Berachain's Proof-of-Liquidity (PoL) Mechanism: Design, Impact, and Strategies

This article will provide you with the most comprehensive overview of POL and its potential impact on the ecosystem, especially the price of BERA.

Author: DeFi_Cheetah, former Binance researcher

Compiled by: zhouzhou, BlockBeats

Editor's Note: This article will provide you with the most comprehensive overview of POL and its potential impact on the ecosystem, especially the price of BERA. The content covers basic mechanisms, inflation emission plans, token economic models, and key strategies (or tips) for absorbing inflationary pressure. Berachain's PoL mechanism promotes ecological growth through liquidity incentives and delegation rewards, creates a positive cycle and capital efficiency, and provides liquidity and staking rewards through iBGT and iBERA to promote the revival of the DeFi ecosystem.

The following is the original content (for easier reading and understanding, the original content has been reorganized):

Berachain's liquidity proof mechanism is designed to solve the incentive mismatch problem of consensus mechanism in traditional proof-of-stake (PoS) blockchains. Under the PoS mechanism, users need to lock assets to obtain staking rewards, but this leads to incentive mismatch because DeFi projects also need assets and liquidity, which ultimately leads to their direct competition with the PoS mechanism. PoL redesigns the incentive mechanism so that it can promote DeFi activities while improving network security and decentralization, rather than relying solely on asset locking.

Basic Mechanism

There are two core native assets in the Berachain ecosystem: BERA and BGT:

BGT can be redeemed (or destroyed) for BERA at a 1:1 ratio, but more importantly, BERA cannot be converted back to BGT.

Unlike traditional PoS, in the traditional PoS mechanism, validators are rewarded directly from the blockchain by verifying transactions, and users who delegate to validators also receive rewards in proportion to the amount of stake. In Berachain, validators receive BGT (BlockRewardController contract authorizes Distributor smart contract to mint and distribute BGT). However, they must immediately allocate most of the BGT to the reward vaults of whitelisted DApps.

Protocols then compete for these validators’ BGTs through bribes (usually the protocol’s native token), with the incentive rate for bribes being related to the emission of 1 BGT. The more attractive the bribe, the more likely the validator will direct BGT to the DApp reward vault that offers the highest return.

For example, users can provide liquidity in certain liquidity pools of native DEX to earn LP transaction fees. Then, by depositing LP tokens into the DEX reward vault of a specific trading pair, users can receive additional BGT issuance rewards on top of the LP fee income.

After receiving BGT rewards, users can choose to delegate BGT to validators or stake BERA. The BGT emission of validators will increase as the number of BGT delegated increases.

Since POL is now live, the number of whitelisted vaults has increased significantly.

Regarding BGT delegation, validators can actively or passively decide which reward vaults to direct the release of BGT to, depending on the amount of bribes offered by the dapp. As a delegator, users can choose to delegate based on the validator's strategy and the bribes they expect to earn for the delegator. Therefore, validators who can bring the most benefits to delegators are more likely to receive more BGT delegation.

Regarding BERA staking, stakers contribute to the validator’s self-bond and therefore receive a portion of the BGT and BERA earned by the validator.

Block Production and BGT Release

Validator selection criteria: Only the top 69 validators with the highest BERA stake are eligible for block production (minimum 250kBERA, maximum 10MBERA), and their block production probability is proportional to the amount of BERA staked, but this will not affect the amount of BGT released from the reward treasury.

BGT release per block: This part is crucial because the lockup of BERA depends on how the formula is designed.

The release of BGT consists of two parts: Base Emission and Reward Vault Emission.

Base Release: A fixed amount (currently 0.5 BGT) paid directly to the validator who gave the block.

Reward Treasury Release: This part is highly dependent on the "boost", that is, the proportion of BGT delegations obtained by a validator to the