Ooga booga! Hope all of you have been enjoying your experience on bArtio. Today’s post will cover the basics of Proof-of-Liquidity (PoL) and why it’s so pivotal to the Berachain experience. Let’s get silly.

The Ethos of Proof of Liquidity 

In a world dominated by Proof of Stake blockchains, capital allocators and users balance liquidity and security. Place too much weight in security, and find yourself with a ghostchain. Place too much weight in liquidity, and find yourself negotiating with North Korean hackers. 

Proof of Liquidity is, fundamentally, a bet on the ability to transform this balance into a perfectly weighted coin - liquidity and security scaling in tandem as the network grows. 

However, I’ll go so far as to say the quiet part out loud. I don’t think anyone cares about security anymore as a concept, whether restaking or basic chain security. As a society we resigned ourselves to the belief that if we print enough tokens, and private investors stake them, all will be right in the world and the chain(s) will be safe. I don’t necessarily agree with this school of thought, but this also isn’t the hill that I’m willing to die on.

I’m willing to die on a very different hill that ties into liquidity and I’ll fud my own bags to make the point. 

I regard the infrastructure layer as value extractive, and think it has accomplished very little over the last few years. I also strongly believe that a chain is little more than the sum of the applications built on top of it. 

Proof of Liquidity is an accelerant for the application layer of Berachain. 

Berachain is the first example of a decentralized blockchain that mechanistically incentivizes the flow of rewards towards applications and builders as part of block production.

In order for crypto as an industry to scale, we need to see a growing wave of applications that could only exist on-chain, differentiated from anything that we’ve seen in web2. 

Proof of Liquidity enables any application on Berachain to tap into the chain’s native emissions as a source of yield, putting power back in the hands of the applications and the users who are actively growing the on-chain ecosystem.

In a world where Proof of Liquidity is successful, I expect the default launch for a new application will involve tapping into PoL emissions to turbocharge yields and user acquisitions, allowing hundreds if not thousands of applications to successfully reach breakout velocity - increasing the number of shots on goal for truly category defining crypto applications on Berachain. 

And the beautiful thing about it is that all of this takes place in an entirely decentralized and meritocratic system. Proof of Liquidity is for the people. The system is governed by those who have contributed their own liquidity to the ecosystem, and demonstrated their willingness to put skin in the game. 

Ultimately, it isn’t your inclusion in the “cabal” or your degree of “Eth alignment” that causes an application to succeed in a Proof of Liquidity powered world. PoL doesn’t discriminate, whether you’re a serial builder from a top school, or a first time hackathon participant from a developing country who just shipped their first dApp. 

Proof of Liquidity is meant to serve as the canvas for infinite economic games. And as a wise man once said - show me the incentive, and I’ll show you the outcome. Berachain’s got more than enough of those to go around.

The PoL Primer

PoL is Berachain’s novel consensus mechanism that revolves around three major participants: validators, users, and applications. Traditionally, consensus mechanisms like Proof-of-Stake and Proof-of-History only focus on growing a network’s economic security; interests between these three major participants are not aligned at the protocol level. On Berachain incentives are aligned from day one.

Berachain utilizes a model that consists of BERA, BGT, and HONEY. Users transact in BERA, trade tokens for HONEY (Berachain’s native USD-backed stablecoin) and earn BGT by providing liquidity on the network. Short for Bera Governance Token, BGT is the glue that holds everything together. BGT is non-transferable, and cannot be bought or sold; the only way to earn BGT is through interacting on-chain and participating in Proof of Liquidity. 

BGT stands out against other tokens because of its value within the Proof of Liquidity system. A standard governance token is generally used for one thing: voting on a protocol’s forum. This isn’t exciting and doesn’t capture value from the chain’s growth, which causes a lack of demand for most governance tokens. Governance is crucial to distributed networks, but users don’t want to participate in the process as it stands today. 

With BGT, the users that contribute the most value to Berachain are in control of the lion’s share of rewards. It’s been said that people vote with their wallets- on Berachain, users vote with their BGT. 

Clearing some things up

Before digging into PoL, there are a few foundational pieces of Berachain that deserve definitions - reward vaults, incentives, and delegation weight. 

On Berachain, reward vaults (previously referred to as gauges) are smart contracts that let users stake specific assets to earn BGT rewards. Because BGT is only earned through providing liquidity, reward vaults act like gates to the PoL ecosystem. 

The basic order of operations is as follows: users deposit liquidity on Berachain and receive LP tokens, which are then staked in a specific reward vault. This position earns users BGT, which can then be staked in BGT Station. 

When users deposit into a pool, they might choose one option or another based on the amount of rewards they receive. It’s up to users to monitor their on-chain liquidity and make choices that best benefits them. They must decide when they want to provide liquidity, analyze reward quality based on available options and determine when to stop providing liquidity.

Not all reward vaults are the same; a user’s ability to earn BGT stems from their share of total assets staked within the reward vault and the amount of BGT validators are actually emitted to the reward vault.  Blocks and receive BGT, which is only made useful upon directing BGT rewards to various reward vaults. 

Certain reward vaults might offer more rewards than others, and it’s up to users to decide what the fair return is for their risk taken. Reward vaults are able to offer more rewards based on the amount of incentives provided to them from validator-directed rewards and protocols. This may fluctuate depending on validator selection choice or the amount of liquidity needed from these protocols, as week-to-week changes in TVL may indicate a higher or lower necessity to incentivize reward vault deposits. 

Incentives are defined as creative and customizable marketplaces for a validator’s BGT emissions. When validators produce blocks, they’re able to emit BGT. It’s up to validators to decide which reward vaults are worthy of their BGT emissions, this decision being made based on a variety of factors. Maybe one reward vault has seen heightened incentive distribution from protocols or another is more popular with users - each validator’s approach to incentive management in PoL will be different. 

Incentives are defined as creative and customizable marketplaces for a validator’s BGT emissions. Aside from directing BGT emissions to specific reward vaults on a recurring basis, validators also have the option to direct BGT to protocols on an as-needed basis with incentives. A protocol can incentivize more BGT from validators by offering a reward, typically in the form of their native token. For example, protocol X might set an incentive of 100 native tokens for 5 BGT. Any validator can fill this incentive, either partially or in full. The incentive the validator accepts in exchange for BGT emissions can then be shared with their delegators.

But why might a protocol provide incentives?

If a team wanted to incentivize liquidity for a specific reward vault, they might opt to incentivize a reward vault in the form of token rewards. Users would see this and opt to deposit more liquidity into the reward vault, earning BGT and increased rewards relative to other reward vaults. 

BGT emissions are distributed each block, and depend on a validator’s delegation weight. The more BGT a validator has delegated to them, the more BGT emissions they receive per block. Since the launch of Berachain V2, validators stake 69,420 BERA to start securing the chain. BGT is only awarded once users make the decision to delegate. From here, validators select reward vaults based on profitability or social alignment and act in a way to maximize alignment (fiscal or social) with their delegators. 

Aside from the obvious task of securing Berachain, validators are given two major roles: maximizing their BGT delegation and directing the flow of BGT incentives. They might choose to direct BGT rewards to the most farmed reward vaults, or focus on maximizing reward vault incentives. In the latter, validators become a black hole for BGT, should users elect to optimize individual allocations for maximum BGT distributions. 

In this scenario, validators that consistently focus on maximizing reward vault incentives could see more consistent deposits, initiating a positive feedback loop to these specific validators. 

PoL serves as the first attempt at scaling economic security and liquidity simultaneously, where users are put first and validators base their decisions on user outcomes. For the end consumer, PoL stands out as a more sustainable system. 

You know the story. 

A new application launches, users rush to participate in its liquidity mining program, and, as emissions fade, the capital deposited slowly drips away to zero. The same is true for new chains, though it’s often less visible. Users that are early to a new L1 or L2 might be there for a variety of reasons - maybe they’re excited about the new tech stack, maybe they’re testing out different strategies, or, and this is most important, maybe they’re only participating to farm an airdrop. Once a token is launched, capital is no longer tied to an economic outcome and retreats, flocking to the next opportunity. 

Berachain fixes this. With a thriving ecosystem built on sustainable liquidity, there should never be a reason to migrate your capital. Everything you need is on-chain, managed by quality developer teams and validators that have your best interests at heart. Whether minting HONEY, trading berps or buying a meme coin on BEX, actions are all there and designed to grow effectively. Any capital deposited into Berachain is put to work. This is sticky liquidity, this is PoL. 

But what about the flywheels, non-native Berachain applications and profit maximization - how do these fit in? That’s probably what most are here for, anyways.

Strategies and flywheels and profit maximization, oh my!

Imagine an average crypto user that’s stumbled their way onto Berachain. Maybe they’ve transacted across other DeFi ecosystems, and know their way around a blockchain. They’re new to the ecosystem, and are dying to put their skills to work to earn some BGT - but where do they start? 

In this scenario they might navigate to BEX and provide two-sided liquidity to the HONEY/BERA pool. This way they’re holding stables and Berachain’s native gas token, while also earning some BGT on the side. After this, maybe they want to try out something different, like Kodiak or Infrared.

This piece discussed the roles of validators and users on Berachain, but what about the applications? These the third crucial actors on Berachain provide most of the foundation for the user experience. Kodiak offers a few different flywheels, including planned strategies referred to as treasury and community flywheels. Both leverage Infrared Finance’s iBGT, a liquid staking derivative for BGT. Users deposit their LP tokens into Infrared vaults, opting them into a new system with increased reward capacity. 

PoL enables applications to bootstrap deposits, as users are more inclined to interact with pools that offer higher incentives than those that don’t. Applications on Berachain can align themselves with validators to incentivize users with BGT rewards for their reward vaults. These same applications might also offer additional yield (potentially in the form of native tokens) on top of BGT rewards, adding another layer of rewards. 

In Kodiak’s example, they might collaborate with 1-2 validators and market a pool with 5-10% greater BGT rewards than a competitor. Users become eligible to earn fees, Kodiak emissions, iBGT and iRED - just through liquidity provision. As more applications deploy and larger amounts of capital and users enter the Berachain ecosystem, it’s easy to see how this enables the most competitive liquidity games ever on a blockchain. 

Incentives and reward vaults aren’t unique to Berachain, but the presence of PoL makes the experience of participating in Berachain DeFi incredibly rewarding and unique. Thanks to PoL, users, protocols, and validators are now able to collaborate in a new way and incentivize each other from day one. No more siloed liquidity or zero-sum games occurring within individual protocols; every ecosystem participant on Berachain has an equal say in where the liquidity flows.