Berachain: The Proof is in the Liquidity

Berachain

TLDR: Berachain is an EVM-compatible Layer 1 (L1) chain, currently in test net phase. Built on Cosmos SDK, it focuses on Defi apps. It stands out through its adoption of a so-called Proof-of-Liquidity (PoL) consensus mechanism and separate gas and governance tokens. Berachain recently raised an impressive sum of $100 million in a Series B funding round. There is a large active community hoping for an airdrop.

Lark Davis often quips that Cardano should have called itself Dogdano: it would have seen much more recognition and price appreciation. Well, Berachain seems to have taken notice. What animal is still not taken AND is furry? Well, there you go. Berachain it is.

So, another L1… long live the L1 race and may the best win. The question is: is there even room for yet another layer 1? Berachain is a niche player in a few ways, and what stands out most, technically speaking, is its proof-of-liquidity consensus mechanism. More on that later.

From a usability perspective, what makes Berachain stand out is that it has several in-protocol Defi primitives. Of course, they are bear-themed and start with a B: the decentralized exchange is called BEX, and Bend and Berps are its lending and perpetuals protocol, respectively.

Berachain’s Technology

Berachain: The Proof is in the Liquidity - - 2024

Custom Polaris EVM is Berachain’s custom-made virtual machine: its core technology which allows it to be compatible with Ethereum, while also integrating with Cosmos for better performance and modularity. View it as a bridge between Ethereum’s ecosystem and Cosmos’ interconnectivity, enhancing the configurability necessary for broad adoption.

(EVM compatibility, to clarify, allows a blockchain to engage with Ethereum’s ecosystem to a certain degree. It supports Ethereum’s smart contracts and tools, though it does not fully replicate the entire EVM environment. But it’s of course a nice feature to have for any chain, to make it compatible with the biggest smart contract platform out there.)

Proof-of-Liquidity (PoL) Explained 

As mentioned, Berachain uses Proof-of-Liquidity as a consensus mechanism. Unlike traditional Proof-of-Stake systems where validators lock up native tokens to secure the network, Berachain’s model requires them to contribute to the liquidity pools of the network. For example, as LP’s for Defi protocols and pools. Here’s an image by Mangata Finance.

Berachain: The Proof is in the Liquidity - - 2024
Source: Mangata Finance

To clarify what’s the difference between proof-of-stake (PoS) and proof-of-liquidity (PoL), imagine a community garden.

A Proof of Stake ‘Community Garden’

First, imagine a proof-of-stake community garden where the right to decide what to plant and harvest in each section of the garden is determined by how much each member has invested in gardening tools. The more tools you contribute (stake), the more fruits and veggies you may harvest. Compare this to Proof of Stake, where participants secure network operations by locking up (staking) a certain amount of their coins. The more they stake, the higher their chances of being chosen to validate transactions and earn rewards. PoS ensures that those who have a significant investment in the network are in charge of maintaining its security and operations.

A Proof of Liquidity Community Garden

Now, consider a twist on the community garden model. In this version, the right to make decisions isn’t just about the tools you’ve contributed. Instead, it’s about how much you actively participate in watering the plants and improving soil fertility—essentially, how much you contribute to the garden’s overall health. By participating, you not only help the garden thrive but also earn a share of the produce based on your contributions.

In other words, in a Proof of Liquidity model like Berachain’s, securing the network isn’t just about locking up coins: it involves providing liquidity to the network’s financial ecosystem. It’s a more active way of being involved than proof-of-stake. The benefits go further than just securing the network: it’s about increasing its economic activity, about promoting a vibrant ecosystem.

Berachain: The Proof is in the Liquidity - - 2024

Tokenomics of Berachain

Defi on Berachain is built-in. Popular features from Defi apps on other chains including a decentralized exchange, perpetuals trading, and lending are all denominated in chain-native cryptocurrencies. Berachain’s has put incentives and tokenomics in place designed to quickly attract large volumes of liquidity.

Traditional PoS protocols denominate both governance and gas fees in the same token. This has the negative effect that when stakers delegate to a validator, the protocol token’s overall liquidity decreases. Gas fees go up and this is of course bad for usage.

Berachain’s PoL and separate gas and governance tokens aim to keep on-chain gas fees low while also incentivizing ecosystem participants to both stake and provide liquidity.

  • BGT (Governance Token): Users who provide liquidity and lend, for example, get rewarded with BGT. This token is non-transferable.
  • BERA (Gas Token): Used for transaction fees on Berachain, 
  • HONEY (Stablecoin): A stablecoin pegged to USDC, used mainly in Berachain’s lending protocol. Think of it as the reliable dollar that keeps its value steady in the network.

Berachain’s Ecosystem

The pillars of Bera’s ecosystem are its dex, its perpetuals exchange and its lending protocol. 

  • Bera’s dex, called BEX: A decentralized exchange where users can swap tokens directly without an intermediary. BEX allows for up to 8 tokens in each pool. Any user can create a new pool using an asset weighting they choose. Berachain also introduces the concept of MetaPools. In a MetaPool, one LP token is minted to represent a share of another liquidity pool. These can then be used in an asset pair in another pool, boosting capital efficiency across Berachain.
  • Perpetuals (Berps): A platform for trading derivatives that uses HONEY as collateral, aiming to provide low fees, with up to 100x leverage.
  • Berachain’s lending protocol is called Bend. It’s quite similar to platforms like Aave, where users can lend and borrow tokens, with interest earnings distributed among participants.
Berachain: The Proof is in the Liquidity - - 2024
Berachain’s dex called Bex

Conclusion

Berachain is a new, ‘mem-y’ blockchain focusing on Defi, leveraging a novel incentive system to attract and retain liquidity. What makes it stand out among other Layer 1s, is that Defi on Berachain is built-in. You could call Berachain an app chain for Defi. Popular apps on other chains, like a decentralized exchange, are all in-house and denominated in chain-native cryptocurrencies. Moving these features from apps on a larger L1 to a native protocol helps to build network effects for Bera’s ecosystem. If you’re curious, you can still take part in the testnet and probably be eligible for an airdrop. With the clout it has garnered, a multi-billion valuation for Berachain upon launch isn’t out of the question. A challenge with a protocol like Berachain, which has native, built-in apps, is whether it will attract builders to build competing apps? 

Berachain: The Proof is in the Liquidity - - 2024

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Berachain: The Proof is in the Liquidity - - 2024
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