What is Tezos?
The Tezos, much like Bitcoin or Ethereum, is a decentralized ledger that utilizes the blockchain technology. And like Ethereum, Tezos also makes use of smart contracts. Essentially, Tezos is a blockchain network that was designed with the intention to facilitate safe and scalable use of smart contracts and dApps or decentralized applications.
However, unlike Ethereum and other blockchain networks using smart contracts, Tezos takes the concept of smart contracts “one step further by letting participants directly control the rules of the network.” Aside from that, Tezos also tries to do away with other issues its predecessors struggle with, such as the lack of flexibility and scalability in Bitcoin’s blockchain network that keeps it from going mainstream. It’s this approach that makes many want to buy Tezos.
Through the utilization of its open-source functional programming languages – OCaml and Michelson, Tezos creates a more secure and inherently stable architecture compared to its contemporaries. These open-source coding languages lower the barrier to entry for potential decentralized application developers, which helps the Tezos network in achieving steady growth and evolve, all the while allowing the network to also maintain robust security.
Additionally, the unique on-chain governance mechanism of Tezos enables the blockchain to adapt exciting, new features automatically and natively with high stakeholder participation. The Tezos coin, or XTZ, is the native cryptocurrency used on the Tezos network.
How Does the Tezos Network Participation Work?
As mentioned above, the Tezos network has a pretty unique on-chain governance process called the Liquid Proof-of-Stake (LPoS). This mechanism incentivizes user participation and helps the Tezos blockchain avoid unnecessary and controversial hard forks.
The Tezos coin holders on the network can stake the XTZ they own on the blockchain. Thus the XTZ owners get to vote on governance decisions of the Tezos blockchain, and decide as a community the voting system to be used for network enhancements. The Tezos baking system (more on that later) provides all users on the Tezos network with the opportunity to stake their coins – regardless of the amount of coins in their possession. The validators on the network (also called the Tezos bakers) are the people who suggest any potential upgrades to Tezos, and they get rewarded in exchange for offering up their time and expertise to the Tezos blockchain.
The Tezos upgrade and voting system can be classified into four sections:
- The Proposal Stage: All users on the Tezos network first vote on which changes they think might be the best to test out on the blockchain. The proposal(s) that gets the most number of votes go forward to the next round.
- The Exploration Stage: Next, users on the network vote on the proposals selected during the proposal stage. The proposals that get a minimum number of votes this time all move to the testing round.
- The Testing Stage: Now a separate blockchain is created to test out the suggested changes, and make sure that they would be both stable and secure to integrate permanently with the Tezos blockchain. This time, the changes that meet these technical requirements reach the next, and final, round.
- The Promotion Stage: This time, all users on the Tezos network vote on the upgrades that have been tested successfully. The upgrades chosen then get uploaded onto the Tezos blockchain through a “hot-swap”. The hot-swap process does not require any interruptions to the usual operations of the Tezos blockchain, nor does it need any splitting or forking of the blockchain.
What is Tezos Baking?
Tezos baking is essentially the act of validating Tezos network transactions, and signing and publishing a brand new block on the Tezos blockchain. This process is more usually called ‘mining’ for the better known Proof of Work (PoW) blockchains (such as the Bitcoin blockchain), and ‘validating’ for other Proof of Stake (PoS) blockchains like EOS. On the Tezos network, a user who holds any amount of the Tezos coin XTZ gets to validate transactions and sign and produce blocks on the chain, and of course, receive rewards directly proportionate to their staked amount.
The users who would get called ‘validators’ on other PoS blockchains are the one the Tezos network dubs the ‘bakers’. Only the users who own at least 8,000 Tezos coins or XTZs get to operate as bakers on Tezos. Bakers also need to have the necessary hardware and software they need to validate transactions and add new blocks to the Tezos blockchain, not to mention the required expertise. Moreover, to qualify as a Tezos baker, users on the network have to provide a security deposit, which would be forfeited if the user ever behaves immorally.
Tezos bakers for each block are randomly selected and published at the beginning of every cycle (which means the addition of every 4096 blocks, that takes approximately 3 days). Along with the validation of network transactions and creation of new blocks, the Tezos bakers also act as the decentralized developers for the Tezos network, and have to work with the development teams behind Tezos to help eradicate any issues with the network code. In exchange for their work, Tezos bakers receive baking rewards in the form of XTZ coins, which incentivizes them to continue their Tezos baking.
Bakers earn a block reward of total 16 XTZ for baking a block on the Tezos blockchain. To become a Tezos baker and exercise your baking rights, you’d need to run a node with baking software, and keep it online and updated.
Now, What is Tezos Delegation?
Tezos delegation is the act of delegating your Tezos baking rights to another Tezos baker, instead of setting up your own Tezos node. Tezos delegation can prove useful as it enables a user to take part in Tezos baking and receive the baking rewards without going to the hassle of maintaining a node. Plus, the users who can not qualify as Tezos bakers for the lack of XTZ coins or expertise can still participate in the network’s governance mechanism by assigning the rights to their Tezos coins to qualified Tezos bakers of their choice through a smart contract.
When it comes to Tezos delegation, all beking rewards are credited to the baker to whom the delegators assigned their money to. In turn, the baker pays out their dues to the delegators (in proportion to the amount they had staked) after charging some service fees.
With Tezos baking and Tezos delegation, the Tezos network successfully incentivizes all XTZ holders to participate in staking, and care about the growth and development of the Tezos blockchain itself.
How to Delegate the Tezos Coin (XTZ)?
Tezos delegation has been made quite simple, because almost all the wallets that already support the Tezos coin (such as Atomex) have also implemented an easy to navigate interface for users to delegate the XTZ they own. In most cases, this is how you delegate your Tezos coin:
- Open the wallet through its website or mobile app.
- Choose the baker of your choice from a list you’ll be given.
- Tap the “delegate” option.
And it’s done! All you need to ensure before assigning your coins to a Tezos baker, or choosing a delegation service, is that they are reliable.
Tezos Baking vs. Delegating: Which One Should You Choose?
For a relatively newer user, Tezos delegation is definitely the easier option. While Tezos bakers get slightly more Tezos baking rewards and get to charge fees from the delegators, Tezos baking requires a lot of technical knowledge, Tezos bakers need to spend time running and maintaining a Tezos node, and they can even get punished and risk losing out on their XTZ if they don’t meet the network expectations.
On the other hand, with Tezos delegation, you can get someone else to bake for you, and participate in Tezos staking in a vastly safer way. Additionally, baking rewards and the rewards a Tezos delegator receives are not radically different; in fact, the difference between the two rewards is less than a percentage point according to StakingRewards.com.
How Much Can You Earn Baking Tezos, and is Tezos Baking Worth It?
There is a formula to figure out how many Tezos coins you can earn by becoming a Tezos baker. The formula roughly looks like this:
The amount of XTZ you hold x Bakes per cycle = Rewards
As the network is supposed to function, if, say, a user left 10,000 XTZ tokens to bake for a year, they would receive about 760 new Tezos coins as reward by the end of the year. However, there are many variables that can affect the baking rewards.
As Tezos grows popular, the total number of Tezos bakers will likely increase. At the very beginning, the baking rewards will probably start out high as the number of Tezos coins being baked on the network is supposed to stay low. However, with time, the number of XTZ being delegated might increase and lower the baking rewards. So all things considered, Tezos delegation is probably a better option if you’d like to earn Tezos rewards.
We hope our post on Tezos baking helps you understand the network a little better! For more informative posts regarding cryptocurrencies, options, futures, and crypto trading in general, do give our website a visit!
Hitesh Malviya is the Founder of ItsBlockchain. He is one of the most early adopters of blockchain & cryptocurrency enthusiast in India. After being into space for a few years, he started IBC in 2016 to help other early adopters learn about the technology.
Before IBC, Hitesh has founded 4 companies in the cyber security & IT space.
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