By separating gas fees and security staking from governance and economic incentives, the motivation for holders to sell off in large quantities has been suppressed.
Author: DeFi Cheetah - e/acc
Compiled by: Deep Tide TechFlow
With the official launch of the POL (Proof-of-Liquidity) mechanism led by @SmokeyTheBera and @codingwithmanny from @berachain, this article aims to provide readers with the most comprehensive overview of the POL mechanism and explore its potential impact on the entire ecosystem, especially the price of the $BERA token. The content covers the basic mechanism, issuance plan, token economic model (Tokenomics), and strategies and techniques for absorbing the highest inflationary reward sources.
The Proof-of-Liquidity (PoL) mechanism of @berachain aims to address the incentive misalignment issues present in traditional Proof-of-Stake (PoS) blockchains. In traditional PoS mechanisms, users need to lock up assets in exchange for staking rewards. However, this model leads to incentive misalignment because DeFi projects built on these blockchains also require assets and liquidity, thus directly competing for asset usage rights with the PoS mechanism. PoL reconstructs the incentive mechanism to prioritize DeFi activities over asset locking while enhancing the network's security and decentralization.
Basic Mechanism
There are two core native assets in the Berachain ecosystem: $BERA and $BGT:
$BERA
- $BERA is the gas and staking token in the ecosystem; it is responsible for the selection of validators (see below for details).
$BGT
$BGT is a governance token (non-transferable) that can be exchanged for $BERA at a 1:1 ratio;
It also determines the economic incentives or token issuance amount that can be allocated to the whitelisted dApp reward vaults.
It is worth noting that $BGT can be exchanged (or burned) for $BERA at a 1:1 ratio, but $BERA cannot be converted back to $BGT.
Note: Validators will receive higher rewards when producing blocks if they hold more $BGT. However, whether a validator is eligible to be selected to produce blocks for these rewards entirely depends on the amount of $BERA they have staked.
Unlike traditional PoS, in Berachain, validators do not directly receive rewards from the blockchain for validating transactions, nor do they receive a portion of rewards based on the staking shares of delegators. In Berachain, validators earn rewards through $BGT (which is minted by the BlockRewardController contract and sent to the Distributor smart contract). However, validators must allocate most of their $BGT directly to the reward vaults of whitelisted dApps (Reward Vaults). In this mechanism, protocols will compete by bribing validators, with these bribes typically offered in various tokens (usually the protocol's native tokens) and setting different incentive rates based on the emission of each $BGT. The more attractive the bribe, the more likely validators are to allocate their $BGT to the reward vaults of the decentralized applications (dApps) offering the highest bribes.
Validators tend to allocate $BGT to the dApp reward vaults that offer the highest bribes. For example, users can provide liquidity for certain liquidity pools in the native decentralized exchange (DEX) to earn LP fees, and then deposit the LP tokens into the reward vault of a specific trading pair to earn additional $BGT rewards. Users can choose to delegate the earned $BGT to validators or stake $BERA, thereby increasing the $BGT emissions for the validators.
With the POL now live, there are more whitelisted options: https://t.co/EC0LUJKGGk
$BGT Delegation: Validators can actively or passively decide how to allocate $BGT emissions to reward vaults based on the bribe amounts offered by dApps. Users, as delegators, can choose their delegators based on the strategies and expected returns of the validators. Those validators that can bring the highest returns to delegators tend to attract more $BGT delegations.
$BERA Staking: Stakers contribute to the self-bonding of validators, thus earning a portion of the $BGT and $BERA rewards earned by the validators.
Block Production and $BGT Emission Mechanism
Validator Selection Criteria: Only the top 69 validators ranked by the amount of staked $BERA are eligible to participate in block production (with a minimum stake of 250,000 $BERA and a maximum stake of 10,000,000 $BERA). The probability of proposing a block is proportional to the amount of staked $BERA, but this does not affect the amount of $BGT allocated to the reward vaults.
$BGT Emission: This part is crucial because the amount of locked $BERA depends on how the formula is designed.
The emission of $BGT consists of two parts: Base Emission and Reward Vault Emission. The Base Emission is fixed (currently 0.5 $BGT per block) and is directly paid to the validators producing the blocks. The Reward Vault Emission is closely related to the "incentive boost," which is the proportion of a validator's $BGT delegation to the total delegation across the network. The greater the weight of the incentive boost, the more significant the impact on the Reward Vault Emission.
In short, validators staking more $BERA are more likely to be selected to produce the next block; validators delegating more $BGT will receive more $BGT emissions and allocate them to different reward vaults, thus obtaining more incentives provided by the protocol through the reward vaults (usually in the form of tokens).
In block production, the top 69 validators participate in block production based on their $BERA staking qualifications and allocate $BGT emissions to reward vaults. The protocol provides bribes to validators through reward vaults, which validators then distribute based on commission rates, with the remaining portion allocated to delegators based on the incentive rate per $BGT. The $BGT in the reward vaults ultimately flows to users providing liquidity for the corresponding liquidity pools. These users, upon receiving non-transferable $BGT, can choose to delegate it to validators to earn bribe rewards from other protocols or directly exchange it for $BERA for immediate profit.
Scale of PoL at Launch
During the Berapalooza 2 event, over $500,000 in bribes were submitted within the first 24 hours of RFRV submission. If this momentum continues and doubles before the PoL launch, the weekly bribe amount could reach $1 million, injecting substantial incentives into the Berachain ecosystem.
Meanwhile, Berachain emits 54.52M $BGT annually, approximately 1.05M $BGT per week. Since 1 $BGT can be exchanged for $BERA at a 1:1 ratio, and the current price of $BERA is $8.43, this means Berachain distributes incentives worth approximately $8.8 million annually. Of this, only 16% of the emissions are directly allocated to validators, while the remaining 84% (about $7.4 million/year) is allocated to reward vaults. Therefore, for every $1 million in bribes, the protocol could receive $7.4 million worth of $BGT incentives, resulting in a very high return on investment.
How Bribery Enhances Capital Efficiency
For protocols, this bribe-based model changes the game. Protocols do not need to spend large amounts of money to attract liquidity; instead, they amplify the incentive effects through the bribery mechanism.
For users, this means extremely high annual percentage yields (APY) in the initial weeks following the PoL launch. As protocols compete to attract liquidity, they will offer higher $BGT rewards, creating incredible "farming" opportunities. If you want to maximize your returns, now is the best time to prepare, calculate, and seize the wave of Berachain PoL incentives.
Self-Driven Ecological Flywheel
The Berachain ecosystem forms a positive feedback loop: more $BGT is delegated due to bribes, leading to more $BGT incentives being used to launch liquidity for trading pairs, attracting more liquidity pool funds, reducing slippage, and promoting an increase in trading volume, which in turn increases platform fee revenue. This further attracts more $BGT emissions to the corresponding pools, creating a self-sustaining growth flywheel.
The Proof-of-Liquidity (PoL) mechanism of Berachain creates a self-reinforcing cycle:
More liquidity → Users receive more rewards
More $BGT delegated → Validators receive more incentives
More validator incentives → Higher network security and synergy in DeFi ecosystem growth
PoL Creates Positive Economic Outcomes
Unlike traditional staking mechanisms, PoL not only enhances capital efficiency but also continuously expands economic activity within Berachain. Its operational model is as follows:
Users provide liquidity → Receive $BGT → Delegate $BGT to validators;
Validators allocate emissions → Incentivize DeFi protocols;
More liquidity → Attract more users → Provide more rewards → Cycle repeats.
Why Is This Important?
More liquidity: Improves trading conditions, reduces slippage, deepens lending markets.
A stable and growing liquidity blockchain is more attractive to developers.
This flywheel effect ensures that as liquidity enters the ecosystem, it attracts more users, developers, and capital, thereby enhancing the long-term security and sustainability of the network.
The "Magic" of Berachain's Tokenomics
Regardless of how various teams design and articulate their token economic models, the core point ultimately boils down to one thing: minimizing sell pressure and optimizing the process of initial capital accumulation. This can be analyzed from two dimensions:
Inflationary Sources
- $BGT partially exchanged for $BERA (the partial exchange is because the funds obtained are subsidized by incentive tokens from other protocols in the Bera ecosystem).
Deflationary Sinks
$BERA is staked to gain eligibility for block production and increase the probability of being selected to produce the next block;
$BGT is delegated to validators for higher returns;
The irreversibility of $BGT exchanges (especially when $BGT cannot be obtained from the secondary market, this mechanism deters holders from selling);
Initiating more liquidity through the PoL mechanism reduces slippage, promotes higher trading volume, thus generating more fees and further enhancing the deflationary effect.
In traditional PoS staking models, the selection and reward increments for validators are usually determined by the amount of staked native tokens relative to the total staked amount. Here, a clever design is employed: by separating gas fees and security staking from governance and economic incentives, the key lies in assigning the distribution function of economic incentives to a token that lacks liquidity. This design raises the threshold for obtaining economic incentives (i.e., people cannot simply acquire tokens through the secondary market), thereby suppressing the motivation for holders to sell off in large quantities.
Taking voting-locked tokens (like $veCRV) as an example, $BERA goes a step further—while $veCRV can be converted from $CRV, and $CRV can be purchased on the secondary market, $BGT cannot be obtained from the secondary market nor converted from $BERA. This design creates a stronger deterrent effect for $BGT holders: if users holding a large amount of soulbound $BGT choose to sell off most of their tokens, they will face a high barrier when they wish to regain economic incentives for development in the ecosystem. They must provide liquidity for certain trading pair liquidity pools (associated with whitelisted reward vaults) to reacquire $BGT and enjoy economic incentives.
Additionally, it is worth noting Berachain's dual-token separation PoS model: validators must stake $BERA, but this only determines their eligibility to participate in block production. Therefore, validators need to 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 $BGT delegators, thereby vying for more $BGT delegation. This dynamic mechanism can generate a strong deflationary effect, effectively absorbing the significant sell pressure caused by the initially high inflationary $BGT emission plan. The reason is that validators must continuously stake more $BERA to improve their chances of producing blocks; meanwhile, users need to hold and delegate $BGT to achieve high returns.
However, one potential fatal risk is: if the intrinsic value of $BERA exceeds the returns from $BGT, then $BGT holders may choose to queue for redemption and sell $BERA. The realization of this risk depends on a game dynamic where $BGT holders need to assess whether the profit from holding $BGT for returns is greater than the profit from directly redeeming and selling $BERA. This further relies on the prosperity of the Bera DeFi ecosystem— the more competitive the incentive market, the higher the yield for $BGT delegators, thus reducing the likelihood of this risk.
Infrared Finance — A Leading Liquidity Staking Protocol with Over $2 Billion TVL
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 for other DeFi activities, such as trading on decentralized exchanges (DEX) or participating in lending markets.
$iBGT is backed by $BGT at a 1:1 ratio. Notably, unlike the soulbound nature of $BGT, $iBGT can be directly transferred. @InfraredFinance operates as a validator, allowing users to deposit PoL assets into a vault to earn $iBGT, which can be used within the Berachain DeFi ecosystem. Users can also choose to further stake $iBGT to receive a staked version of $iBGT (i.e., $siBGT), thereby capturing the returns from $BGT. $siBGT can amplify the returns from $BGT, as $iBGT holders choose liquidity over yield, creating a multiplicative effect on the returns for $siBGT holders. Meanwhile, $iBGT aims to establish its monetary premium, reflecting its potential utility as a liquidity token.
While I do not wish to delve into the details of every protocol within the ecosystem, it is evident from Bera's design that it is very DeFi-centric. Since the collapse of the Luna ecosystem, whether @AndreCronjeTech and @soniclabs can help Bera restore the former glory of DeFi will be a topic worth watching.
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