In a recent article I did a brief overview of Berachain, a new blockchain that introduced a novel and unique consensus mechanism.
Now that some time passed since Berachain launched and I learned some more about the chain and its mechanisms, I thought it would be a good idea to write a new article and go a little deeper in its particularities.
Quick disclaimer: I'm not involved with Berachain in any capacity - not even as an investor. The only thing that pushed me to understand and write more about it was the innovative Proof of Liquidity (PoL) mechanism.
PoL review
Speaking of PoL, let's take a step back and quickly review what it is.
Proof of Liquidity is essentially an expansion on the traditional Proof of Stake mechanism. The main difference is that on PoS protocols, validators stake the native token to secure the chain, but on Berachain, participants stake assets into liquidity pools, and these staked assets contribute to the network's security while simultaneously ensuring liquidity in the ecosystem.
One direct consequence of this is that all on-chain agents, that is, validators, liquidity providers and users, are all incentivized to participate actively.
Berachain tokenomics
Now that we got that out of the way, let's go ahead and take a look at the tokens that exist on the Berachain ecosystem.
BGT
This is the governance token. It is non-transferable and can only be earned by providing liquidity to selected pools.
It's also used to determine how new token emissions are allocated to different liquidity pools.
BERA
BERA is the gas token that is used to pay transaction fees on Berachain. It can be obtained by burning BGT on a 1:1 ratio (but the opposite cannot be achieved).
HONEY
This one was not mentioned on my previous article. I'm not sure if it was only released after Berachain was launched and because of that it was not on the whitepaper or if I just completely missed but, anyway, here is the breakdown.
HONEY is the Berachain stablecoin. It's pegged to USDC and is the primary borrowing asset in Berachain's lending protocol.
It can be minted via a swap from USDC and generates fees that are collected by the blockchain.
Tokens interaction in PoL
Now that we have the ecosystem mostly mapped, let's understand how these tokens interact with the protocol and how they can be used by the different agents on the blockchain.
Validators can stake BGT and users can also delegate BGT to validators. They, the validators, define which liquidity pools receive emission rewards. This creates incentive dynamics where DeFi projects aim to incentivize BGT holders to direct emissions towards their pools.
Liquidity providers that have assets staked to the pools selected by validators receive a share of the BGT emissions.
This shows how all agents on Berachain are economically incentivized to be active participants in the governance process.
Other use cases
Berachain also integrates native DeFi protocols that use PoL:
- BEX (Berachain Exchange): A decentralized exchange (DEX) that rewards liquidity providers with BGT, aligning incentives with PoL.
- Berps (Berachain Perpetuals): A perpetuals trading platform using HONEY as the primary collateral and liquidity token.
- Bend (Berachain Lending): A lending protocol where users can borrow and lend assets, with HONEY as the main borrowing asset.
Final thoughts
This article provides a little more depth on Berachain tokenomics and the dynamics of the Proof of Liquidity (PoL) consensus mechanism. It is also more complete as, for whatever reason, I did not include HONEY, the stablecoin, in my previous post.
Again, my goal is not to advocate for or against Berachain, but merely to inform and discuss more about their innovative Proof of Liquidity mechanism, which I find very interesting, at least on paper.