Tezos and Baking – A Different Crypto Approach

Launched by the Tezos Foundation, a Switzerland-based non-profit, in 2017, Tezos (XTZ) continues to be one of the most successful ICOs, after managing to raise approximately $232 million in funds. It represents a technology for deploying a blockchain capable of modifying its own set of rules with minimal disruptions to the network, thanks to the on-chain governance model.

Unlike popular cryptocurrencies like Bitcoin, Ether, or Litecoin, the Tezos blockchain relies on a Proof-of-Stake consensus model, and instead of the traditional mining process, XTZ tokens are created through a process called “baking”.

Baking XTZ tokens – what does that mean?

According to the information available on tezos.com, baking is the action of signing and publishing a new block on the chain. Since we’re dealing with a Proof-of-Stake protocol, Bakers will need at least 10,000 XTZ tokens in order to qualify as delegates. In order to increase their chances of being selected as a Baker/Endorser, they will need to have additional delegates stake.

The system works in a pretty simple manner. At the beginning of each cycle (approximately 3 days or 4096 blocks), bakers for each block are selected and published randomly. For each block they bake, bakers receive 16 XTZ tokens as a reward. In addition to the baker, 32 endorsers are selected randomly in order to verify the last baked block. The reward for each endorsed block is 2 XTZ.

Inflation and block rewards

There is a protocol defined inflation that funds block rewards. The number of XTZ tokens grows at 5.5% per year in order to calibrate the rewards and if 100% of the tokens are delegated, the annual yield will be 5.5%. In order to ensure that both bakers and endorsers are acting in an honest manner, there is a requirement to post a deposit for each block they bake/endorse. Additional protocol amendments are adopted over election cycles (131,072 blocks), or approximately 3 months. The cycles will increase in length as the protocol matures and an 80% quorum is required for governance proposal.

Final thoughts

In 2019, XTZ had been one of the best-performing tokens, rising to $4 on the Bittrex exchange. At the time of writing, the price had retraced to $1.4 as all major cryptocurrencies had been erasing gains. Still, Tezos ranks 10^th on coinmarketcap.com, with  $1 billion in market capitalization. There are more than 700 million XTZ tokens in circulation and based on how the project performed so far, it really has a huge potential over the upcoming years and will certainly be a big competitor of Ether in the smart contracts field.