Tezos is a blockchain network designed to address some of the issues other blockchains have run into, such as protocol updates. Employing an 'open-to-everyone' validation policy, Tezos aims to be the first self-evolving blockchain that can seamlessly integrate new positive changes and upgrades voted on by the community.
Other prominent blockchains, such as Ethereum, have run into problems when attempting to alter their protocol, requiring a fork like Ethereum Classic. This ultimately divided the community. This is what Tezos strives to avoid. Alongside this ambition, Tezos offers secure, institutional-grade smart contracts, and continues to keep a keen eye on future innovation.
Tezos operates on a Proof-of-Stake (PoS) protocol. XTZ is the native token of the Tezos network and is used for all transactions that take place on the blockchain.
This guide will explore the various ways you can stake XTZ tokens to earn rewards.
Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific
provider, service or offering. It is not a recommendation to trade.
What is Tezos staking?
is the process of locking up cryptocurrency tokens in a smart contract. Those cryptocurrencies are then used to help run and secure the blockchain network. The smart contract rewards those that support the protocol with new tokens.
In the real world, staking can be compared with a term deposit. A term deposit allows an institution access to those funds, which can then be used for operations. The term deposit would then receive an annual interest.
When staking XTZ, users actively contribute to running the Tezos blockchain. As Tezos utilises a PoS consensus mechanism, XTZ tokens are vital for validating transactions. Without the process of staking the Tezos network wouldn't work.
Staking on the Tezos network is colloquially referred to as 'baking'. There are two ways users can earn rewards by staking XTZ: as a self-baker (validator) or as a delegator.
Any XTZ token holder is eligible to become a self-baker and begin earning interest on their assets. However, to become a self-baker on the network, a user must stake over 8000 XTZ tokens and run a full-node validator using the supported 'baking' software. The self-baker must also ensure it stays active on the network and remains up-to-date. With high electricity fees, this can be expensive, time-consuming and a technologically complex process.
Delegators can support self-bakers by sending them XTZ tokens. In return, rewards collected by the self-baker are then redistributed proportionally amongst supporting delegators. The amount of staked XTZ sitting with a self-baker dictates the frequency of transactions they can validate on the blockchain. The more validations, the more rewards. As the process of validation requires much more effort, self-bakers charge a commission to delegators on the rewards they distribute.
Due to the complexities of the process, the option of self-baking on the Tezos network is not suitable for the average cryptocurrency investor. Thankfully, the alternative option of becoming a delegator is very straightforward.
Becoming a delegator still allows XTZ token holders to earn rewards but without the hassle of running a node. There is no minimum amount of XTZ tokens required. Delegators can select a self-baker to provide tokens to (through a supported wallet or exchange). Delegators then accrue additional tokens depending on their proportional investment.
How to stake Tezos
Staking Tezos through a wallet
XTZ holders can stake their coins using a supported wallet. This is a simple process and the steps are typically consistent from wallet to wallet.
Tezos supports hardware wallets like Ledger, browser wallets such as Atomex, and software wallets (including iOS and Android) like Guarda.
When you bake with a wallet, you are in control of your own destiny as you get to select your validator (baker). This freedom may be appealing to more advanced users who know what to look for in a trusted validator. Data such as total pooled tokens, time spent online and commission rate are all important factors to consider when selecting a baker.
Tezos delegators have no minimum stake amount, whereas self-bakers running a node will need to stake a minimum of 8000 XTZ tokens.
How to become an XTZ baker through a wallet like Atomex:
- Atomex application. Download the Atomex wallet and use it as a mobile application, computer software or simply in a browser.
- Account. Create an account.
- Secure. Back up and secure your 12-seed phrase.
- Cryptocurrency exchange. If you do not already hold XTZ you will need to set up an account on a cryptocurrency exchange like Binance or Kraken. On the exchange, you can either purchase XTZ with fiat currency or exchange other cryptocurrencies for XTZ.
- Acquire XTZ. Purchase the desired amount of XTZ via the exchange. (Note: You can purchase Tezos directly through certain wallets, however, the gas fees are usually much more expensive than using an exchange).
- Transfer XTZ. Forward the XTZ you have purchased from the exchange to your unique Atomex wallet address.
- Atomex wallet. Navigate to the 'Wallets' tab on the Atomex application. This is situated on the left of the application.
- Find Tezos. Select 'Tezos' from the list of available wallets.
- Delegate. Once your XTZ funds are in your wallet, simply press 'Delegate' in the staking box. Select a baker (validator) from the dropdown list.
- Confirm. Confirm the pop-up menus for your transaction and that's it! After about 1-2 minutes, the Tezos blockchain will process the order and you will start passively earning rewards on your XTZ tokens.
Staking Tezos through an exchange
Cryptocurrency exchanges such as Binance and Kraken command a huge proportion of the total cryptocurrency trading volume. This includes both fiat-to-crypto and crypto-to-crypto transactions.
Though initially focusing on the purchase and sale of cryptocurrencies, the popularity of these platforms has seen them expand to offer numerous functionalities, including liquidity provision, staking and lending.
When using an exchange to stake coins, the exchange will act as the validator (baker) on your behalf, removing the necessity to research a validator to choose. It also greatly reduces the risk of a validator misbehaving. Binance charges no staking fees, making it a slightly cheaper option than using a wallet.
Exchanges often have a longer unbonding period when a user wants to withdraw funds. This leaves users unable to react to volatile market conditions, which may eat into profits. The entry point for delegators can also be much higher in comparison to completing the process through a wallet.
How to 'bake' XTZ through an exchange like Binance
- Binance exchange. Head over to the Binance exchange and signup for a Binance account.
- Deposit. If you do not already hold XTZ on your Binance wallet, purchase XTZ tokens either with fiat, transfer XTZ from an external wallet, or exchange other cryptocurrencies for XTZ.
- Binance Earn. Navigate to the Binance Earn tab. This can be found via the dropdown menu at the top of the screen: Finance > Binance Earn.
- Find XTZ products. Using the search box, look up 'XTZ'.
- Stake. Locate the staking option for XTZ and click 'Stake'.
- Locking period and amount. Choose your locking period (30, 60 or 90 days) and input the number of tokens you would like to stake. The minimum stake amount on Binance is 50 XTZ.
- Confirm. Accept the staking service agreement and confirm the purchase. You will then start earning additional income on your XTZ tokens.
Staked XTZ can be withdrawn or traded at any time by simply clicking 'Redeem earlier' after navigating to your staked orders. This can be done by going to Wallet and then Earn. Doing this will invalidate you from receiving any interest earned.
Other ways of earning interest on your Tezos tokens
Crypto Lending Services
There are other ways users can put their XTZ tokens to work. Lending services are becoming quite popular within the cryptocurrency community and operate in a very similar fashion to a bank savings account.
By locking up tokens in a platform such as Crypto.com or Nexo, users can earn interest as the company lends out tokens to others.
DeFi Yield Farming
Decentralised Finance (DeFi) applications offer another avenue for XTZ holders to earn interest on their holdings. Most DeFi platforms rely on user-provided liquidity. Decentralised exchanges (DEXs), such as Uniswap, use an Automated Market Maker (AMM), or algorithm, that works in conjunction with user-provided liquidity pools. This combination allows the DEX to offer traders instant exchanges 24/7.
Users are rewarded for depositing liquidity into liquidity pools, which support the exchange. To incentivise the provision of liquidity, DeFi applications can offer APYs that vary depending on the supply and demand of the liquidity pool.
A liquidity pool is composed of a cryptocurrency pair. For example XTZ-USDC. Unlike staking, which would only require depositing XTZ, depositing into a liquidity pool requires a user to provide an equal proportion of both cryptocurrencies. This is based on the exchange rate at the time. For the XTZ-USDC liquidity pool, a user would need to deposit equal shares of XTZ and USDC.
How much can I earn from staking Tezos?
Baking Tezos can be a powerful method of earning extra income on XTZ holdings and is a great way to support the Tezos network.
When baking XTZ in the Tezos network, how much a user can earn is variable and depends on a few factors:
- The number of coins being baked
- The locking period of XTZ
- The validator selected to bake on your behalf (commission fees will vary)
- The total amount of Tezos being staked on the network. If there is an excess of XTZ, the incentive to bake (rewards rate) will be marginally lowered, and vice versa.
A user's earnings will fundamentally depend on the market value of XTZ. This can be tricky when locking tokens up. However, one great thing about baking XTZ through a digital wallet is that it utilises Tezos's Liquid Proof-of-Stake mechanism. Baking through a wallet has no locking period and a user can access coins as soon as they unstake them.
Lending and DeFi Yield Farming
When putting XTZ tokens to work via other applications such as crypto lending services or DeFi applications the greatest factor that can affect the APY return is demand. Most protocols are based on supply and demand systems that automatically increase or decrease APYs. Like baking, if the demand for XTZ decreases the returns offered will decrease and vice versa.
The amount earned will also be affected by the market value of XTZ. If there is a locking period, market volatility may eat into profits before a user can react.
Is staking Tezos safe?
Baking Tezos is both a simple and relatively risk-averse process compared to other cryptocurrencies, however, whether through a wallet or through an exchange there are several risks that should be considered.
When staking other cryptocurrencies there can be risks of slashing a validator's holdings if malicious actions are discovered. This can affect all supporting delegators. However, if a validator misbehaves on the Tezos network, only the validator's token holdings are slashed (punished). Delegators take no hit in regards to their invested tokens.
The biggest risk with staking Tezos comes from bakers improperly, or simply not, paying out the earned rewards. Delegators should remain vigilant to payment cycles and know exactly when and how much their rewards are meant to be. Rewards can be tracked via the Baking Bad dashboard.
Users must also be accountable when staking Tezos through a wallet. When baking through a wallet, a user must remain in control of both the password and seed phrase at all times. If both are forgotten a user can lose all deposited XTZ tokens.
Additionally, staking XTZ through an exchange poses an increased risk of a security breach. Exchanges are online systems that are, therefore, inherently at more risk of an attack. If the system is exploited it could mean you lose XTZ assets.
Pros and cons of staking Tezos
- Passive income. Staking Tezos is a way to earn additional revenue on coins that would otherwise be sitting idle.
- Support the blockchain. Stakers contribute to the evolution, governance and running of the Tezos blockchain.
- Several options for investment. Users have the ability to use lending services or DeFi applications to earn additional income.
- Low-risk profile. Very low risk compared to staking some other coins.
- Liquid PoS. No locking period when staking via a digital wallet means a user can react to volatile markets quickly.
- Delegators are exempt from slashing. Delegators in the system hold no risk of having assets slashed due to a validator breaking protocol.
- Validator control. There is the potential for validators to not distribute rewards to delegators.
- Accountable. If a user loses a wallet password and seed phrase they can lose access to XTZ holdings.
- High entry point on exchanges. Certain exchanges require a larger deposit of XTZ tokens to start staking.
Disclaimer: Cryptocurrencies are speculative, complex and involve significant risks – they are highly
volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of
future performance. Consider your own circumstances, and obtain your own advice, before relying on this information.
You should also verify the nature of any product or service (including its legal status and relevant regulatory
requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may
have holdings in the cryptocurrencies discussed.