer value on the Tezos network, they use XTZ to cover the costs. Additionally, XTZ holders have the ability to participate in the governance of the network, making it a crucial component of the Tezos ecosystem.

The Tezos platform was designed to be self-amending, meaning that it can upgrade itself without the need for hard forks. This feature is facilitated by the use of XTZ in the governance process, allowing token holders to vote on proposed upgrades and changes to the protocol.

How Does Tezos Work?

Tezos operates on a proof-of-stake (PoS) consensus mechanism, which is different from the proof-of-work (PoW) mechanism used by Bitcoin. In a PoS system, validators, known as 'bakers,' are chosen to create new blocks based on the amount of XTZ they hold and are willing to 'stake' as collateral.

• Baking: Bakers lock up their XTZ to participate in the validation process. The more XTZ a baker stakes, the higher their chances of being selected to create a new block.
• Delegation: Users who do not want to run their own nodes can delegate their XTZ to a baker. This allows them to participate in the network's security and earn rewards without the need for technical expertise.

The Role of XTZ in Governance

One of the most distinctive features of Tezos is its on-chain governance system, which allows XTZ holders to vote on proposed changes to the protocol. This system is designed to be more democratic and less contentious than the hard fork processes seen in other blockchain networks.

The governance process on Tezos involves several steps:

• Proposal Period: Anyone can submit a proposal for a protocol upgrade. These proposals are then reviewed and discussed by the community.
• Voting Period: XTZ holders vote on the proposals. The voting process is divided into several periods, each lasting a week, to ensure thorough consideration.
• Testing Period: If a proposal receives enough votes, it enters a testing period where it is implemented on a test network to ensure it works as intended.
• Promotion Period: If the test is successful, the proposal is promoted to the main network, and the protocol is upgraded.

How Does On-Chain Governance Work?

The on-chain governance system of Tezos is designed to be transparent and inclusive. Here's a detailed look at how it functions:

• Proposal Submission: Any XTZ holder can submit a proposal for a protocol upgrade. The proposal must be written in a specific format and include detailed explanations of the changes.
• Voting Process: The voting process is divided into four periods, each lasting a week:
  • Period 1: XTZ holders vote on which proposals should be considered.
  • Period 2: XTZ holders vote on the selected proposals to determine which one should be tested.
  • Period 3: XTZ holders vote on whether the tested proposal should be implemented on the main network.
  • Period 4: XTZ holders vote on whether the proposal should be promoted to the main network.
• Quorum and Supermajority: For a proposal to pass, it must meet both a quorum requirement (a minimum percentage of the total XTZ supply must vote) and a supermajority requirement (a high percentage of the votes must be in favor of the proposal).
• Implementation: If a proposal passes all voting periods, it is implemented on the main network, and the protocol is upgraded.

Benefits of On-Chain Governance

The on-chain governance system of Tezos offers several benefits:

• Decentralized Decision-Making: By allowing XTZ holders to vote on proposals, the governance process is decentralized and inclusive.
• Avoidance of Hard Forks: The self-amending nature of Tezos means that upgrades can be implemented without the need for hard forks, which can be contentious and divisive.
• Continuous Improvement: The ability to propose and vote on upgrades allows the Tezos network to continuously improve and adapt to new challenges.

Participating in Tezos Governance

To participate in the governance of Tezos, XTZ holders need to follow these steps:

• Acquire XTZ: First, users need to acquire XTZ through a cryptocurrency exchange or other means.
• Set Up a Wallet: Users need to set up a Tezos-compatible wallet, such as the Tezos client or a third-party wallet like Kukai or Galleon.
• Participate in Voting: During the voting periods, users can cast their votes using their wallet. They need to follow the instructions provided by their wallet provider to submit their votes.

Frequently Asked Questions

Q: Can I participate in Tezos governance without running a node?

A: Yes, you can participate in Tezos governance by delegating your XTZ to a baker. This allows you to vote on proposals without the need to run your own node.

Q: How often are voting periods held on Tezos?

A: Voting periods on Tezos are held every three months, with each voting cycle consisting of four one-week periods.

Q: What happens if a proposal fails to meet the quorum or supermajority requirements?

A: If a proposal fails to meet the quorum or supermajority requirements, it is rejected, and the protocol remains unchanged. The community can then submit new proposals for consideration in the next voting cycle.

Q: Can I change my vote during the voting periods?

A: No, once you have cast your vote during a voting period, you cannot change it. It is important to carefully consider your vote before submitting it.