What is baking?

“Baking” is just a fancy name we use in the Tezos community for the same process that’s called “staking” in other PoS networks. And staking is basically the act of validating network transactions and producing new blocks with the help of staked (locked in a smart contract) native tokens. 

Just as expected, generating blocks on Tezos garners monetary rewards. 

What is delegation?

Anyone (with a running Tezos node) can be a baker. But not all network members want to pursue this career. The delegation mechanism exists to facilitate active participation of all token holders in the governance and earning rewards without everyone having to maintain their own nodes.

Token holders may delegate their tokens to other people. Such bakers command these pools of staked assets and receive baking rewards. And then the baker redistributes the rewards proportionately among all the people who trusted him their stakes.

As Tezos is a liquid PoS network, XTZ are always liquid, wich means they can always be moved or exchanged even if they are staked. Unlike other PoS networks there is no lock up period for delegates.