Practical Guidelines to Choosing a Baker for Your tez
In Tezos, you can delegate your stake to any baker, but remember that they are not the same.
Tezos employs the consensus algorithm called Liquid Proof of Stake, which enables a relatively simple stake delegation and delegation cancellation process. So, what should you heed when choosing a baker? Let’s find out.
What Kinds of Bakers Are There?
You have probably come across terms like ‘public baker,’ ‘private baker’ or ‘corporate baker.’ How are they different? In terms of protocol, i.e. participation in block validation, there is no difference. But there is one somewhere else.
A public baker is different from a private one by functioning as a public staking service promising to share its profits with anyone who had delegated them their stakes. A private one doesn’t offer everyone to delegate their stakes, and though, technically speaking, they can’t forbid you to delegate your tez to them, they are under no obligation to share their baking profits with you.
These days, it is the centralised exchanges that hold the biggest stakes. They offer their users an opportunity to stake tez from their exchange accounts and get profit. If you delegate your tez to such a baker from elsewhere, i.e. directly, you won’t get any profits. This means that an exchange is not a public baker, and only a baker-selected group of people can profit from delegating their tez to such a baker.
A ‘corporate baker’ only means that someone wants to emphasise that it is a corporation that bakes Tezos. Such a baker can be private or public.
How Public Bakers Are Different From Each Other?
Fees. A baker’s fee is a share of profit from staking your tez that the baker keeps as a payment for their services. On average, the profitability is the same across all bakers, yet their customers have varying profits as different bakers have different fees. If the fee is too high or too low, it’s a good reason to start thinking why.
Minimum delegated amount. Bakers can set up a minimum amount they expect to get from a customer, thus limiting the potential clientele. Some accept stakes starting from 1 tez while others from 1,000 tez. Some bakers also set up a minimum amount of payouts.
Stake amount. In short term, the bigger the stake, the less the baker’s profit fluctuates from cycle to cycle. Still, in the long run, the stake amount does not affect profitability, so if the baker’s stake is too little compared to that of their competitors, it’s reasonable to wonder why.
Lifetime. Tezos Nodes measure the baker’s lifetime in validation cycles. A minor stake sum may well mean that the baker is a newbie on the market.
Clientele. TzKT shows the number of addresses that delegated their tez to the baker. A minor stake may just mean that there are not so many customers.
Free space. Each time a baker creates a block or confirms another validator’s block, they have to block a certain amount for 5 cycles as an insurance deposit. If a baker has insufficient funds (no free space), a major stake may result in the baker missing the blocks and getting a smaller reward that they could have with this stake amount.
Efficiency. The situation above may also be caused by technical problems. In a perfect world, a baker has to work 24/7 with no interruptions, but unfortunately, this is not a perfect world.
Payouts periodicity. Bakers set up the payout periodicity. Usually, you’ll get your first reward after 12 cycles (37 days) or 7 cycles (23 days).
Payouts accuracy. Bakers don’t always pay the amounts expected by their customers and can miss the schedule as well. The reasons may vary, yet this information is publicly available and must be taken into account.
Insurance. Baking Bad have implemented full and partial insurance of bakers’ clients. The insurance guarantees that if a baker ceases payouts, misses blocks (which results in profitability plummeting), or changes operation conditions without warning, Baking Bad will cover the losses for a predetermined term.
Involvement in network management. Aside from the right to validate blocks, you also delegate your Tezos governance vote to a baker. So, if you support an update (say, Florence) and your baker doesn’t vote for it, you might want to delegate your tez to somebody else.
Other projects. Some bakers don’t limit themselves to validating blocks and create added value to the Tezos ecosystem. This might be all kinds of projects, from Soundcloud podcasts to Tezos Giga Node. This is also worth taking into account.
Support. You can only contact some bakers via social networks, while others offer support via Telegram chats. The responsiveness level may vary dramatically.
Those were the things you should heed when choosing a baker. It is up to everyone to decide which of those criteria is more important than the others. But no matter what, your choice of a baker should be conscious and well-reasoned.
It’s not the last time we talk about baking, so stay in touch if you do not want to miss anything: