How does the fishing mechanic work?
Any critter that is an insect can be used as bait. This includes worms, fireflies/lightning bugs, butterflies, grasshoppers, and scorpions. I generally go for worms followed by fireflies, based on how common they are while still having a decent bait %. One variety of butterfly is as good as Master Bait (50%), but it's rare.
Bait consumption is a random chance separate from rod and bait %'s. There is an accessory (Tackle Box) which reduces bait consumption chance, and I think there's also a potion that does the same thing.
Bait % is added to the rod's power %, similar to bows' damage being combined with the arrows' damage. The combined value affects your likelihood to get a higher-rarity fish and how quickly fish bite. I think some of the rarest fish are unobtainable without a high-power rod and/or high-value bait.
I highly recommend using a Sonar Potion while fishing. It tells you which fish is on the hook, so you can let the Bass just keep on swimming. It's crafted from bottled water + waterleaf + coral at a table with a jar on it.
It's worth noting that some fish are fished out of honey and lava instead of water, so give that a try, too!