Not every Tezos holder will own a minimum of one roll (8,000 ꜩ) or have the technical knowledge or expertise to become a baker. Delegating is a process that lets Tezos token holders delegate their right to produce a block to a baker, who can do so on their behalf. Delegates manage their tokens through a private key called the manager key. The owner of a manager key can specify a public delegate key. The entity delegated has the right to participate in PoS and governance on behalf of the token holder.

Delegating lowers the entry barriers to participating in staking for the average user. While bakers receive higher rewards for staking, they also pay for hosting and maintaining node infrastructure and risk having their funds seized for poor performance.

Tezos Staking Rewards

Staking rewards incentivizes participation in the blockchain’s consensus mechanism. It also offsets the impact of inflation on users’ funds. As token holders receive assets in reward for staking, their holdings increase in line with network inflation as more assets are added to the overall circulating supply.

Rewards issued for staking vary, given the level of network participation. As more people participate, the rewards will be lower. As participation decreases, the reward will be higher. If all Tezos token holders bake with their tokens, the baking rewards would be near 5.51% per year. In reality, the rewards for token holders who delegate are less than that of baking directly, as delegates share rewards. The portion of rewards the baker keeps is known as a ‘fee’, which ranges from 5% to 20%.

What makes a good validator?

Good bakers perform consistently, put up a healthy security deposit, and contribute to the network's health. Here is an outline of the key considerations for what makes a good validator:

• Financial Considerations: Selecting a validator requires considering what amount of funds they will receive for performing their services as commission.
• Capacity: Bakers have a capacity of how many coins they can accept. A baker is ‘over-delegated’ when the delegated coins go beyond their set limit.
• Reliability: Baker's reliability is key, meaning they have a proven track record of paying out reliably and consistently.
• Security: Security means having a secure setup in that they have not acted maliciously in the past (i.e., double baking).
• Tezos Staking Risks

Delegating funds is risk-free, as the tokens are never locked or frozen. This is because token owners delegate their right for a baker to mint blocks on their behalf rather than sending the funds themselves. For delegators, being vigilant about bakers not paying rewards is important. This is because rewards are not automatically distributed by the protocol but by the bakers. However, the community quickly identifies such behavior, and delegators can easily switch to a better baker who doesn’t misbehave.

If a baker behaves dishonestly, the protocol can punish that actor by seizing their security deposit. Such security deposits are in place to prevent Nothing-at-Stake attacks on a PoS blockchain, ensuring participants have “skin in the game”. Security deposits for baking are 512ꜩ and 64ꜩ for endorsing. These deposits are locked up for 5 cycles, roughly 14 days. These deposits are slashed in the case of double baking/endorsing.

The network is alerted of bad behavior with accusations. A baker can make these if they discovers two endorsements have been made for the same slot or if a delegate has created two blocks for the same height. An accusation forfeits the safety deposit and reward of the delegator or endorser at that point in the cycle.

Validator Requirements

Becoming a baker requires both knowledge and specific hardware. The full list of requirements is outlined here.

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