Learn About Tezos
Learn more about Tezos and how this revolutionary blockchain protocol works. This section will be expanded in the future with video tutorials and explainers on all aspects of the Tezos project.
In Tezos, which is built on a Proof of Stake algorithm called liquid proof of stake (LPOS), the process of securing the network and processing transactions is called Baking.
Baking is what Tezos refers to as the action of signing and publishing a new block in the chain. Bakers need at least 8,000 XTZ to activate as a delegate, and having additional delegated stake increases their chances of being selected as a Baker or Endorser.
At the beginning of each cycle (every 4096 blocks or 3 days), the Bakers for each block are randomly selected and published. Bakers earn a block reward of 16 XTZ for baking a block.
In addition to the Baker, 32 Endorsers are randomly selected to verify the last block that was baked. Endorsers receive 2 XTZ for each block they endorse.
Baking vs. Mining
Bitcoin has mining, Tezos has Baking. In Bitcoin, miners compete to publish blocks containing a proof-of-work stamp by repeatedly hashing block headers. In Tezos, block creation is done by bakers. Rather than deriving the right to create a block by finding the solution to a proof-of-work problem, bakers obtain that right when a Tezos token (or rather a roll, see below) they own (or that is delegated to them) is randomly selected to create a block.
Since Tezos Baking requires an account to have at least 8,000 XTZ to make up one role, many Tezos coin holders will decide to delegate their coins rather than bake themselves.
This is called delegation which allows you to allow a delegation service (like Tezos Tacos) to use your coins for the Baking process and provide you rewards in the form of earning more XTZ.
It is important to note that the delegate does not own or control the coins in any way. In particular, it cannot spend them. However, if and when one of these coins is randomly selected to bake a block, that right will be given to the delegate.
For most Tezos coin holders, delegation is the best option if you aren’t inclined to run your own server and/or maintain the infrastructure needed to reliably bake on the network. There is a level of technical knowledge and commitment involved. Most users will settle on delegating their coins to a delegation service so that they can earn rewards for participating, but not actually be responsible for any of the technical aspects of baking their own tokens. Delegation is perfectly safe since you cannot lose your coins by delegating, but your earnings can vary depending on the delegation service that you choose.
What’s the Catch?
In most cases, the largest difference between delegation services is the number of rewards they return to you for allowing them the use of your coins for baking. Usually, the amount returned to the coin holder is between 85-90% of rewards, which means most delegation services “charge” a fee of around 10-15% of the rewards you earn.