Abstract

Berachain’s concept can be likened to implementing a ve-model (vote-escrow) directly at the chain layer, fundamentally integrating economic alignment and governance into the blockchain’s core design. Just as protocols like Curve use ve-tokens to incentivize long-term commitment and direct governance, Berachain’s Proof-of-Liquidity (PoL) ties network security, user rewards, and governance power to liquidity provision at a protocol-wide scale. This chain-level ve-model ensures that all participants—users, protocols, and validators—are aligned from day one, creating a robust, self-sustaining ecosystem where economic activity and governance are inherently interconnected.

Key Innovation: Proof-of-Liquidity

TL;DR by ChatGPT

Proof-of-Liquidity (PoL) is Berachain's innovative consensus mechanism that enhances network security by incentivizing liquidity provision within its ecosystem. Unlike traditional Proof-of-Stake (PoS) systems, PoL rewards users who actively supply liquidity to decentralized applications (dApps) on the chain. Participants earn non-transferable governance tokens, known as $BGT, which can be delegated to validators to boost their reward potential and influence over reward distributions. This approach fosters collaboration among validators, protocols, and users, aligning their interests to promote a more secure and liquid network.

In the Berachain ecosystem, several native dApps are integrated with PoL to facilitate user participation:

• BEX: As Berachain's native decentralized exchange, BEX allows users to provide liquidity to various pools. By depositing assets into PoL-eligible pools and staking the corresponding LP tokens in designated reward vaults, users can earn $BGT rewards.
• Bend: This lending protocol enables users to earn $BGT by borrowing the stablecoin $HONEY. Users deposit collateral, borrow $HONEY, and automatically receive $BGT rewards proportional to their borrowing activity, incentivizing the utilization of $HONEY within the ecosystem.
• Berps: Focused on perpetual futures trading, Berps allows users to deposit $HONEY into its $bHONEY vault. In return, they receive $bHONEY tokens, which can be staked to earn $BGT rewards, promoting active participation in the derivatives market.

Through PoL, Berachain effectively aligns economic incentives across its network, encouraging active liquidity provision and collaboration among all participants to enhance overall security and efficiency.

Reverse-Engineering the Thinking Behind Proof-of-Liquidity (PoL)

*Reference: https://blog.berachain.com/blog/flow-of-value-examining-the-differences-between-pos-and-pol-a-case-for-a-new-paradigm-in-sustainable-incentive-alignment-at-the-protocol-layer*

By examining Berachain's blog post and the examples they highlighted, we can piece together the thought process that likely guided the team in designing Proof-of-Liquidity (PoL). While we can only speculate, these examples offer clues about how the team had in mind when building the its Proof-of-Liquidity (PoL) mechamism

Shifting Focus from Technical Trilemma to Economical Trilemma

The blockchain trilemma has said that tradeoffs must be made between security, decentralization and speed. This was the consensus prior to the growth of modular blockchain configurations, which have made it possible for blockchains to accommodate for all three without needing to overengineer complex design choices or limit the behaviors of its core user base. Now that developers are able to integrate functionality like shared sequencing layers, data availability laters or even the offloading of proving to dedicated zk proving markets, the game has changed dramatically.

There’s another type of trilemma that’s less discussed, but arguably far more relevant than ever before - a practical trilemma of sorts between users, developers and capital.

Interestingly, Berachain seems to have recognized that the technical challenges of building a blockchain were already well understood. This acknowledgment allowed the team to shift their focus toward designing a protocol that excels in incentive alignment, sustainability, and cultural relevance.

Ethereum’s DeFi, and Solana’s Memes: Prior Successes By Luck

While Solana’s low transaction costs led it to become more popular for memecoins relative to Ethereum, there’s no evidence to support the idea that this was crafted meticulously by the core developer team - this type of activity can only form naturally, and it’s probably the best form of PR you can receive in crypto.