In a year where few projects have captured attention, Berachain has built a dedicated cult-like community, blending meme culture with real substance.

Many attribute its success to clever marketing and community-building strategies, but behind the fun, there’s innovation driving the excitement. At the core of Berachain’s appeal is Proof of Liquidity (POL), a novel consensus model that aligns the incentives of all network participants - validators, applications, and users - to create an ecosystem-wide flywheel.

This model is anticipated to enhance composability and collaboration within the Berachain ecosystem, streamlining the launch of new projects and bootstrapping liquidity.

In an increasingly competitive landscape, where numerous platforms fight for users and prominence, POL is a noteworthy experiment in incentivizing network participation.

Throughout this analysis, we dive deeper into Berachain, contextualizing POL within the broader evolution of consensus mechanisms. Then, we examine its practical implications for projects building within the Berachain ecosystem, using some of the most prominent ones as use cases.

What is Berachain?

Berachain is a Layer 1 (L1) blockchain distinguished by its innovative POL consensus model, which allows participants to leverage their liquidity as a security mechanism for the network.

This marks a significant departure from the prevailing trend of building Layer 2 (L2) solutions on Ethereum or developing independent app-chain and Layer 3 (L3) networks.

Berachain’s decision to establish itself as an L1 blockchain is intrinsically linked to the unique benefits of its POL consensus mechanism.

Unlike traditional blockchains, Berachain prioritizes the presence of collaborative incentives at the consensus level rather than focusing solely on technical specifications or performance metrics.

Berachain operates with Byzantine Fault Tolerant (CometBFT) consensus, ensuring single-slot finality while maintaining compatibility with the Ethereum Virtual Machine (EVM). This allows developers to build on Berachain without needing to modify their existing code, with some projects that have already expressed their interest in building L2s on Berachain.
Additionally, Berachain’s modular architecture, built on BeaconKit, separates consensus from the execution layer, enabling integration with Ethereum execution clients, such as Geth or Reth, without requiring significant adaptation.

Despite initial skepticism, Berachain has established itself as a real and promising force in the blockchain landscape.

Since its inception in Q1 2022, Berachain has raised over 150 million through Series A and B funding rounds, raising expectations for its launch. The Bartio testnet V2 was deployed in June 2024, with the mainnet launch expected in Q4 2024.

A Brief History of Consensus

Before examining the intricacies of POL, it is important to understand the historical context that led to its emergence.

Over the years, blockchain consensus models have evolved significantly, driven by the need to address the blockchain trilemma—balancing security, speed, and decentralization. Early models focused primarily on ensuring the correct functioning of decentralized systems, while more recent innovations aim to align the incentives of network participants from the beginning.

Bitcoin pioneered the Proof-of-Work (PoW) consensus model, which required miners to expend computational resources (energy) to solve complex mathematical problems and validate new blocks.

This model was revolutionary in its ability to align the incentives of self-interested actors within a decentralized system. However, PoW’s energy-intensive nature and reliance on specialized hardware have raised concerns about sustainability and miner centralization

In response, alternative models such as Proof-of-Stake (PoS) have gained traction.

Ethereum, for instance, transitioned from PoW to PoS in 2022. PoS secures the network using native tokens as collateral (“stake”), with validators risking their stake getting slashed in case of malicious behavior.

Delegated Proof of Stake (DPoS) further allows users to delegate their stake to validators, adding flexibility to the system.

Despite their strengths, PoW, PoS, and DPoS share certain limitations. Two of the most significant issues are:

1. The lack of involvement for other participants aside validators
2. The lack of incentive alignment across different ecosystem participants—validators, applications, and users often operate with divergent goals.

This absence of collaboration has prompted the development of new consensus models that align all stakeholders from the outset, supporting and driving value to applications, with POL being a prime example.

Compared to the previous consensus models, POL block rewards are shared not only with validators but also with applications and users. This way, applications can also benefit from the chain native emission as a source of yield and incentivize user liquidity.

In the next section, we explore POL in more detail, introducing the concept and explaining how this consensus model provides several advantages for projects building on Berachain.

Berachain Tokenomics

Understanding the delicate balance of incentives achieved through POL requires an introduction to the Berachain token model, composed of three distinct tokens:

• BGT (Bera Governance Token): BGT is the centerpiece of POL. It is a non-transferable token that only validators can earn as block rewards. Users can obtain BGT by performing certain actions in authorized dApps (like adding liquidity to liquidity pools (LPs) or borrowing assets). Once acquired, BGT can either be burned for BERA or delegated to validators.
• BERA: The gas token of Berachain, which must be staked by participants wishing to become validators. BERA is transferable and can be obtained by burning BGT tokens.
• HONEY: A stablecoin native to Berachain, pegged 1:1 to the USD. HONEY is minted by depositing whitelisted collateral into a vault.

Through this differentiation, Berachain separates gas/security functions (BERA) from chain rewards (BGT), ensuring that different aspects of the ecosystem are incentivized appropriately.

Proof of Liquidity (POL)

Show me the incentives, and I’ll show you the outcome

Charlie Munger

POL represents Berachain’s innovative approach to consensus, designed to align the interests of validators, developers, and users.

It builds upon DPoS by incorporating a soul-bound token (BGT), which:

• Determines a validator’s reward weight based on delegation
• Incentivizes liquidity provision through reward vaults.

To achieve mindshare in an increasingly crowded ecosystem, networks have extensively used incentives to attract applications and users.

In contrast to traditional incentive mechanisms, which often rely on short-term grants or subsidies, POL shifts the focus of incentives to the long-term, embedding a native incentive system directly into the consensus model.

This ensures that network security and application liquidity are mutually reinforcing and act as an accelerant for Berachain’s application layer, benefiting from native incentives.

Through these efforts, Berachain’s architecture is built with a consumer-centered approach and deeply ingrained collaboration among all network participants:

1. Under a POL model, users delegate BGT to Validators.
2. Based on the amount of tokens delegated to them, a Validator will have a certain reward weight, representing the % of rewards it will receive out of the total emission. Validators earn a fee from those rewards.
3. When a Validator successfully creates a new block, it receives block rewards in BGT tokens and HONEY. Validators then distribute BGT rewards in reward vaults to users according to the liquidity provided in the pool and HONEY directly to users.
4. This way, validators can direct BGT to specific pools, promoting decentralized token emissions and stakeholder alignment. \

To ELI5 POL, think of it like food halls scattered across a city:

• Berachain is the city itself, with multiple food halls.
• Validators are the owners or managers of each food hall, ensuring it operates smoothly and attracts visitors.
• Applications are the food stalls inside each food hall, providing customers specific dishes (services).
• Users are the customers at these stalls—they buy food (traders, who execute transactions) or hang out, eating and drinking (liquidity providers, who stake their assets or provide liquidity for others to trade).

Here’s where the relationship dynamics come in:

• The food hall owners (validators) want to attract more customers to their halls over others in the city. Customers bring foot traffic, energy, and ultimately profit to the halls, but more importantly, they stick around longer if they’re happy, providing stability.
• The stall owners (applications) want the best spots in the food hall to attract these customers. The competition between stalls is fierce, so they negotiate with the food hall owners to secure prime spots or perks that make them stand out to customers.

The POL mechanism is like a new bargaining chip:

• To get favorable placement or lower rent (i.e., better incentives or validator backing), the food stall owners offer a percentage of their earnings (protocol fees) or a share of their products (tokens) to the food hall owners.
• The food hall owners are incentivized to accept these offers, which aligns their success with the success of the stalls. By backing profitable stalls, both parties benefit. In exchange, the stall gets the best spot, attracting more foot traffic (users and liquidity).

This dynamic, through POL, creates a self-reinforcing loop: Validators align with applications that perform well, while applications are motivated to keep growing, keeping both the halls and the city (the network) bustling. Everyone benefits, from users to applications to validators.

Let’s run through a practical example of the different POL steps from a Validator and Liquidity Provider perspective:

Validators

1. Prospective validators must stake an initial amount of BERA (subject to change) to become eligible to produce blocks.

2. For each new block, an Active Validator is chosen randomly, proposing the block.

3. The validator is allocated with the BGT for distribution, which he distributes to different reward vaults according to the incentives received.

Liquidity Providers

1. Liquidity providers might deposit a specific token into a BEX pool.
2. In exchange, they get a receipt token, which they stake in a specific reward vault, making them eligible for BGT rewards. The receipt represents the LP tokens that users can stake into the BGT station to become eligible for BGT rewards (only whitelisted pools are eligible).
3. Liquidity Providers can claim the BGT distributed to the reward holders and either delegate it to an active validator for more incentives or burn it into BERA to make it transferable.

Following these incentives, something interesting is happening: Many Berachain applications are deploying their own validators, such as Infrared, Kodiak, and The Honey Jar, which are currently the validators with the most BGT delegated to them.

Validators assume a more active role in this system, determining how BGT emissions are distributed across various liquidity pools and applications. At the same time, validators want to maximize the amount of BGT delegated to them to increase their reward weight. This acts as an indirect checks and balances on validators’ power, ensuring they ultimately act in the best interest of their delegators.

Those who are interested can have a deeper look at Berachain validators at: https://bartio.station.berachain.com/validators

This model opens up new avenues for collaborations between validators, protocols, and users, each with their self-interests:

• Validators: want to maximize BGT rewards and delegations
• Applications: want to get bigger BGT rewards to their pools to be more appealing to users depositing liquidity
• Users: Want to get more significant rewards from depositing liquidity in a pool or delegating to a Validator

Within this system, the Bera Foundation initially acts as a steward for the ecosystem, operating default dApps (Bex, Bend, Berps) and redistributing fees to BGT holders, thus creating initial demand until more protocols launch.

The liquidity from these initial applications will also be used as the default Reserve Vaults:

1. BEX - Specific BEX Pools
2. Bend - Borrow $HONEY
3. Berps - Depositing $HONEY into Berps Honey Vault

Creating new vaults is permissionless, but to be eligible to receive BGT form validators, they must go through the Whitelisting Process by BGT governance.

To achieve these benefits, actors must work together from the outset through a clever game theory system.

The Game Theory of POL

POL introduces a shift from a zero-sum competition to a collaborative ecosystem-wide flywheel.

An example of this system in practice is the relationship between validators and protocols.

All protocols on Berachain compete for the BGT reward from block production.

Aside from securing the network, validators have to:

• Maximize their BGT delegation
• Direct BGT incentives

Validators decide which protocols and gauges to distribute to based on several factors, such as incentive distribution (profitability), popularity (social alignment) with users, or alignment with delegators.

Applications within the Berachain network can incentivize validators by offering native tokens as bribes, encouraging them to direct BGT rewards toward specific pools. This creates a feedback loop where validators, applications, and users work together to maximize their rewards and promote decentralized liquidity provision.

Here’s a practical example of this system:

1. Validators point their BGT rewards towards LPs of the protocols
2. CastleCap wants to incentivize its $CASTLE and have a strong LP with CASTLE/BERA.
3. To stimulate liquidity, CastleCap will decide to bribe validators with native $CASTLE tokens. Consequently, validators will redirect some of their BGT to the CASTLE/BERA LP to get the bribes.
4. The boosted BGT rewards will make the LP more appealing. Users will want to earn BGT and add liquidity to the LP (e.g., users will see this and opt to deposit more liquidity into the gauge, earning BGT and increased rewards relative to other gauges).

This also leads to a shift concerning how POL affects an application’s tokenomics. Thanks to the native system of incentives, Berachain protocols can effectively use BGT emissions to subsidize their cost and reward their users instead of printing more tokens.

The POL model also contributes to offset traditional challenges faced by Liquidity Providers by providing multiple revenue streams:

• BGT distribution from Validators
• LP rewards
• Additional incentives from bribes

Last but not least, they indirectly increase their governance power by accumulating BGT.

At the same time, POL also contributes to helping applications bootstrap liquidity and deposits by allowing them to offer bribes to validators to attract liquidity. This way, projects can tap into the chain’s native emissions as a source of yield rather than paying liquidity providers to rent liquidity.

The POL model also offers a sustainable solution to ecosystem growth. It allows projects to leverage chain-native emissions rather than rely on short-term incentives or mercenary capital. This collaborative incentive structure promotes long-term growth and ecosystem alignment.

Users play a crucial role in this system, voting with their wallets. Users deposit liquidity into a whitelisted pool and receive LP tokens. These LP tokens can be staked in specific pools to earn BGT, which is then delegated to validators. Users could delegate to validators close to their cause (e.g., helping to bootstrap the liquidity of specific applications), highlighting the importance of validators being involved within the ecosystem.

Through its unique design, the POL model facilitates a comprehensive alignment of interests among all participants, leading to a flywheel effect that enhances value creation within the Berachain ecosystem.

The Berachain Ecosystem/Landscape

The unique mechanisms embedded in Berachain are set to catalyze the emergence of native protocols specifically designed to benefit from its POL model.

Since its inception, the Berachain team has consistently emphasized incentivizing the development of original projects rather than fostering forks of pre-existing ones.

We have previously explored how the POL model enables projects to bootstrap liquidity and protocol-owned liquidity without relying on transient incentives or mercenary capital. This approach represents a substantial shift in blockchain ecosystems, favoring long-term sustainability over short-term capital injections.

A notable commentary from Smokey on this matter underscores this shift:

“While there might still be traditional raises for initial development, the need for reward programs and liquidity mining might shift towards validator incentives. This approach reduces the need to dilute token supplies and leverages the chain’s native token emissions. Berachain anticipates a robust ecosystem for liquidity bootstrapping, including potential public launch events for native tokens that are then used to incentivize validators.”

This is also reflected in their no-grants policy, which contrasts with most ecosystems’ practices nowadays. Through strategic use of NFTs and community-building initiatives, Berachain has positioned itself as a dynamic and vibrant ecosystem, drawing widespread interest.

Within this context, community-building adds value and differentiates projects. With each new user, the network effect expands, amplifying its impact. Ultimately, technology alone is insufficient to guarantee a project’s success, so user adoption is crucial.

Berachain has cultivated an initial user base by leveraging native NFT communities. For a considerable time, holding one of these NFTs was the only entry point into the ecosystem and, for many, the only way to get possible exposure to a possible Berachain airdrop.

The first prominent NFT collection within this ecosystem was the Bong Bears. These NFTs were rebasable, allowing holders to receive future airdropped collections.
These include:

• Bong Bears
• Bond Bears
• Boo Bears
• Baby Bears
• Band Bears
• Bit Bears

However, Berachain’s scope is not confined to NFTs. With the deployment of the Bartio testnet, a new wave of projects is emerging.

The following section provides an overview of key projects within the Berachain ecosystem.

1. Infrared

Infrared simplifies user interaction with POL. It addresses BGT’s non-transferability by offering a liquid version of the token (iBGT).

Users can leverage Infrared to unlock additional yield-earning opportunities.

As Infrared also operates as a validator within the Berachain network, users can maximize their BGT yield through supplementary emissions and trading fees by depositing liquidity into the Infrared vault.

2. Shogun

Shogun is a trading bot facilitating cross-chain trading for Berachain users, utilizing intents to connect native tokens with the broader decentralized finance (DeFi) ecosystem.

It focuses on optimizing Trader Extractable Value (TEV), ensuring that users receive a surplus between the amount requested and the amount received in trades.

3. Kodiak

Kodiak serves as a liquidity hub on Berachain, offering users:

• Kodiak DEX: A non-custodial decentralized exchange (DEX) employing concentrated and full-range automated market makers (AMMs).
• Automated Liquidity Manager (ALM): A “set-and-forget” strategy to abstract POL.
• Incentive Layer: Tapping into POL to incentivize liquidity for the ALM.
• Token Deployer Factor: A permissionless mechanism for creating tokens and seeding initial liquidity on the ak DEX.

4. IVX

IVX is a protocol offering 0 Days to Expiration (0-DTE) options, which expire within 24 hours.

Unlike longer-term options, 0-DTE provides lower costs, higher leverage, and different risk profiles for options writers.

5. Ramen Finance

Ramen is Berachain’s native launchpad. Through this protocol, users can permissionlessly launch tokens on Berachain, bootstrap their liquidity, and ensure fair price discovery.

RAMEN is their native token, used to decentralize the distribution of allocations to project launches. Users must lock RAMEN tokens for 16 weeks to receive gRAMEN and get whitelisted for allocations, reducing the possibility of game allocation through sybilling.

gRAMEN holders will be able to receive token airdrops, or further launchpad-style products boosting their yields.

6. TheHoneyJar (THJ)

THJ aggregates opportunities across Berachain projects, offering an excellent resource for users new to the ecosystem. This takes the form of a “culture hub” where users can learn about new projects and explore their applications. Creators can also benefit from growing their community with Bera native users.

Holding HC NFTs grants access to whitelists, airdrops, and other early-access features for multiple projects.

7. Zeru

Zeru offers a credit infrastructure where Berachain users can obtain zero-collateral loans (ZCLs) based on AI and online reputation. The ZScore, a soulbound token, functions as a credit score, with users able to enhance their ZScore through activities on Zeru. The platform mitigates loan defaults via a Protocol Controlled Value Reserve (PCVR), which acts as an insurance fund.

Beyond borrowing, Zeru integrates several DeFi strategies that users can access either with their funds or through ZCLs. Some examples include:

8. RootsFi

Roots is a decentralized lending protocol (live on testnet) that allows users to maximize yield across the Berachain ecosystem through borrowing, staking, and liquidity provision, unlocking liquidity with a streamlined process that improves the overall UX.

The protocol is backed by Berachain native assets available on BERPS, BEND, and BEX.

Users can collateralize their LP tokens to mint MEAD, RootsFi’s native stablecoin. MEAD can then be staked in the stability pool to earn additional rewards, boosting the ecosystem.

The RootsFi flywheel:

1. Users provide liquidity to whitelisted assets and receive BGT
2. Users can collateralize the assets eligible for BGT within roots, mint (and stake) MEAD
3. By participating in liquidity and staking, users earn BGT tokens
4. BGT tokens can be burned for BERA or delegated to participate in governance. \

9. Beraborrow

Beraborrow is a lending protocol offering liquidity for native Berachain assets, enabling users to borrow NECT, the platforms’ native stablecoin.
Key features include:

• Using LP tokens as collateral: Bex and Berps LP positions can be utilized to mint NECT.
• Arbitrage strategies: Leveraging price discrepancies within the liquid stability pool (LSP) to remain balanced.
• Automated leverage: Utilizing flash loans to open leveraged positions.
• Autocompounding vaults: Specifically, iBGT autocompounding via Infrared.

10. Smilee

Smilee is a decentralized leverage protocol that transforms DEX-style liquidity positions into tradeable options, converting volatility into decentralized products.

The platform supports the creation of various derivatives to improve liquidity efficiency and offers users impermanent gain products to earn yield or speculate on volatility without liquidations.

Smilee leverages a Liquidity to Volatility Engine to build Decentralized Volatility Products. In this way, it recomposes DEX-style liquidity positions to isolate the risk of Impermanent Loss (IL) and transform it into options, finding a way to deliver an inverse IL payout through options.

This provides Smilee users with different strategies. One of its products is new PoL Restaking Vaults (PRV) on Berachain, offering a streamlined solution for liquidity providers and traders to access high APYs and diversified asset exposure. \

This product enhances traditional v2 LP performance (with yields of 1.5x to 3x), ensuring it is one of the first places to earn BGT. Furthermore, users can leverage advanced trading tools to speculate on market volatility with leverage up to 10,000x without liquidation risk.

PRV ensures efficient investment across native protocols like Infrared, Kodiak, Gummi, and Beraborrow while optimizing returns through BEX LP exposure and multiple protocol incentives.

11. EatSleepYeet

There are a few projects that are also building interesting on-chain gaming solutions. In particular, Yeet is a game theory strategy game that solves the problem of users getting rugged by protocols, allowing them to rug themselves through the game dynamics.

1. Players deposit (yeet) BERA into a pool
2. The last player to yeet before the time ends wins 80% of the pool.
3. The remaining 20% is split among 10 random players
4. The more yeets you make and the more YEET tokens you earn
5. Every yeet is subject to a 10% fee, split among YEET stakers, BERA/YEET liquidity pool, and 2% to THJ ecosystem and public good retroactive fund.

Due to the space constraints of this report, we have only highlighted select projects. \
\
Please refer to the Berachain Ecosystem List (Updated June 2024) for a comprehensive ecosystem overview.

Food for Thought

In the increasingly competitive crypto world, the most scarce resource is users.

Rather than focusing solely on technical benchmarks, Berachain leverages POL to create an architecture that incentivizes ecosystem-native applications by engraining a system of incentives at the consensus level.

This creates new dynamics where validators, applications, and users must collaborate to achieve their self-interests and maximize their benefits.

Through a unique branding strategy that blends meme culture with serious innovation, Berachain has carved out a distinct niche. Many community members have risen to leadership positions, allowing Berachain to scale organically while preserving its core ethos.

With competition intensifying, Berachain’s POL model ensures that users are better rewarded for participating within the ecosystem. This represents a departure from traditional, often predatory, incentive structures. Berachain shifts the role of incentives from merely attracting users to making them long-term participants in a self-reinforcing ecosystem.

Users and applications become active participants with increased governance power to determine where liquidity and value should flow and vote with their wallets to delegate BGT to validators.

While POL has been criticized for granting excessive power to validators, there remains a system of checks and balances: validators, driven by self-interest, must engage with the ecosystem to maximize their BGT delegations, thus remaining accountable to users.

The true test of POL’s efficacy will come with the launch of Berachain’s mainnet, where the practical application of its theoretical constructs will be assessed.

As one of the year’s most anticipated launches, Berachain stands out due to its deeply ingrained system of incentives, elevating its ecosystem above others. While many launch with empty networks and are forced to leverage hefty grants, Berachain has been poised to launch since its inception with a vibrant ecosystem of native apps.

The Berachain case is unique for it establishes the conditions for ecosystem-wide collaboration from its inception, representing a fundamental shift from previous models in which consensus primarily secured networks.

This shift introduces efficiency but also centralization, notably through the role of the Foundation and its Whitelisting Process for Validators and Reward Vaults.

Will Berachain eventually manage to decentralize this process?
Or will the launch change the theoretical assumptions behind its functioning?

Will Beras stay in control?
Time will then.

Disclaimer：

1. This article is reprinted from [The Castle Chronicle]. All copyrights belong to the original author [Francesco]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
2. Liability Disclaimer: The views and opinions expressed in this article are solely those of the author and do not constitute any investment advice.
3. Translations of the article into other languages are done by the Gate Learn team. Unless mentioned, copying, distributing, or plagiarizing the translated articles is prohibited.