For example, like most Tezos wallets, TezBox gives users a dropdown of several pre-filled baker options to choose from. TezBox also allows users to enter a custom baker using a delegation key. Though, that carries as much friction as a write-in candidacy in an election. At the end of the day, the pre-filled bakers are going to get the delegates by default of having what is effectively shelf-space in a widely used wallet.

The ‘Premium’ listings component of MyTezosBaker presents a similar paradigm that seems to insulate the top crop of names in the field in terms of new customer perception.

So what’s the problem?

Some may say that this is the fair natural consequence of free-market competition, and that mass-consolidation of the industry to a few outstanding competitors is an apt demonstration of survival-of-the-fittest. That is to say, the smaller bakers had their chance and they couldn’t cut it.

Economics

On the other hand, we must consider that future incentivization of individuals to begin baking operations is important for the expansion and improvement of the Tezos network — so that the network can expand beyond the current <250 distinct bakers to having thousands of bakers and beyond.

Chart of Distinct Bakers (by Cycle) shows a plateau having emerged | from tzscan.io

The wonders of free-market capitalism and the innovation it can bring only thrives with open competition. The movement of small-bakers being priced out of the market by big bakers is anti-competitive. This stymies innovation and free-market capitalism.

We also need to consider that the Tezos network is still in its infancy, and all bakers—including the largest ones—are worse off with huge disparities in policy-making power between all participants. The longevity of the Tezos blockchain and its system of on-chain governance are highly dependent on the continuous growth of new adherents who believe in the distributed participatory nature of the ecosystem. Tezos’ ability achieve such universal acclaim is only threatened by an early degeneration into an oligarchy.

Voting Power

Let’s remember, voting in Tezos is in the hands of the bakers. This was by design, to give those who are closest to the front-lines of the ecosystem and the ones who most acutely aware of its needs, the power to shape it.

However, the theory of a healthy ‘baker-ocracy’ in Tezos assumes that the XTZ delegated (and thus voting power delegated) would be weighted enough towards the hands of a diverse and competitive wide-populous of bakers and not hegemonically dominated by one (or a few) big bakers.

Enter: Institutional Baking

Institutional holders are the largest holders of XTZ and are thus in need of baking services to maximize value (these include custodians, exchanges, and hedge funds). By holding the largest amounts of XTZ, be it through the aggregation of many clients, or simply through proprietary fund-based investments, institutions thus hold the most consequential wild-card power determination in the entire Tezos ecosystem.

Institutions, like everyone else, have 2 main options when it comes to baking:

Start and manage their own institutional baker (as Coinbase has launched for its custody clients, as have some Tezos wallets by integrating their own baker) Delegate to a baker with large enough (institutional) capacity

Each of these options comes with a level of risk that financial institutions would rather do without.

The 1st option is something most institutions would like to avoid. Most exchanges, for example, do not want to take on that kind of responsibility nor resource costs, towards baking for a single blockchain’s asset.

When it comes to voting and power, an institutional bakery would mean a disproportionately high amount of power concentrated towards the institution and their employees of those who merely have custody of the XTZ — not towards an electorate of informed XTZ owners.

Financial institutions would rather avoid getting involved in a blockchain’s politics, and in general, would rather remain governance issue-agnostic.

An institutional baker could always choose to abstain from voting, but as in any democratic body, abstention itself serves as a vote that institutions would rather avoid. For example, a particular vote’s losing party may end up boisterously pointing fingers at the institutions for hoarding such big bags of XTZ and then failing to participate in the ecosystem’s democratic processes.

It could be argued that institutional abstention would mean that the biggest ‘weights’ of XTZ ownership, and thus power, (meant to be distributed across a global grid of bakers) left effectively null, to the detriment of a would-be healthy democracy.

The 2nd option (delegating to a baker) would mean a high amount of trust and risk for that institution to afford to a 3rd party entity.

Financially, institutional actuaries and institutional insurance policy adjusters would sweat at the idea, especially since virtually all delegation services are nascent entities themselves.

Politically, if institutional amounts of XTZ are delegated to those big bakers, by the transitive property, those big bakers would be left with the most of the power in the ecosystem. The public will, of course, see where votes are coming from and will hold institutions accountable for delegating to a power which voted in a controversial manner (and there will always be a disgruntled side after a vote.) Again, political liability is something financial institutions would like to avoid.