Designed for very large companies, the Tezos blockchain is struggling to emerge from the shadow of the giant Ethereum. It is banking on new innovations to catch up. But is it really possible?

What do Ubisoft, Société Générale, Guerlain and Manchester United all have in common?

The Tezos blockchain.

All these world-famous brands work with the protocol of French origin. And despite an ecosystem that is still relatively modest (number of applications and users) Tezos continues to attract new names every month. "You have to give them credit for a certain talent", points out Stanislas Barthélémi, blockchain expert and consultant at KPMG.

Launched in 2018 with the participation of researchers from Inria (the French national institute for research into digital science and technology) and the promise of being the most "scalable" blockchain, Tezos is winning over many customers thanks to two things: firstly, a pitch that is very much geared towards businesses. Secondly, and more importantly, a system of operational teams funded by its foundation to help any company use the protocol.

These "crack teams" are present in various countries, in the UK, Germany, India and of course France. The best known of them is surely Nomadic Labs, which has around 75 employees in Paris.

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Nomadic Labs has a well-honed pitch, and large companies are at the heart of it. "They're the ones that reach a very wide audience," stresses Hadrien Zerah, Nomadic's number two. "It can sometimes take a long time to get them to switch over to blockchains", he concedes. But it's worth the effort. Working with a few major groups gives visibility, credibility and, above all, differentiation from the competition. And there is plenty of that!

The main challenge for Tezos is to manage the inexorable rise of Ethereum. A task that promises to be particularly complicated. In addition to the fact that the blockchain created by Vitalik Buterin has a capitalisation more than 130 times greater than that imagined by Arthur Breitman ($158 billion compared with $1.2 billion), Ethereum is also more widely used.

Most importantly, it is no longer as energy-intensive as it used to be. With the switch to Proof-of-Stake in September, the second largest blockchain on the planet behind Bitcoin (368 billion dollars) consumes much less electricity.

Tezos can therefore no longer criticise its competitor's environmental impact when this was one of its differentiating points. "It had already not been an argument for some time," moderates Arthur Breitman, the Frenchman who conceptualised Tezos in 2014 and sits on the foundation's board. "Many blockchains now offer a less energy-intensive consensus. The Tezos ecosystem is making its way independently of Ethereum", he argues.

The "scalability" of Tezos

According to the Frenchman who lives in the United States, it is Tezos' scalability, i.e. its ability to scale, that could make the difference. "Ethereum took nearly 8 years to implement proof of stake, whereas it was operational from 2018 at Tezos", he slips in, adding: "How long will it take them to really increase the number of transactions tenfold?"

From its "Lima" update, scheduled for mid-December, Tezos will offer "rollups" solutions. The advantage of this system, which will be directly integrated into the protocol, is that it allows the number of transactions to be drastically increased.

For its part, Ethereum needs to go through more "centralised" solutions (Optimism, Arbitrum, etc.) to increase volumes. "With Tezos, all companies will easily be able to develop their own scalability solutions to suit their needs," argues Hadrien Zerah of Nomadic Labs.

However, we might question the priority given to such a development. Tezos has never yet had enough activity to fill all of its transaction blocks... "The network does not currently need this capacity, but it will come," explains Arthur Breitman. "By developing the highest-performance protocol possible, we are offering extremely greedy projects the opportunity to imagine blockchain applications on Tezos."

A pitch that appeals to some. Ubisoft is delighted to have opted for this technology. "Everything we wanted to do worked out correctly. The teams at Nomadic have enabled us to build up our skills," explains Didier Genevois, Tech and Product Director at the video games giant's Lab.

For Fatih Balyeli, the boss of Exaion, the EDF group's blockchain subsidiary, the choice of Tezos from 2020 appeared obvious for reasons linked to its energy sobriety and the presence of Nomadic Labs' experts. "It's a very good technology and we'll continue to work on it in the future," he assures.

EDF is a major supporter of Tezos. Perhaps in fact the most important of them all. However, the public electricity company does not want to put all its eggs in one basket and is also working with others such as... Ethereum.

According to our information (read our article), of the 300 nodes managed by Exaion (all protocols combined), more than half are now on Ethereum, whereas Tezos has long been in the majority.

The same is true of Ubisoft: "Even though we have developed a lot of things on Tezos, the reduction in Ethereum's energy consumption has reshuffled the deck," says Didier Genevois. So Tezos has been warned.

The problem: Ethereum is 4 years ahead

More broadly, the problem for Tezos and other blockchains is that Ethereum, as well as maintaining its lead, is constantly increasing it. "The alternatives to Ethereum (Cardano, Solana, editor's note) have far fewer developers, their programming languages are less mastered and the tools used to deploy smart contracts lack maturity," points out Stanislas Barthélémi of KPMG.

When we compare the total value tied up in the applications of decentralised finance (DeFi) from Tezos, which has barely exceeded... 35 million. Ethereum, on the other hand, is galloping ahead with $31 billion, yes billion! And when we look at the number of DeFi applications available, the ratio is just as unbalanced (576 against 13).

Tezos prefers to emphasise the vibrancy of its artistic ecosystem, which is making increasing use of its NFTs :

A special exhibition, #CleanNFT Gallery, will take place in February 2023 in Paris

The Objkt exchange platform is multiplying projects

However, this is no match for OpenSea, its equivalent on Ethereum: when Objkt posted $1.6 million in value exchanged over the last 30 days (average transaction at $11.4), OpenSea is boasting $336 million ($200).

"Ethereum's lead is mainly explained by its anteriority," Hadrien Zerah tries to justify. "We had to develop all the tools, such as the wallets or the smart contract languages. It took at least two years for everything to be fully operational", he concedes.

A delay that is being paid for in cash today... While Tezos was developing, the other projects, especially the more disruptive ones (MakerDAO, Uniswap and Compound mainly), logically went where the tools were ready. That is, on Ethereum.

The innovation of the last chance?

Tezos has not given up, however, and the arrival of a disruptive innovation to relaunch itself is expected. It will soon be possible to develop Web3 applications using common computer programming languages (Java, C++, Rust, Javascript, etc.). From there to running a video game entirely on Tezos? That still seems a long way off.

But it will be easier to have games incorporating Web3 building blocks (tokens that can be used in the game, NFT, traceability system, etc.). The date is not yet known. According to our information, the end of 2022 is a possible timetable.

"We'll be able to write code without using Web3 languages. This will enable us to reach much wider communities of developers," insists Hadrien Zerah of Nomadic. Still in the video game sector (Ubisoft is a major partner of Tezos), some people are planning to bring old games up to date using Web3. Imagine a Rayman adventure using tokens and NFTs...

"The banks and video game studios we're talking to immediately saw the value of Tezos. It will be easier for them to deploy uses with the languages they already master," adds Hadrien Zerah. Will this be enough to reverse the trend? The answer will be in a few months' time...

The strong point: the financial windfall from the foundation

In the meantime, the Tezos ecosystem is not short of resources and has plenty to look forward to thanks to grants from its generous foundation based in Zoug (Switzerland). "The big advantage of Tezos is that its organisation distributes a lot of funding, which is less the case with the Ethereum foundation," explains Stanislas Bathélémi of KPMG.

According to our information, it only takes two to three weeks to find out whether or not you are eligible. And the sums can be substantial: some projects have received more than $500,000!

"For companies that are wondering whether it is worth launching a project on blockchain, Tezos still has the advantage of not costing much because they can be subsidised," stresses the consultant. The risk for Tezos is that once the subject has been mastered by companies, they will pack up and run off to Ethereum...

Tezos is not, however, the only protocol to practice this policy. It is common for major funding programmes to be set up to support a blockchain's activity. "This sometimes amounts to watering the desert," notes Stanislas Barthélémi.

As of June 30, the Tezos foundation had a reserve of $655 million. But this money is not infinite, especially in a bear market. Since the start of the year, the foundation's reserve has melted by 50%!

Most of its war chest is made up of bitcoin (down 67% in the last year) and XTZ, Tezos' cryptocurrency (down 81% in the last year). "The foundation's room for manoeuvre has been considerably reduced by market conditions", observes Stanislas Barthélémi. Especially as spending is accelerating: the sponsorship of Manchester United football club, signed in February 2022, is not insignificant.

According to the specialist press, Tezos will pay 23 million dollars a year to be on the training shirts of the English stars! "Tezos needs to find its audience and use cases quickly," concludes Stanislas Barthélémi. Otherwise it will be much harder to continue attracting major brands.

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This analysis does not constitute investment advice. It has been written without taking into account your personal circumstances, including your financial situation, risk profile and investment objectives.

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