Triumvirate of tokens

Berachain distinguishes itself with cutting-edge technology, featuring an Ethereum Virtual Machine (EVM) and an innovative Proof-of-Liquidity (PoL) consensus mechanism, setting it apart from the conventional Proof of Stake (PoS) model. This platform is designed to tackle PoS-related issues such as centralization and the impact of token staking on liquidity. Within Berachain's ecosystem, three key tokens play vital roles: BGT as the governance token, BERA as the gas token, and HONEY as the stablecoin, each integral to the functioning of their PoL model.

The PoL system in Berachain is engineered to enhance liquidity, distribute inflation more evenly, and synchronize the objectives of protocols and validators. This strategy has the potential to address the limitations commonly associated with PoS systems, thereby fostering sustained user involvement. At the heart of Berachain's infrastructure are the three tokens - $BERA, $HONEY, and $BGT - which collectively create a versatile platform. This platform adeptly meets the diverse requirements of blockchain users, striking an innovative balance between authority and active participation.

Berachain is an EVM-compatible Layer 1 blockchain that features a unique Proof-of-Liquidity (PoL) sybil resistance mechanism. Designed to boost capital efficiency and liquidity, PoL aligns the interests of infrastructure providers with application developers, driving value to the ecosystem at large.

A key component of Berachain’s PoL design is the Berachain Governance Token (BGT) — a non-transferrable and illiquid governance token. Users earn BGT by engaging with Berachain’s native dapps (e.g. the BEX), enabling them to delegate to validators and actively participate in on-chain governance. Once delegated, BGT becomes a yield-bearing asset as users begin to earn various rewards from the network such as block rewards and “bribes.”

PoL’s design is truly innovative, and will set Berachain apart from other Layer 1 networks, but given its novelty, we are committed to ensuring users have the best possible experience when interacting with the system.

Acknowledging the demand for simplicity and composability in DeFi, we’ve introduced iBGT, the Infrared Berachain Governance Token. iBGT further enhances BGT’s utility by providing a liquid wrapper that simplifies a few complexities of PoL, detailed below.

iBGT Overview

The liquid staking vertical, a $34 billion industry, thrives for one reason: users seek assets that are liquid, composable, and yield-bearing. The Berachain ecosystem is no different.

iBGT is our flagship liquid staking solution for BGT, where each iBGT is backed 1:1 by BGT. Behind the scenes, Infrared operates as a validator on the Berachain network and abstracts away participation in the PoL mechanism for users.

By depositing PoL assets with Infrared, users can take part in various pools to maximize their BGT yields, receiving iBGT in return. Earning iBGT, instead of BGT, enables users to pursue additional opportunities on Berachain or earn boosted BGT staking yield via staking.

To Stake or Not to Stake

Many liquid staking solutions (on Ethereum and other chains) rely on a single token design. Such designs typically involve the use of a rebasing model, which requires the token to be wrapped before it can be used throughout DeFi, resulting in a clunky experience for users and partners.

With iBGT, we’ve embraced a design that gives users a choice consisting of iBGT and staked iBGT, which we believe will improve the user experience, enhance token utility, and make iBGT’s yield more scalable.

iBGT

As highlighted earlier, users earn iBGT by depositing assets into Infrared vaults. iBGT, a liquid version of BGT, does not earn yield natively. Instead, holding iBGT means forgoing BGT’s native yield in favor of using iBGT across the Berachain ecosystem.

iBGT can, and will, be used on DEXes, lending markets, and a host of other use cases available on Berachain. This type of composability would not be possible without Infrared and gives users a novel type of exposure to BGT.

Staked iBGT

Staked iBGT is the staked version of iBGT, which captures all native BGT yields such as block rewards and bribes. But, there’s a twist. Behind the scenes, Infrared allocates all earned BGT to our validators, guaranteeing rewards on every BGT earned by the assets in our vaults. As a result, since only staked iBGT qualifies for these rewards and not all iBGT will be staked, users who stake iBGT enjoy boosted BGT yields.

To simplify: staked iBGT will earn yield from more than one underlying BGT token — creating a yield multiplier.

Why Two Tokens?

By dividing liquidity and staking into iBGT and siBGT, we enhance both the user experience and yield for different user groups. Some of our users will want to pursue opportunities throughout DeFi and some will want to stake and collect BGT rewards. This separation maximizes yields on both sides of the risk curve while maintaining a seamless user experience for users and partners alike.

What’s Next?

iBGT opens new doors for the Berachain ecosystem by building on PoL and BGT’s existing design. Through iBGT, BGT can be integrated into any and all DeFi protocols on Berachain, enabling products that simply weren’t possible before.

Ethereum began as an experiment in whether or not a permissionless and decentralized financial system could be built from the ground up, with little to no intermediation from centralizing third parties. Raising over $18 million in its ICO, Ethereum has grown to become the definitive smart contract network, with the most active DeFi community and most on-chain activity relative to its peers. In recent years Ethereum’s dominance has been challenged and questioned by the growing introduction of modular technology and the rapid adoption of alternative L1s. 

The most popular consensus mechanism for modern blockchains is Proof-of-Stake, with Ethereum being a strong example of how PoS functions at a high level. While Bitcoin has been able to achieve great success with its Proof-of-Work model, the debate isn’t relevant for today’s report. PoW is more dependent on physical hardware, while PoS is more geared towards a token-first model centered around staking which makes it easier for those without expensive hardware to participate.

Managing the balance of tradeoffs between security, speed and decentralization, PoS is able to align validators but falls short in rewarding its users - the backbone of any successful blockchain - and its developers, the ones responsible for creating vibrant ecosystems. Validators of Ethereum stake their ETH to participate in the act of approving transactions or creating new blocks, a feature that’s only accessible to those with 32 ETH. 

Ethereum has done well to grow the largest validator set in all of crypto, with almost 30 million staked at the time of writing, this sum possessing a market value of over $75 billion. Validators maintain the security of the network, putting their staked assets on the line to ensure transactions can be properly validated and included in future blocks. 

Because of the inherent risk presented to validators, they earn a bulk of the rewards that come from being selected to validate blocks. Users, on the other hand, are entirely separate from this chain of command, unable to receive proper reward distribution from the protocol level. Even further, protocols and validators within PoS Ethereum are far from aligned, with protocols unable to improve security and validators separated from the benefits provided by protocols. 

Within Ethereum’s PoS model, there is no collaboration between protocols and the validator set, as there simply isn’t a need to align towards a central goal when incentives for validators and protocols are entirely different and detached from each other. Protocols are probably less concerned with the economic security of the chain they’re deployed on than validators are, just as validators are less concerned with the protocols driving activity as long as it proves valuable to them - this is a growing issue that needs to be addressed. There can't be significant collaboration amongst a decentralized set of individuals without communication, something needs to change.

The utilization of incentives isn’t a new concept, as we first saw this occur in the heat of the Curve Wars, with Convex and Hidden Hand being the two biggest proponents of this system. Berachain would be the first L1 to implement an enshrined bribe system designed to align all parties, taking a variety of lessons learned and folding it into a first-of-its-kind approach in GTM strategy. For the first time ever, validators can diversify their revenue streams and form direct collaborations with the protocols making their work valuable - what good is an ecosystem if there isn’t a sense of teamwork or unity?

PoS is able to help blockchains achieve heightened security, but there’s a small issue not often discussed. In the case of Ethereum, the network exists with a single token model, as ETH is used for both staking and paying for transactions on-chain. If you think about it logically, using the same token for security and transactions does not make sense, given how crucial liquidity is to any financial environment. There’s a reason you can’t use fractionalized Starbucks shares to buy a cup of coffee - no one wants to trade in a share of ownership when fiat money is more accessible and offers zero downsides for the same transaction. 

In the case of Ethereum, users are forced to decide between spending their ETH in order to transact on-chain or staking their ETH to participate in validating the Ethereum network - there’s no option for those that might wish to do both with the same set of funds.

It would make the most sense to offer multiple tokens within a network, mainly to help eliminate any opportunity costs users feel are imposed upon them. While this makes sense in hindsight, this isn’t something the Ethereum team would consider with much significance. Instead, we can build off these inefficiencies and design an economically viable way of managing incentives. 

Introducing PoL as a novel economic model 

Building off the shortcomings of PoS, Berachain’s Proof-of-Liquidity presents itself as a novel consensus mechanism built to incentivize all parties, allowing for Berachain’s security and liquidity to scale linearly. When it comes to growing the security of a decentralized network, there shouldn’t need to be any trade-offs made that affect the user experience for marginal security improvements. 

Berachain has pioneered a new model, one that doesn’t sacrifice on security and works to scale liquidity with the network’s stake - a delicate balance that pleases all actors within a blockchain ecosystem. Utilizing a tri-token model, Berachain is able to support the needs of LPs, standard users, validators and protocols. To better understand the balance of trade-offs achieved, we will briefly explain Berachain’s tokens and their respective functions:

- BGT: The Berachain Governance Token is non-transferable and only earned through liquidity provision on Berachain’s native decentralized exchange, BEX.

- BERA: Berachain’s network token can be used for the payment of transactions, allowing users to spend freely without reducing their capacity to help in network validation thanks to BGT. 

- HONEY: Berachain’s USD-backed native stablecoin, purchasable through a variety of applications or the BEX.

While incentivizing all parties is one of the main draws of Berachain and ideals present within its architecture, it’s important to recognize the priority placed on ensuring validators are treated fairly and properly rewarded. Within the PoL model, value flows directly from the validator set powering Berachain, passing its way through the protocols within the network and ultimately springing from the decisions made by the Berachain user base.

These users vote with their wallets - they provide liquidity and use the applications they want to, which in turn rewards them with BGT, which is sent to validators who reward these protocols in a positive feedback loop. Instead of PoS systems that close out validators from the user base they spend their time and funds securing, Berachain opens the loop up to all ecosystem actors and ensures the delicate balance of incentives continue moving through this loop.

In traditional crypto systems, LPs are incentivized to provide two-sided liquidity to earn a share of a given pool’s volume, though this doesn’t often work out well in practice due to issues like LVR (loss-versus-rebalancing) or the general volatility of nascent crypto markets on-chain, resulting in difficulty for consistent LP profitability. 

In Berachain’s PoL system, it doesn’t have to be that complicated. 

LPs would receive the benefit of BGT distributions, general LP rewards, any applicable rewards from blocks produced and any available validator incentives. By enabling further LP incentivization and providing a backstop in the form of BGT, Berachain is looking to solve problems at the application and protocol layer. If there’s enough of an incentive to delegate BGT and participate in a growing network, it’s natural to assume that liquidity will follow. 

The introduction of an enshrined Berachain ecosystem makes this model more feasible, given the general alignment between protocols that would exist within this collective group. Traditionally, alternative L1s and Ethereum L2s have prioritized ecosystem funds to incentive builders to create applications. All too often, these follow the same trend of reskinned Uniswap and Aave forks. Further into an L1 or L2’s life cycle, more established protocols deploy, bringing a slight liquidity boost and offering more of a marketing kick than anything else. Enshrined ecosystems are a way of aligning a community from day one, rather than having to wait until nine months later after a failed ecosystem fund has made your chain indistinguishable from any of its competitors. 

Users that delegate their BGT to validators earn a portion of distributed block rewards, along with any potential incentives proposed by validators. In an ideal world, validators and protocols would team up to increase the incentive kickback to users, enabling a further increase in LP participation amongst a larger number of users. While the PoL model is mostly novel in its approach to scaling liquidity and security without compromise, the separation between BERA and BGT is additionally useful in making the act of liquidity provision more appealing. While LPs in traditional DeFi protocols are doing it in a purely profit-driven manner, Berachain makes it beneficial as you’re indirectly gaining governance power. 

Learning from the past to build a better future

USV was one of the first to discuss the now infamous fat protocol thesis and its presence within the crypto industry. The basic ideas of this fundamental thesis revolved around the failure of web2 protocols to capture the bulk of the value, letting applications take over and become the largest beneficiaries of the system. Crypto has narrowed the gap between protocol and application layer value consumption, but it still isn’t perfect. If you look even further into the distribution of value present within applications and protocols, the user is often not rewarded proportionally to the immense value they create. 

Incentives and closed-loop incentive systems in DeFi were beneficial to those that participated in the ecosystem - it was never going to serve as an extendable process beyond niche subsectors of DeFi. Curve governance and the demand for veCRV was never a pertinent issue to the value capture of Ethereum as a base layer, let alone the success of Cosmos or Solana and their respective ecosystems. In the increasingly modular world of blockchains, the concept of open-loop incentive mechanisms is more valuable than ever before. The traditional financial system is immensely difficult to govern over, largely because of how interconnected it is and how every cog plays an important role in the great machine. PoL serves as a potential step improvement towards the first open-loop, extendable incentive system at the protocol level. 

It’s difficult to compare Berachain the L1 to Curve the application, but the concept of closed versus open loops make sense with a little context. Concerning Curve (and veCRV specifically), the ability to gain meaningful or significant governance power was useful if you had skin in the game that pertained to Curve, but it wasn’t relevant if your application wasn’t dependent on the success or failure of Curve. 

Curve’s approach hasn’t remained within the walled gardens of Ethereum - it’s alive and well in Berachain’s architecture. Instead of a single protocol’s emissions being directed to a single pool, an entire blockchain has been built with all of its protocols in mind, where users and validators come together to determine where the value flows to next. This can extend to any smart contract within the network, with these same contracts obligated to return some of this back to BGT stakers in order to preserve the loop.  

While Curve was heavily integrated across the DeFi ecosystem and was an extremely core piece of the system as we know it, extending veCRV incentives across the entire crypto ecosystem was never a feasible reality. There’s nothing wrong with a closed-loop incentive system, but it is our belief that crypto can benefit largely from prioritizing collaborative open-loop systems that leave the door open to innovation.

As highlighted earlier, modular blockchains are increasingly a core topic of contention and leading the way for blockchain design at all levels of the tech stack. Interoperable VM environments, evolving consensus mechanisms and shared modular building blocks (see: data availability or shared sequencing) are enabling a world where inter-blockchain communication will quickly become the norm. Now is the time to develop open-loop incentive systems and take advantage of this new paradigm of communication. 

While it isn’t entirely clear where value should accrue in this hypothetical (but increasingly likely) multichain world, it’s undeniable that L1s and L2s will need to collaborate more than ever before to accommodate for the increasingly debated issue of fragmented liquidity. Even though a modular blockchain might be technically superior to its monolithic counterparts, there isn’t a standardized way of solving the fragmentation problem and L2s are quickly becoming more competitive towards each other, the exact opposite system of what modularity was supposed to carry the industry towards.

When protocol ownership is distributed to users from the beginning, alignment isn’t something that needs to be worked on extensively or slotted in a roadmap for future integration - it’s a core feature, one that’s just as immutable as the blockchain it’s built into. 

Some examples of incentive mechanisms across PoS blockchains and how PoL can fill in the gaps

The blockchain trilemma has said that tradeoffs must be made between security, decentralization and speed. This was the consensus prior to the growth of modular blockchain configurations, which have made it possible for blockchains to accommodate for all three without needing to overengineer complex design choices or limit the behaviors of its core user base. Now that developers are able to integrate functionality like shared sequencing layers, data availability laters or even the offloading of proving to dedicated zk proving markets, the game has changed dramatically. 

We mentioned how it’s difficult for L1s and L2s to differentiate on community and product offerings alone, and while this is still the case for some aspects of blockchain architecture, it’s my belief that innovation on this front will open the door for further experimentation around economic incentives. 

There’s another type of trilemma that’s less discussed, but arguably far more relevant than ever before - a practical trilemma of sorts between users, developers and capital. With so many L1s and L2s now competing for very similar user bases and use cases, there needs to be a discussion around not only the incentives required to please all three of these parties, but the methodology used to achieve this.

It’s easy to look at established blockchains like Ethereum and Solana as examples of mature blockchains representing the best of what we can build, but they’ve grown into this position only through the deliberate effort to make it this far. In terms of their architectures and daily usage, these two chains should be recognized as the pillars of excellence for modular and monolithic blockchains. In terms of culture, Ethereum is quickly becoming viewed as a more established, institutional type of chain that’s experienced its respective waves of degeneracy like DeFi Summer. Solana is fresh into its own phase of degeneracy, viewed almost unanimously as the best chain for memecoins and recognized as a casino of sorts, evident through its growth in daily volumes and impressive cultural rebound. Ethereum’s validator set is the largest in crypto, but Solana has built an enviable and decentralized validator set of its own - both are doing quite well across all of these metrics.

The other side of the coin is less easily quantifiable. While Solana’s low transaction costs led it to become more popular for memecoins relative to Ethereum, there’s no evidence to support the idea that this was crafted meticulously by the core developer team - this type of activity can only form naturally, and it’s probably the best form of PR you can receive in crypto. Looking at Ethereum and DeFi Summer, there also isn’t any evidence that the Ethereum Foundation actively sought out to attract hundreds of food farms with ridiculous APYs - once again, this occurred quite spontaneously. 

Berachain stands out as one of - if not the first - blockchains to build with all of this in mind from the beginning. There’s been a collaborative effort between the broader Berachain community and a swarm of passionate developers to align themselves around a central goal, with PoL serving as the overarching north star in this equation. Berachain’s approach isn’t entirely novel or revolutionary on its own, but its deliberate effort to align everyone from the beginning and build out an infrastructure to accommodate for this is what’s so exciting. 

PoL as the potential first properly aligned consensus mechanism with longevity in mind

PoL navigates these difficulties, utilizing BGT as its main reward function, separating the emissions and creating a sustainable revenue stream through traditional dynamics of block validation, with incentives used to enable a secondary market atop core PoS functionality. Beyond all of this, one of the most important questions to answer is whether or not Berachain validators and BGT stakers can maintain a properly aligned relationship far into the future - a blockchain’s block space is only as valuable as its demand for it at any given time. 

While this report won’t get into the dynamics of Berachain’s ecosystem, cross-protocol interactions and other topics related to adoption and usage, we can make an argument that Berachain blockspace will be highly in-demand, especially given the recurring issue of Ethereum transaction costs and a lack of originality present across existing blockchains. If you’d like to explore the Berachain ecosystem in greater detail, here’s a link to an excellent report covering the current state of BeraFi. 

There are a handful of applications that have persisted throughout all of DeFi’s life cycle, but this pales in comparison to the number that have faded away after liquidity mining incentives or have simply seen usage drop off a cliff due to lack of product-market fit. Blockchains offer everything from a secure validator set, ecosystem of applications and obvious utility that’s inherent in blockchain design - this is where Berachain can succeed. 

It’s been difficult for crypto to fulfill the fat protocol thesis, but what if the answer was in front of us the whole time? From my perspective, enshrined ecosystems work in favor of a blockchain, developing an aligned set of applications and loyal users that feel comfortable participating in actions like LPing and delegating, knowing the rewards available. The larger number of users you draw into your ecosystem, the more likely it is they’re converted as well.

The phenomenon can be examined through the most widespread example of an enshrined ecosystem, this being Apple and MacOS. Those that purchase an iPhone or MacBook are almost immediately sucked into the Apple ecosystem, becoming so dependent on it for everything from cloud storage to iMessage functionality that there isn’t much incentive to leave. Apple’s hardware and software design are not technically superior to its competitors, which doesn’t align with the traditional belief that faster and cheaper blockchains will win out, but it does confirm that there’s real value in offering a superior user experience. Users of Apple products enjoy the UI, ease of access and a variety of other ancillary features available to them. 

Going back to the topic of finance more broadly, if you are a financial system of any kind, liquidity is more than likely the #1 factor that goes into crafting a superior user experience. If you are a DEX, you need liquidity for new coins. If you are a lending protocol, you need borrowers to provide the yield for lenders. In the traditional financial system, liquidity is the key to ensuring the stock market continues turning and keeps the global economy running smoothly. Berachain’s enshrined ecosystem is a feature that directly serves PoL, creating an entirely unique flywheel never attempted at the protocol layer.

Exploring the near future of PoL and its effects on liquidity

With all of this in mind, you might be asking yourself how PoL will function in reality, and whether or not a system can be self-sufficient in an industry as volatile as crypto. Ignoring the question of incentives at the protocol layer, we’re stuck wondering how Berachain might behave once mainnet is live, when the users start flooding in and breathing life into the network. Where will they choose to provide liquidity? What type of coins will be launched, and which of these will attract the most liquidity? Will meta flywheels emerge amongst Berachain protocols, with alliances forming to further incentivize LPs in the pursuit of more BGT?

While most of these questions can’t be answered without a live environment of Berachain mainnet upon, they’re very important to consider. As highlighted earlier, L2s have been very interesting to examine due to the heterogeneity of communities, despite sharing very similar architectures and value propositions. As far as L1s go, most of the activity since FTX’s fallout has been centered in Ethereum and more recently Solana, with very little innovation at the protocol or application layer. 

User activity in crypto to-date has been nearly entirely driven by financial pursuits, exemplified by a lack of unique product offerings in the application space despite the numerous advancements in blockchain architecture. We’re becoming increasingly modular, performant and superior alternatives to traditional financial systems, but what will it take to make that great leap? PoL on its own is an impressive step forward in blockchain design, but it wouldn’t be significant without the additional steps taken by the Berachain team to build a complementary structure surrounding it. 

There are a variety of promising, unique protocols building atop the primitives offered by Berachain. To give a short list, there’s Gummi, Infrared, Kodiak, Shogun, IVX and many, many more- how might these teams use PoL to their advantage? Are there hidden synchronicities waiting to be unlocked, partnerships or strategic collaborations that can unlock value and create a truly aligned ecosystem? Numerous attempts have been made in recent months to build L1s or L2s with a community-first mindset, though none have succeeded for an extended period of time. It’s disingenuous to market a blockchain as a place of battleground, an arena where your users are forced to compete amongst each other to extract value from a whitelisted group of protocols. 

In a world where Berachain launches and PoL becomes a dominant alternative to PoS, there’s immense value in this unified ecosystem where value creation can exist within its own sovereignty. There’s frequent debate over cross-chain interactions, infrastructure and solutions designed to bridge applications to new ecosystems. Despite this, we as an industry are far from a scenario where users can access cross-chain liquidity, with easy access between chains for traditional on-chain activities like making swaps, purchasing an NFT or depositing into a new protocol. What if everything you needed to do was situated on one blockchain, situated within an ecosystem where protocols complement each other and share the pie?

With all of this in mind, there’s a question to be asked: what might Berachain resemble at the launch of mainnet? How about three months after that, or even three years? It’s difficult to apply traditional forms of fundamental analysis to crypto, but it’s just as difficult to perform any sort of long term analysis due to its unpredictability. There are zero examples out there to gauge Berachain’s success on - what’s been built over the past two years has never been attempted and PoL is a novel concept that’s yet to be tested in the wild. 

This would maybe give traditional financial analysts cause for concern or confuse them, but to crypto natives it’s the opposite. It’s an exciting time to be a user interested in Berachain, a developer exploring a new idea or a supporter of crypto who likes when novel ideas get released into the wild. Simply put, Berachain is fresh, new and ready to surprise the industry. Berachain’s collaborative approach has been highlighted and it’s evident the chain and its community are extremely competitive in the culture category; combining these two ideals prior to the launch of a blockchain has not been done, and hopefully that’s enough of a reason to let go of traditional mental models and explore what everyone is so passionate about.

The flywheel effect

Since its Testnet launch on January 11, Berachain has experienced remarkable engagement, boasting over 1.5 million wallets and a variety of native decentralized applications (Dapps). As it gears up for its Mainnet launch in Q2, the platform has already attracted interest from over 65 protocols keen on building on Berachain. At its inception, the platform introduced six native Dapps, including:

1. BEX - A platform for swapping and providing liquidity.
2. BGT Station - A governance hub for BGT.
3. Honey - A tool to mint or redeem Honey, the native stablecoin.
4. Bend - A service for asset supply and borrowing HONEY.
5. Berps - A platform for perpetuals.
6. Beratrail - A block explorer.

Berachain's innovative structure separates BERA (the gas token) from BGT (the governance token), thus avoiding the monopolization issues seen in Proof of Stake (PoS) systems. This separation encourages broader participation in liquidity provision (LPing) to earn rewards and delegate, aligning incentives more effectively.

In terms of inflation, Berachain decentralizes it by distributing BGT inflation rewards to active liquidity providers rather than direct stakers, promoting a more equitable distribution of BGT tokens. This design ensures a value flow towards the users.

Furthermore, the platform fosters a collaborative environment where protocols significantly influence validator selection and help accumulate BGT, which can then be used to incentivize delegators through bribes. This collaboration between validators and protocols leverages the flywheel effect, guiding users to delegate their BGT to specific validators. Such a cooperative model not only encourages responsible actions from validators, ensuring network security and enhanced rewards, but also provides users with additional financial incentives to contribute to incentivized liquidity pools. As a result, deeper liquidity leads to increased capital usage and more protocol fees.

The tale of Berachain is still being written, and it promises to be a thrilling saga.

In Berachain's ecosystem, validators and the governance system play a crucial role in setting the reward rates for different methods of earning BGT. Users who delegate their BGT are rewarded with fees in $HONEY, the network's native stablecoin, and they also have the ability to impact how rewards are distributed throughout the system. Notably, BGT can be converted into BERA through a one-way burning process, offering a unique set of economic incentives.

Berachain is strategically positioned to draw in developers and protocols by offering them sustainable methods for building and boosting liquidity. Protocols that succeed in governance votes are rewarded with the inclusion of their smart contracts in the reward system, earning them BGT rewards. This approach enhances the efficiency of capital attraction and utilization.

For its users, Berachain offers an engaging ecosystem where their involvement in liquidity provision directly influences their economic benefits and bolsters the network's security. The platform's design is tailored to avoid the common issue of fleeting forks that often occur with new blockchain launches.

In this ecosystem, validators play a pivotal role. They are at the helm of economic incentives and play a key part in drawing new capital. They have the potential to earn bribes or rewards from protocols in return for directing BGT rewards.

Berachain also tackles the blockchain trilemma – decentralization, security, and scalability – through its distinctive governance model, robust security protocols, and compatibility with the Ethereum Virtual Machine (EVM) on the Cosmos platform.

The platform's community-centric approach has already cultivated a strong and active user base, encompassing NFT holders, diverse community projects, and a wide array of crypto enthusiasts, even before the launch of its testnet.

The Berachain team, composed of seasoned professionals from leading blockchain initiatives, is dedicated to developing a platform that harmoniously balances the needs of users, developers, and liquidity. As they move closer to their mainnet launch later in the year, Berachain stands as a beacon of the possibilities in merging liquidity and security through innovative blockchain solutions.

The Berachain team is composed of young, dynamic professionals who are experts in fields like computer science, type theory, economic game theory, risk management, and enterprise development. These team members have amassed extensive experience in developing and expanding technology teams at leading companies, including Apple, Coinbase, IBM, and Y-Combinator. Their expertise is further enriched by a profound comprehension of the cryptocurrency sector, gained through significant involvement in some of the most influential DeFi protocols.

United by their enthusiasm for Web3, Toybox, and the democratization of decentralized finance, the team is headquartered in Toronto. This core group of engineers is committed to creating state-of-the-art infrastructure that brings decentralized finance within everyone's reach. Their efforts are robustly supported by substantial funding from prominent digital asset investors, hedge funds, ventures associated with centralized exchanges, and strategic angel investors.

We played around with the local testnet the day it launched, and we will be exploring collabs going forward with this community of degens and gigabrains.

The happy day has arrived. Rejoice, one and all, because if you’re reading this, Berachain Public Testnet “Artio” is live.

At long last, we’re excited to reveal Berachain to the world.

First and foremost, the question that’s been on everyone’s mind for months:

Since our inception in 2022, people haven’t known exactly what we do or what the chain is, or why they should care (our fault and kind of by design). So without further ado, let’s get into it.

Berachain is an EVM equivalent L1 built on top of the Cosmos SDK, using Proof of Liquidity (PoL) Consensus, a variant of delegated Proof of Stake.

What is Proof of Liquidity? In short, proof of liquidity is a sybil resistance mechanism meant to harmonize staking and align incentives between security and liquidity. This stands contrary to typical proof of stake chains where users possessing a fixed amount of capital have to choose between contributing to security by staking with a validator, or contributing to on-chain liquidity by providing liquidity in a DEX or lending platform.

In Proof of Liquidity, the only way to contribute towards network security is by first doing the “work” of providing liquidity to a set of DeFi primitives that are built into the chain itself; namely a native AMM DEX, a perps exchange, and a stablecoin lending platform.

The only way to earn BGT, the staking token of the chain which contributes to security, is by providing liquidity to the system. BGT is naturally illiquid and soulbound, and cannot be market bought, only earned.

Validators and governance play a large role within PoL, and effectively control the “rewards rate” for different methods of earning BGT across the chain. Block by block, the validators direct the inflation back into the Berachain ecosystem across multiple primitives, keeping the network liquid. However, this can extend to any governance-approved smart contract on the chain over time.

Each validator can set its own set of incentives and distribution of the BGT rewards it receives across a wide variety of governance-approved protocols. The weighted average of all of these distributions across the ~100 validators in the network will determine the APYs of each pool. The best mental model for this is Curve / Frax gauges, except in this case instead of veFXS/veCRV, it is the average weighting and distribution of BGT across the validator set which determines network wide rewards rates.

Users delegating BGT will earn fees in the form of $HONEY, the native stablecoin of the network from the various protocols that are part of (or become part of) Proof of Liquidity, along with bribes from the validator that they are delegated to (more on this later).

Finally, users can redeem or burn 1 BGT into 1 BERA at any point in time. However, this is a one-way process. Once the BGT is burned, it is gone for good. This gives them a choice between holding the liquid gas token, or holding a token which allows them to earn fees in the form of a stablecoin + bribes + influence the distribution of rewards across the ecosystem, while accruing fees from applications powered by BGT emissions.

So in short, Berachain is fully EVM compatible L1 where users provide liquidity into the chain-enshrined primitives (dex, perps, stable lend, or others voted in by governance) to earn BGT, delegate it with validators to earn fees / bribes, or burn it into Bera. Through their contribution to liquidity on the chain, users bootstrap its security.

Why should developers or protocols care?

Berachain is the first chain with mechanics structured to sustainably enable protocols to build their liquidity base and drive capital efficiency over time.

Protocols who successfully pass a governance vote will have their smart contracts included in the set of contracts whose LPs will receive BGT rewards (in the same way as the dex / perps / lend LPs receive rewards at genesis). This means that a new NFT AMM, on-chain game, SoFi protocol, or any other DApp requiring that extra helping hand in bootstrapping their protocol could launch on Berachain and effectively subsidize their cost of user acquisition by passing a governance vote for their vault / LP contract to receive BGT rewards, thereby giving their LPs emissions in the form of the staking/gas token of an L1 blockchain (in addition to any native token emissions).

In short, protocols are able to attract more liquidity at lower costs. The chain is aligned, as it attracts the best protocols to build on top of it which serve as user acquisition channels. PoL allows protocols building on the chain to become “enshrined” into the base layer and contribute to security (BGT generation) via their users’ liquidity provisioning without modifying user behaviour.

Typically, in bootstrapping liquidity, a protocol will launch a liquidity mining program, in which they pair their own native token against another token, and require users to stake this LP in exchange for emissions in the form of their native token, generally inflating or devaluing their native token. On Berachain, a protocol may work directly with validator(s) to bribe for liquidity in the native dex in the following process:

1. Protocol offers some amount of the native token to validators as a bribe.
2. Validator directs some portion of their BGT rewards to that protocol’s pool on the native DEX, such that LPs will earn emissions in the form of BGT for LPing.
3. Validator’s delegates receive some portion of the bribes.
4. Decreases cost of capital acquisition for protocols, and incentivizes protocols to run their own validators to direct emissions to their own pools.

Why should users care?

Berachain’s private testnet and months of buildup have provided us with a thriving ecosystem. We strongly believe that an ecosystem can get off the ground quickly with effective planning. The basic primitives are built into the chain, discouraging a series of repetitive forks which are normally the short-lived basis of new chain launches. This will be bolstered by the 30+ native protocols and 100+ groups building from other chains which will be deploying on Berachain.

Users can have their stake and eat it too — users who LP will earn BGT emissions, contributing to security, and be able to stake those BGT emissions to help influence the direction of liquidity across the chain, while earning bribes and fees from the network. This means that a user can tangibly impact their own economic incentives by participating in network, at no cost to themselves (eg. A user farming a stable pool LP in the DEX may choose to stake their BGT with a validator directing the majority of their BGT emissions to that stable pool, thereby increasing the user’s effective rewards or earnings on their existing LP)

New game theory always brings out new ways to win in an ecosystem; the tradeoffs between BGT and Bera at different points in an economic cycle will give users an entirely new way to play — is it better to stake BGT and earn more network fees when not much is staked? Which validators will have the best bribes? Will they even reap the rewards of that new liquidity if they accept the bribe?

At times this is a meme, but Berachain has a real community. There are thousands of NFT holders who have already bought into the ecosystem, and multiple projects that have formed their own communities even prior to the launch of this testnet with thousands of engaged users — see Infrared, Kodiak, The Honey Jar, Berachein, Ramen Finance, Beradrome, Beramarket, Goldilocks and more. There are podcasts, community rating services, public goods and a raving group of crypto-natives who are often the earliest users of new and exciting protocols across the space. They’ve been waiting for over a year, and they’re ready to go.

Why should validators care?

Validators are first class citizens in Berachain, controlling economic incentives and reward rates across the ecosystem; an unprecedented role and set of responsibilities for validators across crypto.

There’s an opportunity to attract new capital and engage in a new form of governance. For Cosmos validators, they can now attract delegates and liquidity from the EVM world, which has typically been a major restriction for growth in the Cosmos ecosystem.

This responsibility also brings new revenue streams to validators. Validators on Berachain may receive bribes or rewards from protocols building on the chain in exchange for directing BGT block rewards towards their pools or smart contracts. This allows a validator to diversify their treasury / holdings, receiving exposure to new protocols on the chain at no cost to their own users and delegates.

Why should blockchain purists care?

We talk a lot about how the blockchain trilemma has become a bit of a meme; decentralization turning into a form of regulatary arbitrage, scalability never reaching par with offchain/web2 options, and security being ignored until proven otherwise. The ideal chain probably maxes out on all of these properties, but a more practical trilemma perhaps revolves around users, developers, and capital/liquidity. With that somewhat counterintuitive point, Berachain actually makes meaningful strides in improving 2/3 of these angles, with the last one to be tackled in the future.

1. Decentralization. Since Berachain is built on the Cosmos SDK + uses Tendermint consensus under the hood, there is a validator set of ~100 validators which play a massive role in governance. The majority of Cosmos chains can currently be taken over by their top 3–5 validators. On Berachain, since each validator sets its own individual distribution of BGT incentives (and many will work with protocols on the chain to direct liquidity towards their pools or smart contracts), there will inherently be more incentive for users to delegate with different validators (depending on the other protocols or tokens on the chain which they are supporting). As such, Berachain looks to combat stake centralization by giving validators significantly greater control over the customization of their incentives and revenue streams.
2. Security. Berachain is secured by BGT, which is illiquid, soulbound, and cannot be market bought. As such, in contract to most/all PoS chains, Berachain is resistant to short range attacks. The only way for a user to attack Berachain would be by providing the majority of liquidity across the system for a long enough period of time to work with the majority of validators across the network to direct emissions to their pools and acquire enough BGT to halt the network.
3. Scalability. Berachain is an EVM on Cosmos chain — we’re somewhat limited by the capacity of the EVM, though we are excited about potential improvements to the Cosmos SDK over time (Mega Blocks etc) that will allow us to further improve UX and transaction speed, while maintaining our modular and interoperable structure.

Beyond all else, Berachain is its community — it’s a product of long nights on VC in Discord, CoD games with Dev, rap nights, MC sessions with FW, Honey Jar ceremonies with Jani and the guys, the Honeylist, fudding ourselves, podcast eps, raiding Polaris tech talks, meetups at conferences across the world, typing Bm in Discord, and everything in between.

Let’s see what happens when the liquidity is unchained.