Author: DeFi_Cheetah, former Binance researcher

Translation: zhouzhou, BlockBeats

Editor's Note: This article will provide you with the most comprehensive overview of PoL and its potential impact on the ecosystem, especially the price of BERA. The content covers the basic mechanisms, inflation emission plans, token economic models, and key strategies (or tips) for absorbing inflation pressure. Berachain's PoL mechanism drives ecological growth through liquidity incentives and delegation rewards, creating a positive cycle and capital efficiency, providing liquidity and staking rewards through iBGT and iBERA, and promoting the revival of the DeFi ecosystem.

The following is the original content (reorganized for better readability):

The liquidity proof mechanism of Berachain aims to address the incentive misalignment issues present in traditional Proof of Stake (PoS) blockchains. Under the PoS mechanism, users need to lock assets to earn staking rewards, which leads to incentive misalignment because DeFi projects also require assets and liquidity, ultimately causing them to compete directly with the PoS mechanism. PoL redesigns the incentive mechanism to enhance network security and decentralization while promoting DeFi activities, rather than solely relying on asset locking.

Basic Mechanism

There are two core native assets within the Berachain ecosystem: BERA and BGT:

• BERA is the gas fee and staking token, primarily used for validator selection (see below for details).
• BGT is the governance token (non-transferable, can be exchanged 1:1 for BERA). Additionally, it determines the economic incentives and emission amounts allocated to the reward vault for whitelisted DApps.

BGT can be exchanged (or burned) 1:1 for BERA, but more importantly, BERA cannot be converted back to BGT.

Note: The more BGT validators hold, the higher the rewards they receive each time they produce a block. However, whether they are selected to produce a block and thus earn rewards depends entirely on the amount of BERA they have staked.

Unlike traditional PoS, in the traditional PoS mechanism, validators receive rewards directly from the blockchain for validating transactions, and users who delegate to validators also receive corresponding rewards based on their staking amounts. In Berachain, validators receive BGT (minted and distributed by the Distributor smart contract authorized by the BlockRewardController contract). However, they must immediately allocate most of the BGT to the reward vaults of whitelisted DApps.

Subsequently, various protocols compete for these validators' BGT through bribes (usually in the form of the protocol's native tokens), with the bribery incentive rate related to the emission amount of 1 BGT. The more attractive the bribe, the more likely validators are to direct BGT to the DApp reward vaults offering the highest returns.

For example, users can provide liquidity in certain liquidity pools of the native DEX to earn LP trading fees. Then, by depositing LP tokens into the DEX reward vault for specific trading pairs, users can earn additional BGT minting rewards on top of the LP fee earnings.

After receiving BGT rewards, users can choose to delegate BGT to validators or stake BERA. The BGT emission for validators increases with the amount of delegated BGT.

With the launch of PoL, the number of whitelisted vaults has significantly increased.

Regarding BGT delegation, validators can actively or passively decide which reward vaults to direct the release of BGT, depending on the bribe amounts offered by DApps. Users, as delegators, can choose their delegators based on the validators' strategies and the expected bribes they can earn for the delegators. Therefore, validators that can provide the highest returns for delegators are more likely to receive more BGT delegation.

Regarding BERA staking, stakers contribute to the self-bonding of validators, thus earning a portion of the BGT and BERA that validators earn.

Block Production and BGT Release

Validator selection criteria: Only the top 69 validators ranked by BERA staking amount are eligible to produce blocks (minimum 250k BERA, maximum 10M BERA), with their block production probability proportional to the amount of staked BERA, but this does not affect the BGT release amount for the reward vaults.

BGT release per block: This part is crucial because the locking situation of BERA depends on how the formula is designed.

The release of BGT consists of two parts: Base Emission and Reward Vault Emission.

Base Emission: A fixed amount (currently 0.5 BGT), directly paid to the validator producing the block.

Reward Vault Emission: This part highly depends on the "boost," which is the proportion of BGT delegated to a particular validator relative to the total BGT delegated across the network.

Parameters a and b will affect the degree to which the "boost" impacts the final reward vault release. In other words, the larger a and b are, the more significant the impact of the "boost" on the reward vault release. The release amount of the reward vault is proportional to the weight in the validator's reward distribution formula.

In other words, the more BERA staked, the higher the probability that validators will be selected to produce blocks; the more BGT delegated, the more BGT minted from the BlockRewardController smart contract, which can be directed to more reward vaults, allowing validators to obtain more incentives from various protocols through the reward vaults (in various token forms).

Summary Process

• The top 69 validators with the most BERA staked are eligible to produce blocks.
• They decide how to allocate the BGT release to the reward vaults and earn a portion of the incentive tokens based on the commission ratio, with the remaining portion distributed to delegators according to the reward ratio for each 1 BGT.
• The BGT in the reward vaults will be allocated to users providing liquidity to the relevant liquidity pools.

After liquidity providers receive non-transferable BGT, they can:

As delegators, delegate BGT to validators to earn bribe income provided by the protocol;

Irreversibly exchange for BERA to gain immediate profits.

During the first day of the Berapalooza 2 event, the RFRV submission amount attracted over $500,000 in bribe funds. If this momentum continues and doubles before the launch of PoL, the weekly bribe amount could reach $1 million, forming a massive incentive flow within the Berachain ecosystem.

Meanwhile, Berachain releases 54.52M BGT annually, approximately 1.05 million BGT weekly. Since 1 BGT can be burned to exchange for 1 BERA, and at that time the price of BERA was 8.43, it means that the incentives allocated by Berachain each year could be as high as $8.8 million.

However, it is worth noting that only 16% of the BGT release goes directly to validators, while the remaining 7.4 million enters the reward vaults weekly. Therefore, for every $1 million invested in bribes by the protocol, it can obtain $7.4 million in BGT incentives, creating an extremely attractive ROI (return on investment).

How Bribery Enhances Capital Efficiency

For protocols, this mechanism is a game changer. Instead of directly investing large sums of money to attract liquidity, protocols can amplify the incentive effect through a bribery model.

For users, the annualized returns in the early stages of PoL may be extremely high. To compete for liquidity, protocols will offer substantial BGT incentives, providing rare mining opportunities. If you want to maximize returns, now is the best time to calculate strategies and plan ahead.

Self-Reinforcing Positive Feedback Flywheel

The growth logic of Berachain:

• More BGT is delegated for bribery,
• Validators can obtain more BGT incentives to guide liquidity,
• Liquidity increases, making trading pair liquidity pools deeper,
• Slippage decreases, trading volume increases,
• Higher trading fee income,
• Attracting more BGT releases directed to the corresponding liquidity pools,
• Further driving ecological growth, forming a self-reinforcing flywheel effect.

This mechanism creates a self-reinforcing cycle in which:

• More liquidity → Users receive more rewards.
• More delegated BGT → Validators receive more incentives.
• More validator incentives → Stronger security and alignment with DeFi growth.

PoL creates a positive-sum economy.

Unlike traditional staking, PoL enhances capital efficiency while continuously expanding Berachain's economic activities.

The specific process is as follows:

• Users provide liquidity → Earn BGT → Delegate BGT to validators.
• Validators guide distribution → Incentivize DeFi protocols.
• More liquidity → More users → More rewards → Cycle repeats.

Why This Matters

• More liquidity → Better trading conditions, lower slippage, deeper lending markets.
• Developers are more likely to build on blockchains with stable and growing liquidity.

This flywheel effect ensures that as more liquidity enters the ecosystem, it will attract more users, developers, and capital, thereby enhancing long-term sustainability and network security.

The Magical Tokenomics of Berachain

Regardless of how the team defines it, the core of all tokenomics design ultimately boils down to one thing: minimizing sell pressure and smoothing the launch process.

This can be broken down into two dimensions:

• Inflationary "tap": Partial redemption of BGT for BERA (only "partial" because it is subsidized by incentive tokens from other protocols in the Bera ecosystem).
• Deflationary "drain": BERA staking to qualify for block production, with a higher probability of being frequently selected to produce the next block; BGT delegated to validators for more earnings; the irreversible effect of redeeming BGT (especially since BGT cannot be easily obtained in the secondary market) serves as a deterrent; and due to lower slippage, more fees generated from the additional liquidity provided by PoL, resulting in a deflationary effect.

In traditional POS staking, the selection and bonuses for validators are determined by the ratio of the amount of staked native tokens to the total staked tokens. A small trick is used here: separating gas and security staking from governance and economic incentives, with the key being to allocate the guiding role of economic incentives to a non-liquid token, thereby raising the threshold for receiving economic incentives (i.e., people cannot easily obtain it in the secondary market), thus deterring holders from selling off in large quantities.

For example, veCRV is a typical example of a voting escrow token, but BERA goes further—while veCRV can be obtained through CRV purchased in the secondary market, BGT cannot be obtained in the secondary market nor converted from BERA. This creates a greater deterrent effect for BGT holders—if they hold a large amount of BGT soul-bound tokens and sell off most of them, they will face a high barrier to obtaining economic incentives from ecosystem projects—by providing liquidity to specific trading pair liquidity pools and participating in certified reward vaults.

Additionally, the forked dual-token POS model is also worth noting: validators must stake BERA, but this only means they are eligible to produce blocks, so they must stake more BERA to increase the probability of producing the next block. At the same time, validators also need to obtain more incentive tokens from the protocol to attract more BGT delegators. This dynamic mechanism can create strong deflationary pressure to absorb the significant sell pressure initially brought about by the high-inflation BGT issuance plan. This is because validators must stake more BERA to increase the probability of producing the next block, while users must hold and delegate BGT to achieve high returns.

One fatal risk I can think of is that the intrinsic value of BERA exceeds the returns of BGT, which could lead BGT holders to queue up for redemption and sell BERA. The key to realizing this risk lies in a game dynamic where BGT holders must judge whether the profit from holding BGT for returns is greater than simply redeeming and selling BERA. This depends on how prosperous the Bera DeFi ecosystem can be—the stronger the competitiveness of the incentive market, the higher the returns for BGT delegators.

Infrared Finance - a leading liquid staking protocol with a TVL exceeding $2 billion.

In simple terms, it offers iBGT and iBERA, which are liquid versions of staked BGT and BERA, allowing users to earn staking rewards while maintaining liquidity, which can be used for other DeFi activities such as trading on DEXs or in lending markets.

iBGT is backed 1:1 by BGT, and it is worth noting that unlike the non-transferable nature of BGT, iBGT can be directly transferred. @InfraredFinance operates as a validator, allowing users to deposit PoL assets into vaults to earn iBGT, which can be used within the Berachain DeFi ecosystem.

Users can also choose to further stake iBGT to earn staked iBGT (siBGT), thereby capturing the returns of BGT. siBGT can amplify the returns of BGT, as iBGT holders are more inclined to choose liquidity over yield, creating a multiplier effect on returns among siBGT holders. Meanwhile, iBGT aims to build a monetary premium that reflects the potential utility of iBGT as a liquidity token.

I do not intend to delve into the details of each protocol in the ecosystem, but from Bera's design perspective, it is very DeFi-centric. It is indeed interesting to see how @AndreCronjeTech's @soniclabs and Bera might revive the golden age of DeFi, especially after the collapse of the Luna ecosystem.

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