Interpreting Berachain: Evolution from POS to POL and Ecological Flywheel

Author: Francesco Source: substack Translation: Shanooba, Golden Finance

After a year of unfulfilled promises in the Bull Market, Cryptocurrency has a new spirit animal: Bera.

In the highly challenging habitat of Crypto Assets, one project stands out more than others.

This article introduces Berachain, which goes beyond speculation, transforming its protocol's own Liquidity (POL) mechanism's technical complexity into a more easily understandable ecosystem.

What is Berachain?

Berachain is a novel Layer 1 (L1) blockchain.

Contrary to the view that the development of L1 solutions has reached its peak, Berachain, together with Monad, seeks to revitalize and redefine the services that L1 can provide.

This method is in stark contrast to the current trend, where most projects either focus on building Layer 2 (L2) solutions on top of Ethereum, or develop as standalone application chains and Layer 3 (L3) networks.

The decision to innovate at the L1 level is closely related to the most important advancement of Berachain - its innovative POL Consensus Mechanism.

Distinguishing between POL and PoL

Readers may recall the concept of Liquidity (PoL) from the Olympus DAO era, a concept that may evoke mixed emotions.

However, the POL introduced by Berachain represents a unique concept of innovation that needs to be clearly distinguished:

POL= Liquidity Proof
PoL= Liquidity owned by protocol

The Evolution of Consensus

Since the birth of Bitcoin, the Block chain network has been trying to solve the triple dilemma of Block chain, achieving a balance between security, speed, and Decentralization.

In the network of Decentralization, different Consensus Mechanisms are adopted to coordinate the incentive measures of network participants.

Initially, BTC adopted Proof of Work (PoW), requiring Miners to invest in hardware and bear the cost of electricity to solve the encryption challenge and mine new BTC.

POW is a form of encryption proof, where one party proves to others that a specific amount of computational work has been expended.

The POW model was initially adopted by Ethereum and others, becoming the most feasible method of coordinating incentives in the Decentralization network.

However, as the hardware costs and energy consumption rise associated with POW, as well as concerns about centralization of mining rights and long-term sustainability, the industry is beginning to shift towards Proof of Stake (POS) as the preferred Consensus Mechanism.

In POW, validators must purchase physical hardware to mine BTC. In contrast, in POS networks (such as Ethereum), validators are required to participate in block creation and transaction verification by staking a certain amount of native tokens (such as 32 ETH in Ethereum), thus 'participating in it'.

The incentive of validators is consistent with the correct operation of the network: if malicious behavior occurs, validators will lose (be slashed) a portion of their ETH stake.

Transitioning from POS to POL

Although the POS model ensures that validators have interests in the game, it fails to align their interests with the protocol to jointly achieve the goal.

At least at the Consensus level, there is obviously a lack of coordination or deeper involvement in the following aspects:

Ensure the protocol for normal network operation
validators ensure the protocol drives the economic activity of the network

The lack of this collaboration in the Consensus Mechanism has also raised questions about user roles.

This is where POLConsensus of Berachain comes into play.

POL Consensus, based on POS, strategically designs incentives for all network participants (validators, applications, and users) by introducing incentive systems at the consensus level.

The use of incentive measures in the cryptocurrency field has been well-established, with prominent examples such as Curve, Convex, and Redacted demonstrating the power of incentive measures in coordinating interests and expanding product scale.

However, Berachain was the first to directly integrate the bribery system into the Consensus model, ensuring that the collaboration between network participants is rooted in the network infrastructure.

The actual meaning of POL

In this mode, Berachain is building a network where Liquidity and security expand proportionally with the rise of the network, promoting community coordination from the beginning.

The POL system incentivizes all participants, with a particular emphasis on validators, whose active participation is crucial for the success of the network.

To understand the incentive balance achieved through POL, we need to first introduce the Token model of Berachain:

BGT: Bera Governance Token (BGT) is a fundamental component of the POL model. It is non-transferable and can only be obtained by participating in POL. BGT is not just a simple governance token for voting, it represents the most important share of POL rewards: users delegate BGT to validators, and new BGT is only issued as a reward for validators proposing valid Blocks, which they distribute to applications based on received bribes. Users can only obtain BGT by adding Liquidity to LPs with BGT issuance - once received, they can decide whether to use it or destroy it for BERA.
BERA: The gas Token of Berachain, which is transferable and must be staked by network participants to become active validators.
HONEY: Berachain's native USD-backed stablecoin can be minted by depositing different AllowlistCollateral into the vault.

Berachain Flywheel

*Berachain's "modular Liquidity" transforms the ecosystem from a zero-sum game to a collaborative environment, resulting in a flywheel effect for the entire ecosystem: *

Validators interact directly with users, maximizing the BGT delegated to them. Users delegate their BGT to Validators, and the more BGT they own, the more rewards they receive. Validators earn fees from these rewards.
Applications are collaborating to obtain larger BGT rewards for their pools, encouraging users to increase liquidity rather than compete.
Users can choose different options after depositing funds into the pool, and the funds will fluctuate over time. Their rewards will depend on the total stake of assets they have in the pool and the BGT rewards distributed to the validators by the meter.

In the end, validators decide on the distribution of BGT issuance in various pools and protocols, and their strategies may vary.

The protocol can also attract more BGT rewards by using native Token rewards (i.e. **bribes) to incentivize validators. Let's take a look at a practical example:

validators point their BGT to LP of protocol.
Assuming you are FrancescoProject and own FRAcoin. You want to have a strong LP on FRAcoin/Bera.
In doing so, you will decide to bribe validators with X amount of FRAcoin, and then validators will send his BGT to FRAcoin/Bera LP.
Users want to earn BGT, so they will add Liquidity to the LP.

This model requires close coordination between validators, applications, and users to incentivize all parties. Here are the ways in which Berachain participants participate in the flywheel.

validators: validators allocate BGT rewards based on their stake weight, proportional to the amount of BGT delegated to them. Validators' rewards also include bribes from ecosystem applications + rewards from capturing value from Blocks (costs of total rewards, e.g., BERA from gas, HONEY from transaction fees, etc.). In addition to securing the network, validators must also:

Maximize BGT authorization
Direct BGT incentives

Users vote with their wallets: They deposit Liquidity into the whitelist pool and receive LP Tokens. They can stake these Tokens in specific metrics to earn BGT, and then delegate the BGT to validators.

Ecosystem Project: Anyone can use Berachain's native issuance as a source of revenue. Applications can send bribes to representatives, forming a positive feedback loop, incentivizing Liquidity for specific metrics, and distributing more rewards to these applications (e.g., users will see this and choose to deposit more Liquidity into the metrics to earn more BGT and more rewards relative to other metrics).

In this POL framework, the role of validators is becoming increasingly important.

They can establish a direct partnership with applications on Berachain, using bribery to diversify their sources of income. For example, validators can collaborate with the protocol to enhance user incentives, thereby increasing the participation of LP.

Therefore, careful consideration is required when entrusting BGT to validators: due to their interconnectedness with applications and users, they play a crucial role in the ecosystem.

The POS model ensures that validators have interests in the ecosystem, while POL extends this consensus and coordinates the interests of all network participants at the Consensus level.

Although Curve and other protocols use incentives to direct emissions to a single pool, the Berachain ecosystem collectively operates to determine the optimal value flow, thus forming a more comprehensive ecosystem flywheel.

Facing the challenges of traditional Liquidity Providers

POL Consensus also addresses the traditional challenges faced by Liquidity Providers (LPs) by providing multiple reward streams.

BGT distributed by validators
LP Rewards
Additional rewards and incentives brought by bribery

In addition to receiving rewards, LPs can also increase their governance participation by obtaining BGT.

In addition to earning rewards, LP can also gain more governance participation through BGT, further enhancing its role in the network.

POL has also contributed to PoL, which allows Berachain applications to utilize the native issuance of the chain as a source of revenue, instead of paying fees to LP to rent liquidity.

This method simplifies the application process for guiding Liquidity and deposits by aligning with validators and offering higher bribes to attract Liquidity.

Conversely, this can promote the development of consumer-oriented applications beyond Decentralized Finance. These applications will reduce reliance on mercenary capital and leverage the Liquidity of the ecosystem to launch their operations.

The Berachain POL model assumes that as long as there is sufficient incentive to delegate BGT and participate in the network, Liquidity will follow.

Broader Impact and Future Considerations

Good technology can only take you so far.

While technological innovation is crucial, Berachain takes a different approach by focusing on the positive feedback loop within the ecosystem to ensure continuous rise and collaboration.

The scarcest resource in Cryptocurrency is users.

As many people are vying for the same group of users, POL Consensus ensures that Berachain users have better rewards and participation in the ecosystem since its inception. There are many cases of new L2 launches adopting predatory strategies to deal with users, forcing them to lock Liquidity for months in the new ecosystem without any guarantee of rewards or decision-making power.

Berachain rewrote this script so that users can not only exit Liquidity, but also become active and fundamental participants in this field, and play a role in deciding where Liquidity and value should flow in the ecosystem.

Although all previous incentive plans and closed-loop incentive systems have only benefited participants, POL is the first 'protocol layer's scalable incentive system' designed to ensure the long-term success and longevity of the network.

This is in line with Fat Bera's argument that "applications built around PoL will account for the majority of value in the Berachain ecosystem".

Currently, the model relies heavily on the relationship between Berachain validators and BGT delegates. Will this situation continue after the network goes live?

Many people have also emphasized the important role of validators in the ecosystem. Will they eventually become too powerful?

validators' dependence on Block production can also become a single point of failure: What will happen if the demand for Block creation decreases?

Finally, but equally important, many people have raised the issue of devolution of power.

Although Berachain mentioned that 'Liquidity Proof serves the people', will the system operate as expected because most validators and Liquidity pools need to be included in the Allowlist? Or is this just another way to concentrate power in the hands of a few?

Most of the theoretical assumptions of this model must be confirmed in practice.

The success of the POL model will depend on its implementation in the real world and ongoing efforts to ensure decentralization and sustainability.