Tezos' Lead in the Security Token Space Is a Massive Catalyst

A riveting discussion between Chris MacDonald, a crypto-focused Fool.com contributor, Fool.com Editor Eric Bleeker, and The Motley Fool's Lead Crypto Advisor Bernd Schmid on Tezos (XTZ -1.58%) provides some highlights as to why crypto investors may want to consider this security token play. This clip was recorded on Nov. 4 from "The Crypto Show" on Backstage Pass. 

Eric Bleeker: Let's just get right into these three. The first we have is Tezos.

It is a market cap of 5.4 billion, which makes it the 39th largest crypto. I remember when it raised its ICO, it was big news. It was one of the largest at the time. It was 232 million, and it's claim to fame as a self amending blockchain, which I think question number 1 for most viewers out there Bernd, what does that mean and why is this exciting?

Bernd Schmid: Yeah. It's really difficult to wrap your head around this if you're new to the space and just learning. Even I myself have been reading about this space intensive since two years and I'm still learning every day and a bit relaxed after that I already forgot.

In this case, so how does a blockchain work? A blockchain normally is not founded by company and run by a company and making decisions and trying to improve the products, the blockchain technology behind it. But it's normally a community which runs this network, there are different notes which are running the software.

We could call off of the blockchain, and at times you want to upgrade the software. In Ethereum (ETH -1.38%) for example, this is the big one that is happening from Ethereum 1.0-2.0, which might happen next year, is where they're switching from currently proof-of work algorithm to proof-of-stake algorithm.

In this case I'm not even sure if it's called The Hartford, but typically, if you want to make sense upgrades, what you do is you define what the upgrade is supposed to be and then all the people running these notes, the software, the blockchain, they upgrade their software and then from a certain point on, they say, now let's switch to the new code or to this update, to the updated software. This can cause some hiccups. It's happened to Ethereum about a year ago.

I think it's almost exactly a year ago, most of November 2020, if I'm not mistaken. There were some minor upgrade actually happening in Ethereum something that push every now and then. But for some reason, some nodes didn't take note or didn't upgrade their software on time and that what happened was there's couple of Ethereum notes were running the new software and a couple of other Ethereum notes were running the old software and then transactions coming into the blockchain suddenly have two Ethereum blockchains, the one run by the old software notes and the one run by the new software notes and which one is the real Ethereum blockchain now and transactions, that's also pretty good part.

Coming into the old software notes so to say, never only processed on this one blockchain where the old software was running and not processed in the new one. This has to be resolved somehow, and that's something that is not supposed to happen with Tezos because this upgrade process that I've just described loosely by defining the update and then everybody agreeing what should we upgrade and then everybody upgrading and switching.

In Tezos, this is essentially programmed onto the blockchain. The process is very defined and that's why we call it an on-chain process for refining, making proposals for upgrades. Then you're making both the notes running this blockchain. They're discussing these proposals, they're voting for or against the proposals, and in the end, if everybody agrees, I think it's a five-step process.

The last step would be everybody agreed and we bring this live. I need to understand this process exactly a bit better, but the upgrade is just happening. The network itself upgrades itself essentially. There's no manual process where the nodes need to update their software and then agreeing on when do we switch, but this all happens in a coordinated fashion and a programmed fashion. This is very important for one application that makes me so excited about Tezos in general.

Eric Bleeker: Now, a big aspect of something like Digital Explorers is Joe's allocation guidance. It shows how to build a portfolio in the crypto space. If someone's looking at this investment, is this an out-sized position? Is this a smaller position with upside? How would you look at Tezos in a portfolio perspective?

Bernd Schmid: For me, I want to use the term speculative, but I don't want to use it in the senses well, is there something, is there value or is there not?

Tezos is theoretically an Ethereum competitor. I believe in a multiple chain future where you won't have just Ethereum and all others will be gone or maybe Ethereum will be braced by one. I think you will have different blockchains and I think Tezos has a big shot actually of becoming one of these blockchains.

Specifically, in that case, the application that I referred to before, as a blockchain for digital assets and its security tokens, assets that want to be securitized on blockchain or tokenized. I think this is an application where Tezos is especially the future that we set before. It doesn't have many blockchain because we don't want to have two blockchains running in parallel.

I think Tezos has a good shot of becoming this, and that's why I'm thinking of Tezos making a more significant position than just a small investment, for example. It wouldn't become, for example, in my view, at least right now it depends also how it develops it might double down on it, but for the start, it wouldn't become as big a position as something like an Ethereum, where we know they're a clear leader in this space. They have a head start in front of the others. There's a clear network effect already happening and continue to happen.

So it sits somewhere in between this clear leader and we think that's already developed and something that is purely speculative and we still need to see how great are the chances.

Eric Bleeker: Sorry, I should have noted, it should be relatively clear there, but Tezos is one of our first seven recommendations in Digital Explorers. It is active and one of the exciting aspects of the service, as you noted, will be that allocation guidance and seeing how we want to develop it over time.

Chris, when you look at Tezos, what are you looking at in terms of this as an investment opportunity?

Chris MacDonald: I think Bernd touched on a lot of really important features. I think the security token space is a really interesting space right now.

The ability to have fractional ownership of real assets on the blockchain is a really interesting development and it's a compelling opportunity for long-term investors thinking about where the blockchain is headed in terms of securities, and thinking about the fact that a very small fraction today, whether its stock bonds, any real estate, any real assets are traded on the blockchain. Tezos potentially has the ability to lead the way and be in an Ethereum in the sense of being a leader in the security token space.

There's a reason why I think Bernd is right on the money with having it as a top-seven pick. There's a lot of growth opportunity in innovation yet to happen in the security token space. So it's one that I really like as well. I think it's a great pick.

Eric Bleeker: The amount that we're able to. Bernd, could you maybe talk about actual usage of this versus where does this stand today. You're looking at the technology and this is mainly a promise or are we seeing usage of this already growing at rapid rates?

Bernd Schmid: Lesser is the case.

Compared to Ethereum, if you look at the number of transactions of unique users using this blockchain, it's still below Ethereum, but it's growing constantly. I think it's about 10Xing every two years since its launch or even faster. I'm not getting it correctly right, but it's increasing steadily. That's a nice thing.

Specifically, in this security token space, what I like is this already. They have, if you can call it partnerships, but there are companies which I think are leading in this space, tZERO is one of them. They have a platform where eventually they hope to trade stocks, security tokens, cryptos, NFTs, everything on one platform, which I think to my knowledge that the only platform right now, which has the technology and the license actually who could do this.

They have already assets on that platform which are tokenized on Tezos for example, and those other companies like Securitize which are leading the space. One I like a lot of Elevated Returns. They are actually pushing a lot for Tezos. They just announced, I think two days ago, that they are looking for companies exclusively building on Tezos to invest equity into them. But they themselves have digitized the estimate resource in the US.

It's also tokenized on the Tezos blockchain. So this is real. It's already happening. It's slowly happening. This security token space is still very small compared to what might be out there, but Tezos is really utilized already there.

In another sense, Tezos has all the other capabilities of Ethereum, for example. Not sure if many viewers are familiar with the term DeFi, Decentralized Finance. There's also DeFi applications running on Tezos. They don't see the adoption that they have seen in Ethereum or, for example, now that they see in Solana (SOL -4.33%). I'm not sure if this might become something. My bet would be it doesn't even need to be. If Tezos becomes the security token foundation, it's already enough for it to have a solid use case.