What’s the deal with BGT?

At the heart of Berachain’s model lies BGT, short for Berachain Governance Token. Governance is one of the killer features of DeFi, but participating in decentralized governance can feel like more of a chore, or even a full-time job. Berachain fixes this. 

Very little progress emerged from the frequent debate over worthless governance tokens and how applications return value back to holders. Attempts to solve through fee sharing proposals or plans to reward stakers with increased voting power have been fruitless. 

BGT and application collaboration within the Berachain ecosystem modernizes token value, and revamps governance entirely.

The Berachain token model revolves around two assets: BERA and BGT. BERA is the network token, and BGT is the governance token. BGT can be burned 1:1 for BERA, but BERA cannot be burned for BGT - users must actively contribute to PoL to earn governance rights. 

BGT is also non-transferable, making the experience of governance more personal for users, as opposed to other ecosystems that treat governance token value as an afterthought. This model offers Berachain more freedom in design, removing the strict boundaries of legacy blockchains. User involvement in the ecosystem benefits both the underlying application’s utility and the incentive of earning Berachain’s governance power. 

The flywheel revolves around users delegating their BGT to validators, who then vote on which LP pools should receive BGT emissions. In this constant positive feedback loop, validators must coordinate with both users and applications to ensure that all parties are incentivized. 

PoL’s killer feature is the simultaneous protocol layer incentivization of applications, users, developers and validators. One of the most apparent shortcomings of PoS is the lack of collaboration between all invested parties, where validators are incentivized separately from the users and developers that fuel demand for the blockspace that they secure. 

BGT explores what happens when blockchains actually put the power in the hands of users. This post expands on protocol synergies within the Berachain ecosystem, as well as explores how BGT demand cycles benefit the user experience in a unique way. 

Early Innings of BGT

Berachain defines users, validators and protocols as the three parties that make up the demand base for BGT. Users want to see their actions rewarded with additional governance power, applications want to supplement native emissions with BGT to attract users, and validators want BGT delegations to maximize voting power and revenue. Balance between these actors makes up a healthy blockchain - users transact and take advantage of the opportunities created by applications, while validators ensure everything runs smoothly and securely. 

One of the initial crucial applications for facilitating this flywheel is Infrared Finance. Infrared’s PoL based liquid staking makes it simple for users to deposit BGT into Infrared vaults and earn rewards, made possible through iBGT. 

iBGT gives users the capital efficiency of other liquid staking tokens, with the additional benefit of IRED governance token incentives. Infrared is extremely involved in Berachain’s DeFi ecosystem, which will translate to protocol revenues and fee generation. With this, Infrared unlocks new use cases for Berachain native assets, enabling significant utility for iBGT in the process.

Assuming the core functionality runs smoothly in the wild, applications like Infrared allow low-touch users to interact with PoL while simultaneously raising the skill ceiling for power users. These dApps allow a hands-off DeFi user to ensure their funds are in the right place at the right time, which then creates pockets of opportunity for those that want to go above-and-beyond.

DeFi’s complexity can alienate new users. A quick scroll through Curve shows a myriad of gibberish-sounding pools- weeTH/rswETH, ETHx-wstETH, FRAXsDAI- which leave novices unsure of where to start. Applications like Infrared reduce the minimum knowledge requirement to enter DeFi, while allowing sophisticated users upside through thoughtful mechanism design. 

The flywheels, protocol synergies, and processes of accumulating BGT drive user interactions with Berachain. Every decision matters, whether coordinating to diligence validators or examining optimal BGT farming strategies. Those that seek simplicity will find it, but groups that choose to dive into complexity have opportunities to outperform. 

Infrared is interesting on its own, but when considering the potential flywheels driven through its vaults the possibilities are even more electric. Since the Curve Wars, the ad nauseum social discussions of DeFi led to only a handful of new flywheels, combining forces to create a wonderful mess of leverage and incentives. 

Users that only want extra yield on BGT in the form of iBGT rewards can feel comfortable depositing and boosting yield on Berachain, but Infrared didn’t stop there. Infrared will also offer siBGT, a staked variant of iBGT for users that wish to boost their yield. Where iBGT captures block rewards and incentives, siBGT opens the gates for users to earn additional yield from Infrared’s validator set and its own pool of BGT. 

Infrared discussed flywheels in a recent blog post, covering the synergies between themselves, Kodiak Finance and Gummi. Kodiak is a native liquidity hub for Berachain that will leverage Infrared for its treasury and community flywheels, all central to their pursuit for higher Protocol Owned Liquidity (POL, not to be confused with Proof-of-Liquidity). 

Kodiak’s treasury flywheel works by allocating treasury assets to Infrared vaults in return for iBGT and IRED rewards. In addition, Kodiak will incentivize Infrared’s Gauges to entice increased BGT emissions back to Kodiak pools. Their second flywheel focuses more on community, taking user assets and funneling them into Infrared. Through this the Kodiak community can earn Kodiak emissions, pool fees, iBGT, and IRED simultaneously. 

Infrared will also be integrating with Gummi’s dynamic money markets, creating opportunities for users to leverage iBGT positions and earn boosted yield. It’s only right that Infrared would make use of these core financial building blocks to further increase iBGT utility across the ecosystem.

This sounds ideal on paper, but it’s important to be rational. Any financial market is competitive and just because there are native incentives, doesn’t mean that the inherent competition of decentralized finance disappears. 

Applications will be forced into game theoretical situations where every basis point of offered APYs on their frontend are worth fighting for. They want to reward users more than their peers and do it in a capital efficient way. Validators will compete for user attention and BGT delegations while users will be left somewhere in the middle, grappling with these important decisions. Users must think hard about where they put their funds to work, how long they deposit into pools for, and where they might need to move assets next. 

Closing thoughts 

If you were looking at blockchains from the perspective of professional sports, validators are like the referees, coaches and general managers bundled into a singular, dictatorial unit. 

Blockchains are transparent, fair, and cryptographically secure - but this wouldn’t be the case without validators. Ethereum’s PoS consensus mechanism relies on validators committing their assets to the network to gain access to block rewards and the occasional opportunity to produce blocks. With over 32 million ETH staked, this has been a massive success for the network and validators are happy with earning an estimated 3-4% reward rate paid in ETH for their contributions. 

For most validators, the downside of price depreciation through market swings doesn’t matter as much as it would in the traditional financial world. In crypto terms, 3-4% APY is not very attractive relative to the astronomical returns present in DeFi, but this can be boosted if validators opt into MEV-Boost or restake their ETH through Eigenlayer. These aren’t necessary, but options are there. 

The game theory is different with PoL. 

Validators are intimately involved with both the users and the protocols that depend on them - everyone on the Berachain network has skin in the game through a function of just being present.  Users receive BGT from the protocols, delegate it to validators, and let market dynamics determine what pools grab the larger share of emissions. Validators want to make money just as much as everyone else, though the process of doing this on Berachain is fundamentally different. 

It’s likely that Berachain’s launch will see a plethora of activity from all three of the ecosystem actors, each finding their own niche on-chain. There isn’t a world where users, validators and protocols aren’t all fighting equally as hard to earn more BGT - the incentives are there and waiting. It will become more apparent how these relationships and alliances progress, but the opportunities are endlessly engaging.

Crypto hasn’t even been around for twenty years and we’re all still learning. Berachain saw examples of incentive mismatches on other blockchains and implemented a new system that can fill these gaps. PoS validators aren’t incentivized in any way to interact with the user base - Berachain fixes this. Validators in a PoL network are more incentivized to kick back BGT emissions to users than they are to take it for themselves.

Berachain's mainnet launch will be the first example of a community-driven chain powered by the applications that reside on it - not the other way around. The fat protocol thesis discussed the flow of value to L1s, L2s, and other infrastructure. The fat bera thesis feels like less of a meme than reality, given how integral Berachain's application space is to the success of Berachain as a whole.

It'll be interesting to see how this plays out in the wild, as there won't be a set strategy for everyone. No singular approach will fit everyone on Berachain, and that's a good thing. Users, applications, and validators will all be thinking differently, but in ways that can benefit them together as an ecosystem. Thanks for reading, beras.