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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.
The easiest way to earn XTZ is through an exchange or specialised lending platform. These services lend your XTZ to borrowers and pay you with yield (APY) for doing so, similar to a savings account. Although keep in mind that cryptocurrency lending services do not provide the same guarantees as traditional banks, and are not subject to the same rules and regulations.
Use the table below to compare rates on XTZ then forecast your earnings using the calculator provided.
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Bitfinex Professional Trading Exchange | 5% | 1.5% | Varies | Variable | Earn now |
CEX.IO Cryptocurrency Exchange | 5% | 0% | Varies | Variable | |
Kraken Cryptocurrency Exchange | 7% | 0% | Varies | Variable | Earn now |
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 yield.
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 yield 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.
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 Nano X, browser wallets such as Atomex, and software wallets (including iOS and Android) like Guarda.
Use Ledger Live to securely stake Tezos and other assets from your hardware wallet.
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:
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.
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 yield earned.
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 yield as the company lends out tokens to others.
Decentralised Finance (DeFi) applications offer another avenue for XTZ holders to earn yield 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.
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:
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.
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.
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.
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