How It Works

Tezos operates on the Liquid Proof-of-Stake (LPoS) algorithm. Liquid staking is when the delegated funds are not frozen and the user can withdraw them at any time.

Each cycle the protocol creates a schedule for active bakers. It specifies who signs and confirms the blocks.

An example of a baker's hourly schedule. Green cells mean the baker created and signed blocks, red cells mean they missed their turn. Blue cell mean actions for the current hour, while the grey ones signify future tasks. Source: TzKT.io.

Bakers create blocks once every 30 seconds. The reward for a mined block is 40 XTZ in two parts:

up to 20 XTZ for block creation;
0.002857 XTZ for confirmation; one block can be confirmed by up to 7000 bakers, for a total of 20 XTZ.

The Tezos protocol generates the cycle schedule randomly, but bakers have different chances of participating in building blocks. The probability of receiving a reward depends on the amount of XTZ. Thanks to this mechanism, all bakers receive the same return — around 6% per annum.

Bakers take a fee from the profits of the user-delegators. We have calculated the average commission of the bakers listed on Baking Bad, which is 8%. Under these conditions, delegators earn 5.68% per annum. Bakers, on the other hand, earn 6.66% per annum: 6.17% base profit for baking and 0.49% on delegated funds.