Exploring Berachain (BERA) and Its Unique Proof of Liquidity
2025-02-05
Berachain is an EVM-identical Layer 1 blockchain built using the Cosmos SDK that introduces a unique consensus mechanism called Proof-of-Liquidity (PoL). By utilizing PoL, Berachain separates gas tokens from governance tokens to foster liquidity within its ecosystem and incentivize DeFi participation.
Key Takeaways:
- EVM-Identical Network: Berachain is fully compatible with Ethereum Virtual Machine (EVM) applications, allowing seamless deployment.
- PoL Consensus Mechanism: Rewards are determined by the amount of provided liquidity, with gas and governance tokens serving distinct purposes.
- Multi-Token Economy: The network’s ecosystem is supported by BERA (gas token), BGT (governance token), and HONEY (stablecoin).
- Scalable and Modular Design: Built with BeaconKit, Berachain ensures high performance, scalability, and modularity.
- Current Stage: The network is in its public testnet phase, with the mainnet launch anticipated in late 2024.
How Does Proof-of-Liquidity Work?
In most blockchains, users are incentivized to lock up their tokens for staking purposes or to provide computing power (as in PoW systems) to help secure the network. Berachain’s Proof-of-Liquidity, however, leverages liquidity providers as the backbone of its network security. Here's a simplified overview of how it works:
- Liquidity Contribution:
Participants deposit liquidity into the protocol by providing tokens such as ETH, stablecoins, or other assets. These liquidity contributions form the basis for staking and consensus. - Network Validation:
Instead of using computing power (PoW) or simply locking native tokens (PoS), validators in Berachain are chosen based on the amount of liquidity they have provided to the system. This means that higher liquidity equates to greater influence in securing the blockchain. - Earn Rewards:
Validators are rewarded not only through block rewards and transaction fees but also by earning yields from their staked liquidity. This mechanism ensures that staked assets remain productive, contributing to DeFi ecosystems without sitting idle. - Reduced Liquidity Fragmentation:
Because the network directly integrates liquidity provisioning into its security model, users no longer have to choose between staking for network security and earning yield in DeFi protocols. This reduces the inefficiency caused by liquidity fragmentation across multiple platforms.
How Berachain Works
Berachain's design consists of an EVM-identical execution layer and a consensus layer based on PoL.
Execution Layer: EVM-Identical Environment
Developers can migrate their Ethereum applications without making any changes to the codebase. Berachain mirrors Ethereum’s execution environment, making it compatible with upcoming EVM upgrades.
Consensus Layer: Proof-of-Liquidity
Berachain’s consensus mechanism is a modification of the PoS model. Instead of locking tokens for staking, users can stake POL-eligible assets and still use them in DeFi applications. Validators do not directly earn governance token rewards but instead allocate them to reward vaults, creating a dynamic and incentive-driven ecosystem.
Multi-Token Economy
Berachain’s economy operates with three main tokens:
1. BERA (Gas Token)
- BERA is used to pay transaction fees.
- It plays a role in securing the network and can be staked in reward vaults to earn BGT.
2. BGT (Governance Token)
- BGT is a soulbound token earned through staking BERA or other assets in reward vaults.
- Validators use BGT for decision-making within the Berachain DAO and to allocate emissions to reward vaults.
- BGT can be redeemed for BERA in a 1:1 ratio through a burn process.
3. HONEY (Stablecoin)
- HONEY is soft-pegged to the US dollar and provides a stable means of exchange.
- It is minted through a dynamic process managed by a smart contract called the vault router, which accepts collateral.
- HONEY integrates with various DeFi protocols within the Berachain ecosystem.
Berachain’s Ecosystem Projects
Berachain's ecosystem is flourishing with a variety of innovative projects that leverage its unique Proof-of-Liquidity (PoL) consensus mechanism. Here's an overview of some notable projects within the Berachain ecosystem:
1. Yeet (YEET)
- Overview: Yeet is a fully on-chain game that allows players to deposit $BERA tokens into a communal pool, aiming to be the last contributor to win 80% of the total pool. The remaining 20% is distributed among 10 randomly selected participants. Each deposit, or "yeet," must be at least 0.5% of the current pool value, ensuring the game's progression. Players earn $YEET tokens for participating, which can be staked to receive a share of protocol revenue through the Liquidity Trifecta Vault. A 15% tax is applied to each yeet, allocated as follows: 9% to $YEET stakers via the Liquidity Trifecta Vault, 1% to public goods funding on Berachain, and 5% to the Yeet treasury. Holding Yeetard NFTs provides players with a boost in their yeeting weight, enhancing their share of $YEET rewards. The game is designed to be fair and engaging, with mechanisms in place to prevent exploitation by technically skilled players.
- Social Media: Yeet on X
2. Henlo (HENLO)
- Overview: HENLO is a funny memecoin created by @0xhoneyjar , one of the most enthusiastic cultural groups in the Berachain ecosystem. HENLO has no practical use, but is widely integrated into various platforms and protocols of Berachain, such as GameFi, NFTFi, MemeFi, DeFi, GambleFi, etc.
- Social Media: Henlo on X
3. Ramen (RAMEN)
- Overview: Ramen Finance is a decentralized token launchpad protocol on Berachain. It leverages Berachain's Proof-of-Liquidity model to align governance interests with liquidity providers. The platform aims to attract new protocols by ensuring efficient token distribution and transparent price discovery. Ramen Finance offers developers a proven solution for launching projects and provides users exposure to promising new projects. It supports the growth of Berachain's DeFi ecosystem by retaining liquidity and incentivizing active participation.
- Social Media: Ramen on X
4. RedStone Oracles (RED)
- Overview: RedStone is an Oracle that delivers frequently updated, reliable, and diverse data feeds for dApp and smart contracts on multiple L1s & L2s.
- Social Media: RedStone Oracles on X
5. Overlay (OVL)
- Overview: Overlay is a decentralized protocol that allows users to build positions on various markets or data streams without needing traditional liquidity providers or market makers. The platform supports markets based on non-manipulable and non-predictable data feeds, enabling unique trading opportunities in areas like hash rates, NFT floors, and social tokens. Users trade by locking the platform's native token, OVL, as collateral, with profits or losses settled in OVL.
- Social Media: Overlay on X
6. Kodiak
- Overview: Kodiak is a vertically integrated liquidity hub on the Berachain blockchain, featuring a decentralized exchange (DEX) for non-custodial trading and liquidity provision. It uses automated market makers (AMMs) for efficient capital utilization. The platform includes Kodiak Islands, automated liquidity manager vaults for users to deposit funds with a "set-and-forget" strategy. Sweetened Islands provide sustainable liquidity incentives via Berachain’s Proof-of-Liquidity mechanism. Additionally, the Panda Factory allows permissionless token deployment and liquidity provision, targeting volatile assets.
- Social Media: Kodiak on X
7. Dolomite (DOLO)
- Overview: Dolomite is a decentralized money market protocol and DEX that offers token support and capital efficiency with its virtual liquidity system. It is capable of offering over-collateralized loans, margin trading, spot trading and other financial instruments. Over time, Dolomite aims to become a hub for DeFi activity to allow other protocols, yield aggregators, DAOs, market makers, hedge funds, and others to manage their portfolios and run on-chain strategies.
- Social Media: Dolomite on X
These projects exemplify the diverse and dynamic applications being developed on Berachain, contributing to its growing DeFi ecosystem.
Funding and Development History
Berachain originated from an NFT project called BongBears in 2021. The project has raised $142 million through two major funding rounds:
- April 2023: $42 million led by Polychain Capital, valuing the project at $420.69 million.
- April 2024: $100 million Series B funding led by Framework Ventures and BH Digital.
Final Thoughts
Berachain aims to address the on-chain liquidity problem through its innovative Proof-of-Liquidity mechanism, which separates governance and gas tokens while maximizing liquidity. The network’s multi-token economy fosters collaboration between users, validators, and DeFi applications. As Berachain approaches its mainnet launch, users have the opportunity to explore its testnet and potentially benefit from airdrop rewards.
However, users should always conduct thorough research before participating in any blockchain protocol.
Disclaimer: This article is for informational and educational purposes only and does not constitute financial or investment advice.
Disclaimer: The content of this article does not constitute financial or investment advice.
