Coquito Tezem, Ergo Sum (I bake Tezos, therefore I am) – a series of articles focused on the economics behind baking. This series is composed by the following articles:

Similar to (I), this article (II) will walk you through the calculations and the expected earnings in the scenario a XTZ holder decides to offer a baking service and accept public delegations.

The scenarios we will be covering are of a different holders with an initial balance of 10K, 100K and 1M XTZ. We will assume that the reader already has a basic understanding of basic concepts, such as overdelegation, inflation, rewards, cycles, and Tezos Liquid Proof-of-Stake. Else, I highly recommend taking a look at them by skimming through some articles, you will the complete list of suggested writings in this Reddit thread.

Backstube um 1880 — Wikipedia

Expected Earnings of a Tezos Baker

A Tezos baker is a token holder that is operating his/her own bakery, and can do so because he/she possesses at least 10,000 XTZ, which is the minimum self-bond required to open a bakery the Tezos world. Another characteristic is that a Tezos baker offers a public service* to other XTZ holders and is willing to accept delegations in exchange of a service fee.

*Note that a baker could decide to solo-bake and not accept public delegations, in that case refer to this article on economics of solo-baking.

In this section, I will calculate how much a Tezos baker, with different initial balances of XTZ, can expect to generate at the end of Cycle 39— in the most optimistic scenario. One can extrapolate to the following Cycles, assuming that the Rolls Distribution percentages do not vary significantly.

The Global Parameters

The global parameters I took are from Cycle 39, you can find the values if you check TzScan:

Global supply of XTZ is the total XTZ in circulation, 764,317,931 XTZ during Cycle 39

during Global rolls is 42,620 , which equals to 426,200,000 XTZ staked

, which equals to The ratio of staked / total supply is 55.7621%

Which gives a Global Self-Bond Requirement of 9.0157% (you can check for other values in this gist)

(you can check for other values in this gist) I will assume that transaction fees (gas prices) are 0 in every block

For simplicity, I will assume the most optimistic case, where endorsement rewards are always 2 XTZ .

. All bakers are charging a service fee of 10%

The bakery will receive the maximum delegation its self-bond can support

its self-bond can support We will ignore time and assume that the bakery can already bake at Cycle 39

Welcome to Thurar Labs: A New Tezos Bakery

Thurar is a Tezos enthusiast who owns 10,000 XTZ. Previously, Thurar was solo-baking, but after observing a trendy bakery called Lyptium Crabs for a while, he decided to open his own and name it Thurar Labs.

Considering the self-bond requirements of the Tezos protocol, the first step is to determine how much delegation Thurar Labs can accept at most. Since we already know the global self-bond requirement at Cycle 39 (9.0157%), we can calculate the maximum delegation by solving the simple equation:

0.090157 = 10,000 / x x = 10,000 / 0.090157 x = 110,917.62

Thurar Labs is able to accept a maximum of 100,917.62 XTZ in delegations. Let’s assume that Thurar Labs receives the entire maximum in delegations during the same cycle. Then if we sum the self-bond:

Self-bond = 10,000 XTZ

Total Delegations = 100,917.62 XTZ

Staking Balance = 110,917.62 XTZ (11 rolls)

Thurar Labs will have a staking balance of 110,917.62 XTZ, which equals to 11 rolls. To find the ratio of Thurar Labs’ rolls compared to the global rolls:

Global Rolls = 42,620

Thurar Rolls = 11 Thurar Labs' Rolls Distribution = 11 / 42,620 = 0.02581%

If the maximum possible block bakings in a cycle is 4096 blocks and maximum endorsement slots is 131,072, then the likelihood of Thurar Labs receiving baking and endorsement slots are:

Thurar Labs' Rolls Distribtion = 0.02581%

Max. Blocks per Cycle = 4096 Likely Received Baking Slots = 4096 * 0.02581% = 1.0572

Likely Received Endorsement Slots = 131072 * 0.02581% = 33.8290

Note that hese values are not possible: Either you get a slot or not, but you cannot get half a slot. Similarly, if you bake a block, you will receive 16 XTZ, if you make an endorsement you will receive 2 XTZ.

But a way one can read these numbers is that for a baker with the same conditions as Thurar, it might take more than a cycle to receive a baking slot, baking an average of 1.0572 blocks/cycle, and endorse on average 33.8290 endorsement slots/cycle over cycles.

This translates to the following baking and endorsement rewards:

Total Baking Rewards = 1.0572 * 16 = 16.9152

Total Endorsement Rewards = 33.8290 * 2 = 67.658 Total Rewards = 84.5732

The total rewards expected to be produced in this cycle would be 84.5732 XTZ. 7.62 XTZ of which belong to the baker Thurar (as the self-bond represented 9.0157% of the Staking Balance) and the remaining 76.95 XTZ must be paid out to the delegators. However, Thurar will first reduce 7.69 XTZ, which is the 10% service fees of the bakery. Considering this, Thurar Labs would make a total of 15.31 XTZ of earnings in cycle 39:

Total Rewards 84.57 → Rewards to Baker 7.62

→ Rewards to Delegators 76.95 (- Fees)

Fees 7.69 Total Earnings for Baker = 15.31 XTZ

Thurar Labs, Leenkath Labs, and Anry Labs

In the previous section, we walked through the calculation process. The following table shows all the numbers broken down, together with the three different cases: