What is staking

Tezos Baking and where to start…

At the most recent Tezos UK meetup we were delighted to welcome Steve Berryman from TezBaker. They were amongst the first group of bakers (since cycle 8) and delegates (to use Tezos’s own terminology)— for ease we will be using the term baker because it succinctly describes what TezBaker and other delegates do.

Being a baker takes a lot of organisation — the willingness be available for the randomness of slot allocation, the capacity to monitor when the snapshot in a baking cycle starts and the capability to commit a minimum number of Tezos tokens, currently 10,000XTZ. If a baker is not online at the time of baking or endorsing, they will lose the corresponding earnings leaving other bakers to ‘steal’ that baking opportunity and earn from that block.

Tezos is of course a public distributed ledger / blockchain, so there’s nothing to stop an individual acting as a solo-baker, but maintaining vigilance and security and the randomness of when rights assignment to bake occur, means that many individual token holders might prefer to let a baker take the strain. Token holders might also have less than 10,000XTZ.

One thing is for certain, simply holding the tokens and doing nothing with them is perhaps not a good idea — inflation caused by the baking process will mean a slow loss of relative value compared to ‘active’ tokens. Check out our quick guide for more details.

Bakers earn XTZ tokens and fees per block processed and naturally there’s a cost to using their services — a competitive market exists with different bakers offering different rates — so anyone delegating their tokens is advised to shop around and make an informed choice on who to bake with.

Trust is a large part of choosing which baker to work with; they must ideally have an open and transparent policy for transfer of rewards and there should be an agreed timescale in which that happens.

So how do you choose your baker? (in no particular order of preference)

  1. Competitive fees. Why pay more than you need for something that ideally should be identical?
  2. Communication. Contact with your baker can be reassuring though some don’t provide a way of communicating with them or encourage this.
  3. Capacity to bake. Bakers can’t control token holders delegating to them.
  4. Trust. Bakers do control paying out rewards.

The act itself is an on-chain origination, a smart contract. If the number of tokens delegated to a baker exceed the self-bond (that minimum of 10,000 tokens again) then the baker can’t make the bond. If the bond can’t be made, blocks are going to be missed in that cycle, which means rewards allocated will be lower and this results in lower returns.

A trust relationship must exist between delegators and their baker when it comes to sharing endorsement rewards the baker receives for carrying out baking. Because the rewards are distributed by protocol to the baker’s address, a delegator must have confidence that the baker will pay out rewards to them in turn. This is by design to further encourage decentralisation.

There are numerous other tools available with more in-depth information such as tzscan.io. Mytezosbaker has also made an attempt to show how overdelegated different bakers are, however not all bakers agree with the measurement used since some bakers dynamically alter the bond in order to remain within limits.

With all that said, what remains is to thank Steve for his efforts in explaining something complex as simply as possible — we look forward to seeing him around at future events. Thanks also goes to Gregory Fisher (co-organiser at Tezos UK) for tweaking the original article extensively. And if you have any questions or comments, please use the section below.