In Tezos, the creation of blocks on the chain is called “baking,” and there is a formula for figuring out how many Tezos token rewards can be earned if you participate in the process of securing the network and signing blocks. Essentially the returns will average from 5-10% annually, but there is a way to break down the numbers and see how the rewards fluctuate as the number of bakers increase or decrease over time.
The math very roughly looks like this:
Your Tezos Holdings x Bakes Per Cycle = Rewards
For example, consider the following:
10,000 x 0.076 = 760
If your 10,000 tokens were “baked” for an entire year, you’d end up earning about 760 new Tezos tokens by the end of the year. Obviously there are many more variables that can affect earnings, and the return amounts will evolve as the chain matures and real world testing is observed.
The total number of bakers will most likely increase, of course, as Tezos becomes more popular, but that doesn’t mean your rewards will be minimal. On the contrary, as the transactions increase and popularity increases, baking will be very profitable. At the very beginning, the rewards will start out high since the number of Tezos tokens being actively baked on the network will remain fairly low. As time moves on, the number of tokens being delegated to bake or self-bake will increase which will drive down the reward. The absolute minimum is just about 5.5%, which can be considered the lowest annual return possible under the current protocol if 100% of tokens were baking.
Here are some charts to break it down. These calculations are based on the nice round number of 10,000 tokens.
Here is the same chart below but with the actual return in the number of tokens you can expect rather than just the percent. Remember, this is based on the premise that you are baking 10,000 tokens. Your results will vary based on the number of tokens you are baking.
Nobody knows exactly how much of the network will be baking. Conservative estimates say anywhere from 50% to 70%, but it could be much lower than that to begin with. If you want to start making the largest return possible, then you should intend to start baking as soon as Betanet becomes active. It’s entirely possible that the network will start out giving around 20% annual returns until the number of Bakers increases.
Feel free to click the source link below and play around with the numbers. You’ll have to save a copy of the spreadsheet to your Google Drive before you can edit the values. Note that the “Your Tezos Holdings” value cannot be less than 10,000. This is due to the fact that the calculations are based on the number of Tezos tokens required per roll. If you own less than 10,000, as many people will, you can delegate your Tezos baking rights and still earn rewards similar to the numbers shown above. For example, baking 5,000 tokens using a delegation service would yield roughly the same return percent as listed above, but half the number of actual tokens as shown in the second chart. We’ll cover delegation in another post very soon.