The Luna of this bull market? An article interpreting the mechanism design of Berachain

Author: Jian Shu

I. Introduction

Berachain was launched at the end of 2021 and is an EVM-compatible L1 focused on DeFi, built on the Cosmos SDK, utilizing a Proof of Liquidity (PoL) consensus mechanism.

Development History

Berachain originated from the Smoking Bear NFT meme chain, tracing back to the Bong Bears series NFT launched in August 2021. Subsequently, this NFT rebase gave rise to new collections: Boo Bears, Baby Bears, Band Bears, and Bit Bears.

The core members of the Berachain team, after experiencing the ups and downs of the crypto market, deeply realized the significance of liquidity to DeFi. Compared to decentralization, scalability, security, and interoperability, liquidity is the foundation of all these aspects. The team decided to design an L1 public chain themselves, drawing from the advantages of previously successful DeFi projects while avoiding their shortcomings, thus Berachain was born. Subsequently, the Berachain team designed the Proof of Liquidity validation mechanism, which also indirectly laid the foundation for Berachain's three-token model.

On November 28, 2023, Berachain began internal testing.

On January 11, 2024, on the day the Bitcoin spot ETF was approved, the Berachain public testnet "Artio" was officially announced to be online. According to official news, over 30 native protocols are under development, and protocols from other networks such as Pendle, Redacted, Sudoswap, Abracadabra, etc., also plan to deploy on the Berachain testnet and mainnet.

According to rumors, Berachain is set to launch its mainnet in Q2 2024.

Financing Situation

On April 20, 2023, Berachain secured $42 million in funding led by Polychain, with participating institutions including Hack VC, OKX Ventures, etc., at a valuation of $420 million.

Team Background

Berachain was established by an anonymous team, with co-founders including Smokey the Bera, Papa Bear, Homme Bera, and Dev Bear, and the recently hired VP of Engineering Baloo the Bera (former engineering lead at Mysten Labs). Other team members remain unknown. Most of the project team members are early adopters who got involved in and invested in crypto around 2015, possessing a deep understanding and research background in DeFi and public chain development. Although the team is anonymous, their ability to secure $42 million in funding indicates they have rich connections and resources in the crypto space.

II. Mechanism Interpretation

According to co-founder Smokey the Bera, Berachain was established to solve the liquidity problem on-chain. If a chain loses liquidity, it will quickly turn into a "ghost town," a conclusion drawn by the Berachain team after experiencing DeFi Summer.

Now, let's take a look at how Berachain cleverly addresses the on-chain liquidity issue through its design.

Polaris EVM

Berachain is built on Polaris EVM, which is its foundational operating system for EVM built on the Cosmos SDK. Polaris uses messaging to connect EVM and Cosmos SDK, separating block construction, processing, and storage from execution. The Polaris EVM also provides developers with state precompilation and the ability to create custom modules, allowing them to create more efficient and powerful smart contracts.

What are the advantages of using the Polaris EVM framework?

1) Ethereum Developer Friendly

Berachain is EVM-compatible, making it friendly to Ethereum developers and easier to attract developers from other EVM chains.

2) Strong Cross-Chain Interoperability

As a Cosmos subchain, Berachain naturally relies on IBC support. IBC, as the most powerful cross-chain communication protocol, eliminates barriers to liquidity flowing from other networks into Berachain.

PoL Proof Mechanism

Utilizing the PoL mechanism to bring liquidity from some mainstream assets into Berachain is the team's direction for solving liquidity issues.

The PoL proof mechanism is illustrated above:

1) Users provide liquidity to the BEX (Berachain native DEX) pool to earn BGT, which is the governance token. A detailed introduction to BGT is in the "Three-Token Model" section;

2) Users delegate BGT to validators, who generate blocks based on the proportional weight of the delegated BGT;

3) Delegators and validators sequentially receive rewards from the chain (BERA and HONEY);

4) Validators can vote on the inflation situation of BGT in any liquidity pool;

5) Bribes are distributed from validators to their delegators.

What are the advantages of PoL compared to PoS?

1) Incentivizes Liquidity and Enhances Security

The only way to earn governance token BGT on Berachain is to provide liquidity to BEX, and not all tokens can be staked, which enhances security and incentivizes liquidity. In contrast, traditional PoS mechanisms may reduce liquidity while increasing on-chain security.

2) More Decentralized Inflation

In PoS public chains like Ethereum, the only way to increase token supply is to distribute it to ETH stakers. In the PoL mechanism, BGT is not directly allocated to validators but to liquidity providers of certain assets, ensuring that the inflation of new tokens is not limited to holders of a single token. The new token inflation is fairer than in traditional PoS networks, addressing the issue of stake centralization in PoS mechanisms.

3) Coordinates the Relationship Between Asset Issuance Protocols and Validators

The PoL mechanism incentivizes protocols and validators to collaborate in order to

• Allow validators to control the flow of BGT, incentivizing liquidity pools for asset issuance by protocols
• Enable protocols to assist validators in gaining more governance power through bribing BGT holders

Three-Token Model

Berachain's three tokens are BGT (governance token), BERA (Gas Token), and HONEY (stablecoin).

BGT: Governance token, non-transferable, can only be obtained by providing liquidity of certain assets on BEX.

BERA: Gas Token, obtained through a 1:1 one-way burn of BGT or validator rewards.

HONEY: Native over-collateralized USD stablecoin, serving as a medium for distributing protocol revenue.

Operational Mechanism

• Users provide liquidity on Berachain (BERA, HONEY, or other trading pairs) to earn BGT rewards
• Delegate BGT governance rights to validator nodes to earn BERA + HONEY

This three-token model systematically builds liquidity, where

1. The governance token (BGT) is separated from the on-chain Gas token (BERA)
2. The only way to obtain BGT is to provide liquidity to BEX

This means that Berachain's staking supports mainstream assets from other chains, unlike PoS public chains, where staking rewards can only be obtained by staking a specific token. Berachain users have more diverse assets available for staking to obtain BGT, further stimulating liquidity.

Berachain's three-token model draws on many experiences and lessons from DeFi projects. For example, the decentralization of governance rights is inspired by Curve, stimulating asset issuers' competition for governance rights; Honey draws from the native stablecoin concept of Terra, adding more liquidity to the protocol.

III. Overview of Important Ecological Projects

The Honey Jar

The Honey Jar is the entry point of the Berachain ecosystem, holding significant influence in the community, responsible for educating users, incubating and promoting ecological projects, and facilitating various project collaborations. Its webpage is designed like a computer desktop, with all information related to Berachain placed in various "software."

Currently, The Honey Jar has launched the Honey Comb NFT, but has not committed to any specific empowerment. However, as the NFT project of the core community of Berachain, it gathers benefits from multiple projects. Holding this NFT will provide opportunities for airdrops, whitelists, APY boosts, and free NFT minting, all of which come from cooperative agreements within the Berachain ecosystem.

Also noteworthy is the project mentioned by The Honey Jar and its founder Jani on Twitter.

Beradrome

Beradrome is the DEX and Restaking liquidity market on Berachain, featuring ve(3,3) token economics, built-in bribery, voting, and other mechanisms. The team launched an NFT series called "Tour de Berance" a year ago, which is often jokingly referred to as "Beras on Bikes." The team has clearly stated that holding this NFT series will grant rebase rights when Berachain goes live, with the potential for future airdrops of BERO or hiBERO tokens. Moreover, holders of Tour de Berance have already received airdrops of oWIG from another project launched by the team on the Base chain.

Beradoge

Beradoge (BDOGE) is a highly anticipated meme project on Berachain. The project has two NFT series, namely "Beradoge Gen 1" and the recently minted "Mibidiots." According to the project team, holders of these two NFT series will be granted "a bunch of useless stuff" or "a bunch of BDOGE." Additionally, there are rumors that BDOGE may also be airdropped to NFT holders of other Berachain projects.

Sudoswap

Sudoswap is a full-chain NFT AMM liquidity market that raised $12.5 million in a private funding round at the end of 2022. Its focus on liquidity innovation aligns with Berachain's core philosophy, and it announced early on that it would deploy its protocol after the launch of the Berachain mainnet. Once Berachain officially launches, Sudoswap is expected to support bridging blue-chip NFTs, bringing many NFTs from the mainnet to Berachain and providing incentives, making Sudoswap one of the first NFT markets to commit to Berachain.

Beramonium

Beramonium is the chain game of Berachain, having released a casual RPG called "Gemhunters." In this game, players can send their Beramium Genesis beras on missions to earn gems, which can be exchanged for NFTs from other well-known Berachain projects, such as Honey Combs, Beradoges, etc. The minting price for these NFTs is 0.045 ETH.

Redacted Cartel

Redacted Cartel is a DeFi yield protocol incubated by the New Order team, with multiple sub-products covering bribery market trading and LSD liquidity staking. It has previously announced plans to deploy new projects on Berachain, but no further details have been provided yet. Given Berachain's built-in voting bribery mechanism, it is expected that DeFi bribery yield ecological projects like Redacted Cartel will thrive on the bear chain.

Link to Ecological Project Summary: https://docs.google.com/spreadsheets/d/1tLOrxMnws6NX-0JMAIKH1ULFmjDYv2LVvYG8Lbv2kpU/edit#gid=659852632

Conclusion

Berachain's distinctive three-token economic model separates gas and governance, maximizing liquidity release while protecting the rights of active users who contribute significantly to the network (such as those generating substantial transactions and gas). This resolves the contradiction between governance participation and liquidity in staking. Therefore, we are optimistic that Berachain will lead DeFi innovation, creating high liquidity and high capital efficiency DeFi protocols.

As user numbers grow and transaction fee revenues increase, Berachain will further attract more users and ecological projects, coupled with Berachain's governance reward mechanism, forming a positive feedback loop.

However, it is essential to remain rational; whether Berachain will develop as we expect requires attention to the project's future developments (including the project's own growth, ecosystem expansion, and protocol security, etc.).