How much can you earn by staking your Tezos (XTZ)?
What is Tezos?
Tezos (XTZ) is an open-source blockchain platform with a novel governance design that allows XTZ stakeholders to vote on possible changes to the protocol and then implement these changes with an on-chain upgrade mechanism. Through this governance design, Tezos aims to reduce the chances that its blockchain would fork, which is when two separate cryptocurrencies are created from a single project when there is a large enough disagreement between blockchain participants. With its novel design, Tezos brought to light the contrast between off-chain and on-chain governance strategies, an important conversation which continues to play out in the crypto space.
The Tezos blockchain was first created by husband and wife Arthur and Kathleen Breitman in 2014, and the team held an initial coin offering (ICO) in 2017. This was the largest ever ICO at the time, raising the equivalent of $232 million. The Tezos Foundation, based out of Switzerland, was created to launch the Tezos protocol following the ICO.
What is Tezos staking?
Since Tezos operates with a Proof-of-Stake consensus mechanism, users holding XTZ tokens can earn staking rewards in exchange for using their holdings to secure the blockchain. Staking, also known as “baking” in the Tezos ecosystem, is the process of locking up your XTZ tokens to secure the Tezos network, validate transactions and distribute newly minted XTZ. Through the process of staking, the Tezos network ties its security to the honesty of the majority who are incentivized as token holders to maintain the integrity and value of the network.
How do I stake my XTZ?
Tezos staking (aka “baking”) works in two ways:
- Self baking (hard). Advanced users can run their own Tezos node, which must be setup with “baking” software and kept updated and online. This approach is slightly more profitable but also requires your time to maintain the node, pay for hosting, and properly configure the baking software.
- Delegating (easy). Delegation is where you delegate your staking rights to another node called a “delegator” so that you can participate in staking without having to maintain your own node. The downside is that the delegator takes a small fee for their service, reducing your staking rewards.
There are two general approaches to delegating your XTZ:
- Using a non-custodial wallet like Atomic Wallet which means that you do not have to trust a third party with your keys. The downside to a non-custodial wallet is that you are solely responsible for not losing your keys and keeping them secure. When it comes to baking, with this approach you are responsible for choosing a good and reliable Tezos baker, so choose carefully.
- Using a custodial wallet like Coinbase, a crypto exchange. With a custodial wallet, you trust a third party to control your private keys and provide you access to your tokens when you wish to send or trade them. The upside to custodial wallets is that they are typically more convenient and your personal responsibility of safeguarding your private keys is lessened. With this approach, you do not have the ability to choose your Tezos baker – you must use your custodian’s partner baker.