For those who want to stake Tezos, there are different options available. After going over the basics and determining whether solo baking is suitable, looking into delegated options is also worthwhile.
Series Part I: Tezos Staking 101: Solo Baking Isn't for Everyone
Series Part III: Tezos Staking 101: Baking Reward Structure and Payment Cycles
The Concept of Delegated Staking
Similar to most modern currencies with staking support, users can pool together their holdings and increase their rewards. Doing so removes a lot of friction and lowers the barrier to entry in general. It is a good way for those new to XTZ, or people who simply do not (want to) own 10,000 XTZ as of yet.
With delegated staking, Tezos holders can still earn their rewards accordingly. Not everyone can be a baker, for a variety of reasons. Finding the right baker is crucial in this regard, albeit they all share one crucial aspect.
Delegating one's baking rights via a validator does not impact ownership of the XTZ holdings. This is one core aspect that makes this approach appealing. Users will retain control over their Tezos at all times. Funds remain in the original wallet and address.
This includes some interesting options for hardware wallet users. Most of these devices let users bake Tezos and delegate their rights accordingly. Users gain the best of both worlds: high-level security and convenience.
Some Things to Consider
Over the past few years, numerous validators have come to surface. Those include exchanges, as well as independent operators. Sending XTZ to an exchange for baking purposes is not advised. It is often very expensive in terms of fees, which can range up to 50%.
Although this does make it even more convenient, it also removes the ownership of the XTZ balance. Funds stored in an exchange wallet are not the property of the user at any given time. It is an unnecessary security risk that no one should consider as a first option.
Which Validator to Pick?
When choosing a validator to delegate one's baking rights to, several factors come into play. First of all, bakers have a certain capacity. Given the current number of validators, very few of them should be near full capacity. Spreading the funds across different validators contributes to the ongoing decentralization of this project.
Secondly, it is crucial to keep in mind how long the baker has been around for. Older service providers often carry a better reputation, but newcomers should not be overlooked either.
A third crucial factor is efficiency. Everyone wants to be part of a baker with a high efficiency rating. As the efficiency increases, there is a better chance of receiving timely rewards. An efficiency of AAA or higher is crucial, as can be seen on MyTezosBaker.
The location of one's validator may also be of interest. Although the geographical location shouldn't matter much, some users may prefer a baker closer to their own region. In terms of current and future regulation, that may be something to consider as well.
The Fee Structure
All of the above is fine and dandy, but one cannot overlook the most important statistic. Most, if not all Tezos bakers charge a fee. That is only normal, as they provide a service to others that costs money for equipment and so forth.
When it comes to baking Tezos through a validator, the fees can be all over the place. KuCoin, as an exchange, charges a 50% fee right now. Tez Dispensary charges no fee at all, albeit that situation may come to change further down the line.
Most of the providers with excellent efficiency charge between 8% and 20% in fees. Those fees are deducted from the stake rewards a user's XTZ balance generates.
Currently, the annual yield for baking XTZ is roughly 5.7%. Deduct the fee percentage from that, and one can earn between 4.2% and 5.2% annually without problems. This is very different from keeping money in a savings account, to say the very least.