Let’s delve into The Berachain economic model Proof-Of-Liquidity (PoL) – a consensus mechanism and cutting-edge approach to blockchain governance that aims to address the critical challenges faced by decentralized networks.

Intro Berachain

Berachain is an EVM-compatible Layer 1 blockchain that introduces the innovative Proof-of-Liquidity (PoL) consensus mechanism to incentivize liquidity provision. It leverages the Polaris blockchain framework and the CometBFT consensus engine, enhancing compatibility with the Ethereum Virtual Machine. This robust infrastructure is designed to support DeFi applications like decentralized exchanges (DEX) and oracles. Berachain aims to address issues such as unaligned incentives, fragmented liquidity, and bridging infrastructure within the blockchain space.

In April 2023, Berachain successfully raised $42 million in a Series A funding round, achieving a valuation of $420.69 million. The round was led by Polychain Capital, with contributions from various investors and crypto exchanges.

Learn more: What is Berachain?

What is Proof of Liquidity?

Proof of Liquidity (PoL) is central to Berachain’s architecture, designed to tackle common DeFi challenges like liquidity fragmentation and stake centralization. Unlike traditional Proof of Work or Proof of Stake mechanisms, PoL aligns incentives and boosts capital productivity. It ensures that liquidity within the network remains “sticky,” meaning it is more likely to stay within the ecosystem. This strategic design fosters a sustainable and stable DeFi environment.

PoL directly links the network’s security and functionality to its available liquidity. This mechanism not only enhances the blockchain’s security but also promotes a healthier and more liquid DeFi ecosystem. It ensures that assets remain easily tradable and accessible, contributing to the overall liquidity and robustness of the network.

To put it simply, Proof of Liquidity is a new consensus mechanism created by Berachain that allows users to stake tokens from different Layer 1 platforms (wBTC, wETH, wAVAX, etc.) and stablecoins (USDC, DAI, etc.) to a specific validator to earn block rewards.

High-Level PoL Model Objectives

• Systemically Build Liquidity: Contributes to efficient trading, price stability, network growth, user adoption, and the successful operation of decentralized applications.
• Solve Stake Centralization: Helps maintain the integrity of the chain, avoid block space manipulation, and prevent monopolistic control.
• Align Protocols and Validators: Better integrates validators into the protocol and provides better incentives through liquidity provider (LP) pools, bribes, governance tokens, and more to ensure the long-term health of the chain.

How Proof of Liquidity works?

Proof of Liquidity (PoL) builds on the concept of Proof of Stake to address its limitations. Here’s how it functions:

1. Liquidity Provision: Users provide liquidity to BEX to receive $BGT, which can either be converted to the native gas token $BERA or staked with a validator.
2. Staking Options: $BGT holders have the option to stake their tokens with validators.
3. Voting Rights: Those who stake $BGT with validators gain voting rights to influence the distribution of emissions across different pools.
4. Incentives for Validators: Liquidity pools can incentivize validators with rewards (bribes) to secure more emission allocations, aiding in their growth and development.

From a user’s perspective, providing liquidity and staking $BGT in Berachain can yield rewards in various forms:

• Earnings of $BGT directly from Berachain.
• Incentives (bribes) offered by different liquidity pools or projects.
• A share of transaction fees from these pools, paid in $HONEY.

From a project’s perspective, similar to the current ve model, the entire chain is utilized for its operations:

• Projects attract nodes to direct their BGT towards the projects’ pool, aiming to secure BGT rewards distributed each cycle.
• Projects use bribes to attract users as an incentive.
• As more users engage with a project, it gains initial traction and benefits from network effects.

Conclusion

Proof-of-Liquidity represents an evolution of Proof-of-Stake, specifically tailored for DEX-centric chains. It unlocks liquidity, increases capital efficiency, and adds additional revenue streams for stakers and liquidity providers. This promising concept positions Berachain to lead the blockchain space in the near future.

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