Tezos: Passive income from Baking, Endorsing and Delegating.

What is Tezos?

Tezos is a smart contract platform similar to EOS and Ethereum. It was launched in September 2018. Tezos USP (Unique Selling Proposition) is it’s on chain governance or liquid proof of stake, although this has been controversial and challenged by Vitalik, Tezos have some legal challenges and also troubled start. Let’s focus on how we can generate yield from Tezos.

Every blockchain needs to create blocks; there are different formulas to do this. Bitcoin has PoW mining, Pivx has PoS staking and masternodes, and there are still quite a number of another consensus algorithm. Tezos uses banking or lPoS.

How to make passive income with Tezos?

  • Become a baker and endorser
  • Delegate your votes to a baker

How to become a Tezos Baker?

  • Bakers need to have an implicit account and need to register as a baker.
  • Those interested need to apply to become bakers, and they will have time to prepare their safety deposit of TEZ.
  • Bakers need 10,000 TEZ to bake, however, in the future this will be lowered to 2,000. This deposit can be lost if the baking is not done according to the rules.
  • The more coins a baker has the higher the chance to bake a coin. Security deposited is counted in multiples of 10k TEZ.
  • Bakers need to own 8.25% of the total tokens that they have been delegated. The 8.25% requirement will start from 0 in the first 6 months. It is possible to borrow these tokens.
  • Bakers earn the block reward of 16 XTZ, as well as any transaction fees, collected.
  • Bakers are selected at random to bake a blog, so every baker has a chance, when they are selected they earn 16 TEZ
  • Tezos Bakers are also required to endorse blocks; this is an additional stream of passive income for them.
  • Here are more detailed instructions on how to become a Tezos Baker using this Github Registration

What is the responsibility of bakers?

  • Bakers Vote for Tezos proposals.
  • Delegating your vote to a baker should not (only) be about the passive income but also about the baker having the interest of the network put first.
  • Bakers need to have their nodes in order, regarding security patches, network attacks and the uptime of the nodes.

What is the source of Tezos passive income?

Inflation.

16 TEZ is paid the baker who successfully bakes a block. These could be shared with the delegates of their baker, minus the fees charged by the baker. The baker will keep a percentage to pay for operating costs, the delegates will get paid a share of the block reward.

The Tezos inflation is determined by the number of delegated TEX tokens. At 100% delegation, the annual ROI is 5.5% at 40% delegation the ROI is around 14%.

What you need to know about delegation on Tezos.

Find delegates that are transparent about their fee structure and have a commitment to minimal uptime. Delegates keep control of their tokens, there is no need to send tokens, be careful of scammers that ask you to send tokens. Delegation is done from within the Tezos wallet. Once delegated the tokens are held within a bond. Delegate bonds can be transferred at any time, in order to be spent or transferred to another baker.

The actual yield from your Tezos delegate bond depends on your balances when the snapshot is taken. A Tezos account has both an identity and a contract account. The contract account is used for delegation. Delegation is done by the Set Delegate function in your Tezos wallet.

Delegates do not need to have a security deposit, (but bakers do) this means that delegate bonds are not in danger of being lost, but baker security deposits can be lost if the bakers’ act maliciously.

Only delegates with active accounts will get their rewards / passive income. Delegates need to bake/endorse at least one block every 5 cycles and update their security account deposit in order to stay active. Delegates have originated accounts they delegate their vote to a baker for a full cycle which is 4,096 blocks.

How to find a baker:

Tezos passive income strategies

It might be interesting to delegate Your TEZ stack to several bakers rather than just one because this encourages decentralization. If a baking service goes down you will still get returns. When doing this, you diversify your returns from different bakers, all of which will have different fees.

Delegates with more rolls (multiples of 10k TEZ) have a higher chance of baking a block, it is important not to have a few block producers/bakers in control of this process. Once a BP becomes to big it will have too much power.

Learn more on Crypto Passive Income:

Comparing the passive income opportunities on Tezos vs Ethereum vs EOS

Tezos holders can earn a passive income just by staking, the staking wallet does need to be online. At this time it is not possible to do so on EOS, but it in the future there is the REX system. Chintai offers EOS lending through a smart contract, but the token holders lose control of the private keys (learn more: Passive Income from EOS tokens), While ETH tokens can be lent in various ways (learn more: Lending CryptoCurrencies)

Tezos a quick review.

What are the qualities that make a dApp network successful? That question is like asking which animal in the species in the savanna is likely to still be around in the year 3000. I.e It all depends on which environment the dApp network is operating. There are three key attributes that differentiate smart contract platforms.

  • Tokenomics
  • Usage
  • TPS – Transactions per second
  • Consensus, Decentralization

TPS – Transactions per second

At this time the Tezos TPS is 40, although the technical limit is much higher. To compare EOSs ATH was of 3996 and Ethereum’s averages of 7 TPS.

TPS and the consensus model are a balance the more nodes are allowed on the network the lower TPS, this is because there is an additional penalty of time with each node added to the network.

EOS has 21 nodes doing the baking, this is quite centralized and makes it easier to shut down than Tezos. There is no right and wrong when it comes to setups, each step provides strengths in some areas and weaknesses in others.

Usage

I could not find any obvious dApps developed on Tezos. A discussion on Reddit mentioned a few ones in the pipeline. You can checkout dApp radar for the active applications on ETH, EOS and Tron.

Consensus, Decentralization

On Tezos it is easier to become a baking node then it is to become a block producer on EOS. Mining Ethereum requires hardware, but like Tezos baking, anyone can do it. Being elected as a BP on EOS is no easy feat and is restricted to those with a lot of resources.

However in practice if a regulator (state authority) wanted to take down a network such as Tezos they would not try to DDoS it all they would do is make it illegal to run a node. 99% of bakers would drop their baking immediately if this was the case. Decentralization has a place when the threat source is from a non-state actor.

Conclusion

Tezos potential for passive income depends on the number of bakers and delegates, the number of dApps being run on the platform, the number of users and the price of the token.

More info:

Not investment advice. Not financial advice. Consult your financial advisor. Not a recommendation to buy, sell or hold. The staff of this site may own these digital asset/s mentioned on this page. Investing is risky and you may lose all your capital. See full disclaimer.

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Author: Jim Reynolds
Jim Reynolds. Is passionate about finance, passive income and cryptocurrencies. He writes about his passions on NodesOfValue.com. He has worked in the tech and financial industry for a few decades. He holds a masters in business admin and a bachelors in IT. All his writings are not investment advice.

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