Mining is expensive and that’s a fact. However, there are a number of alternatives to the traditional mining methods. Tezos Baking is one of them 🥖
What is baking in Tezos?
Baking is what they call staking on the Tezos network, which hints at the origin of the project. The blockchain’s founders are French and are bakery professionals, according to the stereotype.
Bakers ensure the operations on blockchain are carried out safely and faultlessly: they confirm transactions, sign blocks, and protect the network. Two types of rewards can be received: block mining (baking) rewards and confirmation of blocks mined by other bakers (endorsement) rewards. Users can delegate their funds to public node owners and receive a portion of it.
Staking is different to mining, isn’t it?
Indeed, it is a different approach, but the outcome remains the same. You pay something (or lock if we are talking about staking) to get a certain amount of something in return.
So how does this work for Tezos?
Tezos runs on the Liquid Proof-of-Stake (LPoS) algorithm, which allows the user to withdraw all the frozen funds at any time 🗝️
Bakers create blocks every 30 seconds. The reward for a mined block is 40 XTZ and is divided into two parts:
- up to 20 XTZ for the creation of a block;
- 0.002857 XTZ for approval with up to 7000 bakers being able to approve one block, receiving a total of 20 XTZ.
The schedule for this cycle is generated randomly, but the bakers will have different chances of participating in the creation of blocks. The probability of receiving a reward depends on the number of tries. Such a mechanism ensures that all bakers receive roughly the same yield - approximated at 6% annual 👌
Why would one avoid baking?
Baking has a relatively high entry threshold: 6,000 XTZ ($18,000 at time of publication), when compared to other staking options. You might get the impression that it is just the users who do not have the means to run their own node are delegated to bakers. That is far from true though 🤔
To run the node you will need:
- A separate computer, preferably a laptop with a working battery;
- A Ledger Nano X or Nano S wallet for secure storage of XTZ.
With the minimal system requirements being:
- 100 GB of free disk space. SSD only, since otherwise the node will not have enough time to assemble and sign the block;
- 8 GB of RAM. 4 GB, will not deliver enough speed for the net to operate.
All that makes baking quite pricey and not too relevant when it comes to cheap mining alternatives. However, an intermediate user with a relatively big capital might find the algorithm quite useful due to high profitability and a much lower entry cost, when compared to mining 😌
Stay tuned 📻