What is baking?
Baking is how blocks are produced and validated on the Tezos blockchain. To bake blocks, you need to take part in Tezos Proof-of-stake system, which requires a minimum of 8,000 XTZ (1 roll). The more XTZ you own, the higher your chances are at baking blocks and earning baking rewards.
What is delegating?
If someone does not have 8,000 XTZ or does not want to set up computing infrastructure to bake blocks, they may delegate their coins to a baker (aka "delegate"). Delegating lets coin holders (i.e. "delegators") "lend" their coins to a baker (i.e. a "delegate"), giving the baker a higher probability of being selected to bake and endorse blocks. In practice, bakers usually share the additional revenue generated from the delegated tokens with the coin holder. Importantly, this process does not actually transfer ownership of coins and hence the baker cannot spend or control the XTZ delegated to it, ensuring that bakers cannot appropriate the delegators' funds.
Should I bake or delegate?
Self-baking lets a baker earn a higher yield, but requires technical expertise and time in setting up a baker and running the baking software reliably with as little downtime as possible. By delegating Tezos tokens, a token holder avoids this process altogether but usually earns a lower yield. In the current protocol, token holders with less than 8,000 XTZ can only participate in baking by delegating to another baker.
A list of bakers can be found at this page and allows for comparison of public Tezos delegates.
How much can I earn by baking or delegating?
The current Tezos protocol increases the token supply by approximately 5.51% in the first year (based on constant block rewards of 16 XTZ/block and 2 XTZ/endorsement).
This means that if all Tezos token holders bake with all of their tokens (i.e. the entire Tezos supply), baking rewards would be near ~5.51% per year. However, given variance in time preferences, knowledge, and capabilities, it is unlikely that all token holders will bake and the expected return on baking is in practice greater than 5.51% a year. By illustration, if 50% of the Tezos token supply is being staked, the baking reward will be closer to 11% (double the inflation rate).
In practice, the rewards for token holders who delegate are less than that of baking directly, because delegates share their baking rewards with delegators minus a fee. This fee often ranges between 5% and 20% (see here and varies by the baker.
What is the difference between implicit and originated accounts?
In regards to baking, implicit accounts are the accounts which can participate in baking process. An implicit account can bake with its own coins as well as the coins delegated by other people.
Originated accounts cannot bake directly, but can delegate their coins to an implicit account. Originated accounts use their manager key to specify a delegate key, allowing them to select a delegate to represent their stake in consensus (and governance).
How should I select a baker to delegate with?
First, use this page to browse through bakers. There a few factors to consider when choosing a baker to delegate with:
- Fees. How much in fees is this baker charging?
- Capacity. Each baker has a capacity of how many coins it can accept, which is based on how many coins it currently holds itself. A baker is "overdelegated" when it has exceeded the amount of delegation it can take considering the coins they currently hold.
- Reliability + Responsiveness. Does this baker pay out on time? Does this baker pay correctly? Will this baker respond to my questions about their services? Many bakers operate forums and chat rooms in which they engage with delegators.
- Security. Is this baker's staking setup secure? Does this baker have a track record? Has this baker double-baked in the past and lost coins?