From the very first rumours of Berachain arising in 2022, speculation surrounding the L1 has been shrouded with mystery. Is it all a meme?! Is it real?! A lot of folks took it as the latter with the launch of The Bong Bears and other associated “rebase” NFTs airdropped to holders which were snapped up quickly on the secondary market, given their links to the project. And what better way to start building a cult-like community than to make your early adopters rich?
Following an impressive raise, the absolute memeability of Berachain as a brand, combined with such a fresh and innovative approach to ‘how to build an L1’, saw the project really pick up traction. And we know by now that when you mix a quality product with a truly captivating marketing strategy, sparks can fly. Suddenly, in Berachain, we’re presented with a melting pot of opportunity and new users falling over themselves to test and explore the chain.
However, with blocmates’ first IRL introduction to Smokey, the co-founder of Berachain at Token2049, it became apparent how much the team meant business on a fundamental level. Their deep understanding of the existing problems of fractionalized liquidity, security and incentivization and how to address them with such conviction and clarity was clear as day.
As Smokey took to the stage with some heavy hitters of the industry and succinctly spelt out Berachain’s take on tackling these issues with the L1 and the success of the test net launch on January 11 only reflects the time and effort the team has taken to hone their craft.
Berachain is a bit of a monster in concept, so we thought we’d give you a rundown on the technology behind Bera, including the EVM, why the EVM/PoS isn’t perfect, what is Berachain, Proof-of-Liquidity and the Berachain tokens contributing to the flywheel.
With impending incentives and a plethora of developers already lined up for Mainnet, it's an exciting journey ahead.
The EVM Landscape
It's fair to say the EVM landscape is packed to the rafters, with each chain fighting for users across the board and driving developers to use their chain as their chosen destination. This is always a chicken and egg scenario as developers need users, and users need protocols which can provide value and speculation across many asset classes.
Furthermore, depending on the chain in question, many EVM chains have popped up with two main infrastructure models at play: EVM-compatible and EVM-equivalent.
So what is the difference, and why should you even care?
EVM Model Comparison
We're all familiar with the EVM-equivalent model when it comes to alternate L1s, L2s and sidechains. These platforms are essentially bound by the entire functionality of the Ethereum Virtual Machine, supporting the same operations, smart contract languages, and tools. In this sense, the ability to replicate the Ethereum ecosystem facilitates the ease of migration when it comes to developers adopting and transitioning to an EVM from Ethereum with minimal changes to code and infrastructure.
On the other side of the coin, EVM-compatible models exist currently as forked L1s of Ethereum and certain L2s. They are designed to be interoperable with Ethereum smart contracts but are not a complete replication of the EVM environment. In this case, this gives rise to differences when it comes to the blockchain trilemma between scalability, security and decentralization.
Challenges faced by EVM chains
What is Proof of Stake?
Proof of Stake is the consensus mechanism that provides security for the network where native tokens are used as collateral for the chance to validate transactions and earn block rewards. Validators are selected at random to reduce the computational work required to confirm blocks. This is an alternative to the proof-of-work consensus which is a competitive rewards-based mechanism where each validator must beat the competition to solve a block to earn the block rewards.
Ethereum recently underwent upgrades with Shapella and The Merge, transitioning to a PoS consensus mechanism. This move aimed to address certain disadvantages associated with PoW, particularly concerning efficiency and the democratic nature of validations.
The only problem is that PoS, in its current form, still has downsides when it comes to the infrastructure of the chain.
Downsides of PoS
We're not saying POS is completely infallible - that’s simply not the case. However, Berachain has identified that things can be improved.
- Proof of Stake (PoS) can drive a state of centralization when securing the chain, as major network participants take market share when it comes to staking tokens. Just take a look at Lido and its current market share on Ethereum…
- Protocols are limited by the infrastructure of the chain they choose to build on and are susceptible to any drawbacks that are present, particularly when it comes to the security of the network.
- Locking tokens in staking to improve security prevents their composability in DeFi (without the use of LSTs). Securing the chain, therefore, impacts actions that would otherwise be used by free liquidity on the chain.
- Validators and protocols ultimately have little interaction with each other, and therefore, validators only receive rewards based on the chain itself. They have no way of capitalizing on certain protocol usage, limiting their upside potential.
Other Challenges
We all love an airdrop and god, I should have staked some SOL in the likes of Jito, but we live, and we learn. However, questions arise as to whether this is a great method alone or whether there is a more optimal way to capture users.
In many cases, the recent user acquisition method of a blockchain has been driven by incentives directly tied to the speculation of airdrops, both from the user side and protocols. However, this trend has resulted in short-term attention and challenges regarding the longevity of liquidity. With user adoption surpassing the initial airdrop's genesis, the tendency is for users to migrate elsewhere, detaching long-term incentives from consistently driving users to the chain in question.
With so many chains popping up all the time, there is a fight for liquidity. As mentioned above, the sustainability drivers of airdrops and current methods adopted for driving adoption are limited. So, what drives sticky users? It's increasingly evident that consistently incentivizing and building a liquid environment in a highly fractionated space is essential to keep users returning.
All the above are easier said than done once the core infrastructure of a product is built and cemented.
Rewriting the rules of L1s
What is Berachain?
Enter Berachain, which has turned the existing model on its head to rewrite the rules from the ground up. The “build it, and they will come” mentality takes a back seat as they have built an EVM-compatible model which uses a novel consensus method of Proof-of-Liquidity (PoL) or, in their own words, could be viewed as an “EVM-equivalent plus.”
Berachain is built on top of the Cosmos-SDK specifically for optimization of Proof of Liquidity, as well as having the same tooling operations built into the chain.
The modular EVM, built using Polaris EVM exclusively developed by the Beras, enables easy separation of the EVM runtime layer—the layer responsible for executing smart contracts and decentralized applications. This separation enhances the chain's efficiency for developers, making it easier to build smart contracts and paving the way for greater scalability.
The star of the show, though, is the concept of Proof-of-Liquidity and how it could help Berachain thrive.
WTF is Proof-of-Liquidity?
While users can certainly verify liquidity on any chain through a block explorer, Proof-of-Liquidity (PoL) operates at the consensus layer. It enables validators to align with protocols, leveraging the PoL system for more effective incentivization of rewards. It also addresses the end user by allowing a more directly accessible route for rewards when participating in the network. The main purpose of this is to secure the chain in a new and innovative way through the use of liquidity as well as address the challenges faced by PoS in its current format.
The Berachain Tokens
So, let's start with the tokens utilised on Berachain and how they co-exist as part of the overall consensus.
BGT - the governance token
Like most networks, there exists a governance token or main network token. For instance, Avalanche has AVAX, Ethereum has ETH, and so on. The security of the network hinges on the quantity of staked tokens. However, in these models, token distribution often occurs through market purchases or is held by a DAO. This contributes to a certain degree of centralization, particularly in governance voting and staking.
The primary distinction between BGT and Berachain is that this token is entirely non-transferable. It can only be obtained through active participation in providing liquidity to the network. This involves supplying it to BEX (the native decentralized exchange for Bera), borrowing Honey on Bend (the lending and borrowing platform on Bera), and contributing Honey to the vault on BERPS (the perpetual platform built on Bera). If you haven't figured it out yet, everything native starts with a 'B' here!
Users can then choose to delegate BGT to validators and earn rewards in various ways. Validators can use BGT for governance proposals and for bribes on emissions on certain pools. BGT can also be converted to BERA but more on that soon. This is a one-way function and, once burnt, cannot be reversed!
BERA - the gas token
Looks like we'll have to wait for the Mainnet on this one. It's essentially the gas token for the Berchain network, but it won't be released until then. But you get the gist. It will be used to pay fees when transacting with the chain for all the weird and wonderful things you’ll be able to get up to once Mainnet is live.
HONEY - the stablecoin
Finally, we have the native stablecoin of the platform, the thing we all avoid at all costs but would make us more profitable if we considered swapping our holdings that much sooner when things are on the up and euphoria hits. In this case, Berachain has HONEY as their native stablecoin, your port of call away from the volatility, which aims to be pegged to 1 USDC.
To get that liquid gold you’ll have to wait again until Mainnet as this is currently limited on Testnet. However, it will be mintable through the Honey Dapp or purchasable on BEX.
How these tokens play into Proof-of-Liquidity
Noting the above tokens, the Berachain flywheel comes together, so let’s break down step-by-step what this looks like:
- Users can provide liquidity to the various liquidity pools available on the native Berachain DEX, BEX. In return, they can earn BGT (Bera Governance Token). Again this is the only way users can actively acquire such a token.
- Users can choose to pick a validator or validator(s). The amount of BGT earned by the user is based on a gauge weight of how much BGT is emitted to that pool from the validator and the amount of liquidity the user has provided as part of the entire pool.
- Validators producing blocks are chosen at random, weighted by the proportions of their BGT delegated. The validator is responsible for sharing these rewards with the user using Berachef, a precompiled contract which shares the percentages to the whitelisted pools available.
- To further incentivize a chosen validator by delegates, bribes can be used to influence BGT sway instead of choosing another validator. Each time a new block is proposed, bribes are distributed.
Each function in the flywheel addresses the three main objectives to overcome identified issues with PoS:
- Increasing liquidity - As BERA (gas token) is separated from BGT (governance) you don’t have the issue of BERA being monopolized by staking as you have with PoS. The only way to have a democratic vote on validators is to provide liquidity for BGT; this is entirely separated from the cycle and therefore encourages further participation of LPing to earn rewards and delegate across the board better aligning incentives.
- Decentralizing Inflation - Instead of staking rewards going directly to stakers (causing a route for centralization), BGT inflation rewards are distributed to active participants through LP mechanisms and therefore provide a fairer distribution of BGT tokens. By design, this equates to the system propagating the flow of value towards the user.
- Alignment of protocol and validators - Protocols wield significant influence in selecting a validator and aiding them in amassing BGT, which they can then use to incentivize delegators through bribes. Consequently, validators and protocols must collaborate to leverage this flywheel effect and steer users toward delegating their BGT to specific validators. This collaborative approach encourages validators to act responsibly, ensuring the network's security and earning enhanced rewards. Simultaneously, users receive further financial incentives to allocate to the bribed liquidity pools. The deeper the liquidity, in turn, attracts higher capital usage and more protocol fees. Flywheel complete.
Berachain Testnet
If you fancy having an exploration yourself, the Testnet for Berachain launched on the 11th of January and has already seen a significant uptake, with over 1.5M+ wallets at the time of writing.
They already have six native Dapps at launch, including:
- BEX -Swap and provide liquidity
- BGT Station - Governance for BGT
- Honey - Mint or redeem Honey, native stablecoin
- Bend - Supply assets and borrow HONEY
- Berps - Perpetuals
- Beratrail - block explorer
Additionally, they have over 65+ protocols looking to make the move to be built on Berachain once Mainnet comes around. A complete rundown on these protocols, partnerships, and more can be found here:
I must say the attention to detail on the website alone, with the small quirks on the main landing page (you’ll see what I mean when you take a look), is enough to give it a browse! All you need is a wallet to connect to their EVM, and the Testnet has a faucet to get you going with some gas. There are a couple of great threads out already on this so you can take a look here at how to get started:
Conclusion
Berachain has shaken up the L1 landscape by harnessing the power of virality through memes, cultivating a robust and polarized community, and introducing something to the market that is exceptionally unique. While the Testnet is likely to unveil unforeseen challenges and issues, that's precisely its purpose. Their preparedness to launch a product with diversity will not only enable them to gather more data points but also advance through and solve these issues, gearing up for a seamless transition to Mainnet.
Technically, the EVM equivalent provides an easy entry point for current DeFi users, diminishing the initial barrier to entry with any novel chain. It also introduces a new user acquisition model, incentivizing users to actively participate in the platform as they pursue yield and opportunities.
Similarly, the EVM-equivalency of the Polaris EVM presents the opportunity for protocols to build on Berachain with ease. Protocols and validators can then leverage the potential of the PoL flywheel to capitalize on attracting deep liquidity and users and retaining it over the long term, as well as building a more secure environment on-chain.
As the dynamics of PoL unfold over time, it’s highly likely that innovation will thrive, paving the way for new protocols to emerge on the horizon and capitalize on this consensus mechanism.
It’ll be interesting to see how people choose to play Berachain at Mainnet and whether the changes from PoS to PoL will be able to take hold of the degens’ attention for the long term. Will they be able to draw liquidity in an already very fractionalized landscape? I think it definitely has all the parts when it comes to this, and I’m sure attention will remain on how the product progresses throughout 2024.
