We present to you, PoL

Bm beras.

We’re very excited to announce the official launch of Proof-of-Liquidity (PoL) on Berachain. This is a major step forward for the Berachain network and marks a transitional period for how consensus, incentives, and liquidity will interact on-chain from this point onwards.

If you’ve been following Berachain’s development and post-launch activity, you likely know the core principles it was built around - to align incentives between dApps, users, and validators with a first-of-its-kind consensus mechanism built with exactly this in mind.

In this post, we’ll lay out the mechanics behind PoL, explain what its launch means for Berachain, and examine some high-level questions PoL aims to answer. 

Let’s dive in.

Introducing PoL (for real this time)

At its most simple, PoL is an extension of Proof-of-Stake (PoS) that realigns incentives between a network’s users, dApps, and validators. To understand PoL, we need to first understand Berachain and its two-token system. BERA handles chain security and BGT manages rewards and governance.

Validators on Berachain must stake BERA to participate in consensus and gain the eligibility to produce blocks, proportional to the amount of BERA staked. Block rewards come in the form of BGT, a non-transferable governance token that users can earn through participation in reward vaults. 

PoL was designed in response to L1s wrapping all of the token’s utility under a single umbrella, leading to scenarios where users are often forced to choose between staking their network tokens or using them to transact on-chain. By splitting utility between BERA and BGT, the network can grow healthily and offer an opportunity for users to participate without incurring any opportunity costs.

The lifecycle of PoL, which at first glance seems like a bit much, isn’t that complicated in reality. When users stake their PoL-eligible assets into reward vaults, which are bespoke smart contracts set up by applications to distribute network emissions and direct incentives to users, they gain access to BGT rewards. This is the only way for users to earn BGT. 

So why was this done? By creating this singular process through which BGT can be earned, the network can more easily manage demand from dApps that wish to incentivize their users. Which brings us back to another crucial aspect of PoL - how do reward vaults work?

Reward vault creation is permissionless but dApps must apply via governance process to get their vault whitelisted. Protocols can have multiple reward vaults, and it’s important to note that a different reward vault contract exists for each PoL-eligible asset. Protocols can leverage the reward vault dynamic and incentivize liquidity however they wish, such as rewarding liquidity providers in a DEX or stakers in a lending market. 

Once a user has staked their assets in a vault, the amount of BGT they earn is based on the user’s share of total assets staked within that pool, and of course, the amount of BGT rewards being emitted to a vault. Remember, not every whitelisted vault will receive emissions. Berachain validators are the ones that delegate BGT emissions to reward the vaults of their choosing, dependent on the incentives offered from dApps. 

In practice, this might look like dApp A promising an incentive rate of 10 protocol-specific tokens in exchange for 1 BGT, and dApp B promising a rate of 7.5 protocol-specific tokens in exchange for 1 BGT. On paper it might look like the incentive rate for dApp A’s reward vault is better, which might incentivize validators to direct BGT emissions to that vault. In reality, it really depends on a validator’s preferences, the underlying dApp, potential utility of this protocol token, and many other factors. 

After a validator has directed BGT emissions towards a vault, they receive these incentive tokens and can take a commission prior to distributing these incentives to their BGT delegators. It’s important to highlight that a validator’s ability to delegate BGT is dependent on their delegation weight, which is essentially a function of a validator’s boost and the total BGT delegated within the network. 

In other words, it’s in a validators’ interest to share incentives with BGT delegators and attract more boost. 

That’s a lot to say that PoL enables an entirely new set of interactions between these three ecosystem participants. Users and dApps dictate the rules and depending on the incentive rate, validators choose to participate and direct the flow of BGT to these groups. 

TLDR?

Validators require BGT delegation to maximize their block rewards, while juggling the efficient direction of emissions to earn incentives and increase their boost. 

Users maximize returns by delegating earned BGT rewards to validators and interacting with BGT-eligible protocols. 

Protocols compete - or work together - to offer the most attractive incentive rates to validators and earn a larger share of BGT emissions, which are then used to attract and incentivize users. 

PoL and beyond

The most exciting part about PoL on Berachain is that it isn’t just a radical experiment, but a carefully and thoughtfully engineered evolution of the consensus mechanisms that came before it. PoL might flip the script on how we think about rewarding ecosystem participants, but the underlying logic and math are well-rooted in battle-tested proof-of-stake paradigms (more can be read in the Honeypaper here). 

We’ve seen over fifty, high quality reward vault proposals hit the forum over recent weeks, and several differentiated strategies from ecosystem teams and dApps. 

Now that PoL is here, the game is changing entirely. 

Users can take advantage of innovative reward vault structures, monitor validator performance, and generally adapt their on-chain behaviors to fit their individual needs in the presence of PoL. 

In fact, PoL proves there’s still room for innovation and net-new approaches to the scalability trilemma of security, decentralization, and scalability. Berachain rebalances the equation and introduces a new set of variables to the discussion. 

Under a system like this, new levels of collaboration can be achieved between an ecosystem’s moving parts. Users don’t just hold BERA and earn BGT, they actively take a stake in the chain and in some way, even dictate validator behavior(s).

If you’ve read The PoL Post from Berachain’s blog or skimmed the docs, you’ll know that Berachain’s long-term vision is about far more than just a consensus mechanism. 

PoL is the first step in validating the idea that blockchain security doesn’t have to exist in a vacuum, and proper incentive alignment doesn’t have to remain a mystery. 

Moving forward, the challenge and opportunity will be to demonstrate that PoL can handle real-world demands: high transaction volumes, diverse dApp use cases, and evolving incentive structures on-chain. 

As time goes on and the Berachain community and broader industry begins to get more of a handle on what PoL is fundamentally, it’s likely we see more teams build and design dApps with a PoL-first approach. Just as other ecosystems have led to teams opting for a more PoS-friendly (or PoW) design, maybe developers look to PoL as a crucial boost in bootstrapping early liquidity or user growth.

So whether you’re a developer looking to build the next big dApp, an LP hunting for yield opportunities, or a validator aiming to secure the network, PoL on Berachain offers something new. 

If you haven’t already, we recommend digging into the Berachain PoL documentation to get more familiar with the technical details, or staying updated through the Berachain Foundation’s X account here.