These are my personal notes on designing thumbnails for my Youtube videos. Keep in my that I'm neither a designer nor a Youtuber.
You Need a Thumbnail
If you want people to click on your video on Youtube you need a custom thumbnail. The automatically generated thumbnails will not work well.
A custom thumbnail doesn't need to be something created with Photoshop, with text on it. It can be a specific frame of the video that you have hand picked as the thumbnail.
The point is, if you want people to click on your video, you must AT LEAST upload a custom thumbnail. You can't really skip this step.
I don't know exactly how Youtube's recommendation algorithm works, but, personally, I don't think I've ever SEEN a thumbnail that wasn't hand-picked. I probably have seen one, many, many years ago, but, when I go to Youtube these days, it's all custom thumbnails. At this point, I believe Youtube simply doesn't recommend a video if it doesn't have a custom thumbnail anymore.
I think it makes sense, because if someone can go through the effort of uploading a custom thumbnail, that at least means they're invested into creating Youtube videos, although I do lament that all I see these days are engagement bait thumbnails, instead of just showing me a frame of the video for thumbnail. I really miss those.
Text on Thumbnails
A thumbnail doesn't NEED text if the image alone is attractive on its own. In many cases, that won't be true, so you need text.
Personally, as much as I hate to admit it, if there are a bunch of items with thumbnails and titles in them, my eyes don't even read the titles, only the thumbnails. This means the thumbnail is effectively the REAL title.
Size of Thumbnails
On Youtube, thumbnails are displayed in many different resolutions. On desktop, they are in a very small size on the side pane sometimes. Other times they are larger. On smartphones, they're often the same size as the screen width. In some cases, they can be even larger if they appear inside the video as cards.
When designing thumbnails, I believe it's important to consider the smallest size possible.
In my screen, this is 168x94px. That's the side pane size on desktop. If your thumbnail isn't clear enough at this resolution, it will fail to convey the message it's supposed to (at least to me), so people won't click on it (at least I won't).
In particular, if you add text to the thumbnail, that means you need VERY BIG TEXT so it's readable even in the smallest resolution possible. Consequently, you'll probably only be able to fit very few words since the text is going to be so large.
Since the thumbnail size varies from device to device, it might be worth considering your target audience, e.g. public that watches on 4K smart TVs may have pretty huge thumbnails, but I'm not sure if there really is any case against designing for the smallest size possible.
Problematic Areas
On Youtube, thumbnails are rounded rectangles and the length of the video is displayed at the bottom-right of the thumbnail.
If you add a rectangular frame to the thumbnail, for example, the corners of the frame will be cropped by the rounded corners. Note that adding a frame to the thumbnail sounds like a problematic use of thumbnails, so I wouldn't recommend ever doing that, but even if you really wanted to do ti for some reason, Youtube wouldn't display it correctly, so there wouldn't be much of a point.
Since the length of the video is displayed on the bottom-right corner, it's a bad idea to have anything important there. For example, don't put text there. It's possible the location of the length may change in some cases, but, personally, I don't recall it ever being anywhere else, not that I had been paying attention to this, so it's probably only the bottom-right corner that is a bad corner to use.
For the record, the top-left pixel of the video length is at the X, Y coordinate 132, 70.Since the thumbnails size is 168x94px, that means around 25% in width or height. An easy way to design around this is to simply make a 4x4 grid, and avoid the bottom-right grid cell.
Thumbnails aren't Thumbnails
On Youtube, thumbnails aren't actually thumbnails, they're cover images.
A thumbnail is a small image that represents a large image or a video.
On Youtube, the "thumbnail" should be the same resolution as the video. So if you have a 1280x720px video, you should have a 1280x720px thumbnail. That's because if your video is embedded somewhere, e.g. if it's shared on social media, before being played, what is displayed is the "thumbnail."
In these cases, the thumbnail is going to be huge.
You Need to "Stand Out"?
One advice I've heard that is worth considering is the need for thumbnails to "stand out."
A Youtube channel called Rule of Thumb analyzed Mr. Beast's videos (you can watch it here [https://www.youtube.com/watch?v=k3GW4mvChL4]) and concluded that Mr. Beast used to "stand out" by using brightly colored thumbnails, however, after he became successful, his competition started copying his success by copying his thumbnail style, so now his whole niche is full of brightly colored thumbnails. To stand out nowadays, Mr. Beast has to use different thumbnails, because everyone else in his niche is doing what he used to do.
I have no idea who is Mr. Beast, or most of the people mentioned in that video, but I assume they're famous enough to be noteworthy, and this sounds like good advice.
To implement this in a practical way, I suppose one way to do it would be to open one of your own videos and look at what is recommended on the side pane. It's possible that this doesn't work while you're logged in because most recommendations will be based on your history rather than their similarity to your video, so you may have to open your video in an incognito window in your web browser instead.
When I tried this, most of the videos recommended we also mine, so it didn't help much. A bunch of random videos. The ones in my niche are actually pretty poorly designed, but they seem to be doing just fine, with thousands and thousands of views. I guess a good thumbnail isn't everything in the world. Wow, I do see a thumbnail of a Mr. Beast video here. I don't feel the slightest desire to click on it.
I suppose what this tells me is that most people aren't very good at design, so if you do the bare minimum of diligence, you can stay ahead of a lot of people, at least as in the Youtube thumbnail design sense.