Exploring Berachain and its ecosystem: How does MEME-type L1 create liquidity stickiness?

Written by: PAVEL PARAMONOV

Compiled by: Deep Tide TechFlow

Introduction

In the crypto space, we encounter several different groups: developers, investors, innovators, influencers, degens, etc. The main point of contention has always revolved around whether people are attracted by technology and innovation or by memes and speculation. However, now both groups can coexist and find value within the Berachain blockchain.

On one hand, Berachain offers a novel consensus mechanism that optimizes liquidity performance while maintaining EVM compatibility. This is achieved through the Polaris modular EVM framework, which provides an execution environment for smart contracts on Berachain. On the other hand, the project's anonymous development team has created a bear-themed project that has successfully raised $420 million in its latest valuation. This is an exciting feat driven by meme appeal. While most memes serve merely as speculative material, Berachain strives to bridge the gap between hype and substance, providing a win-win option: memes and technology.

In this article, we will delve into the Berachain ecosystem, exploring the unique culture, history, and technology that supports this innovative narrative.

Summary

• Berachain offers a novel consensus mechanism that optimizes liquidity performance while maintaining compatibility with EVM.
• Liquidity proof is built on a classic proof-of-stake mechanism to address common issues associated with PoS networks: centralization of stakes, limited opportunities to enhance chain security, and insufficient incentives for validators.
• The anonymous development team behind Berachain successfully raised $420 million in its latest valuation. Investors include Polychain, Shima Capital, dao5, Hack VC, Robot Ventures, Tribe Capital, and GoldenTree Asset Management.
• Berachain utilizes the team's specially designed Polaris EVM to easily separate the EVM runtime layer, developing stateful precompiles and custom modules for creating more efficient smart contracts.
• Berachain's three-token model includes three tokens: $BERA for Gas, $BGT for governance, and the native stablecoin $HONEY.

On January 11, 2023, Berachain announced the launch of its public testnet "Artio," attracting over 300,000 users and facilitating over 1 million transactions within the first 48 hours of launching Artio. Currently, Infrared, Kodiak, and Beradrome are the foundational protocols of Berachain.

Spirit of the Chain

It is well-known that the Berachain community is one of the most recognizable and passionate among all communities. You won't find so many fans enthusiastic about Bera and its updates, memes, etc., on Twitter. But how did it achieve this?

The answer lies in the concept of "religion." In the medieval period, religion played a key role in power struggles. Initially, "religion" referred to those who praised saints, but now it refers to ancient or primitive religious practices. There is a saying that religion thrives in bear markets. Link (Chainlink) has proven this with its frog pfps, memes, and low entry barriers. In the Berachain ecosystem, the religious drive extends beyond JPEG prices, fostering its growth.

Core contributors of Bera promote collaborative intelligence, while the broader community contributes significant collective intelligence through ideas, comments, memes, and unique creativity. This fusion makes the open-source community vibrant. All members of the religion (community) benefit from its success; more importantly, they are all part of its financial aspect. The key is that there is no unified image of the believers; whether you are the smartest developer in the world or a GM (Good Morning) poster, you are part of the religion.

Because Bera promotes meme culture, everything unrelated to technology is seen as a meme. Therefore, even when FUD (Fear, Uncertainty, and Doubt) arises, Bera can still benefit from it.

Despite ongoing debates about the merits of technology, the crypto space tends to favor meme coins. BERA is a token with real use cases and various advantages, entering this space with a unique presence.

Labeling Berachain merely as a meme with religious followers greatly underestimates its significance. Considering the narratives favored by crypto Twitter—well, Berachain has it all. Now, let’s dive into the various technological innovations happening within the Berachain ecosystem.

The Technology Behind Berachain

Berachain is a high-performance blockchain compatible with the Ethereum Virtual Machine (EVM), employing an innovative Proof-of-Liquidity (PoL) consensus mechanism. This consensus mechanism is designed to align network incentives, facilitating collaboration between Berachain validators and the project ecosystem. The technological foundation of Berachain is built on Polaris, a cutting-edge blockchain framework designed for constructing EVM-compatible chains, utilizing the CometBFT consensus engine.

Berachain is built on the Cosmos-SDK, containing the same tools and operations. Additionally, it integrates on-chain specific features that are specifically optimized for liquidity proof. Furthermore, Berachain leverages the Polaris EVM, which is specially designed by the team to easily separate the EVM runtime layer for developing state precompiles and custom modules for creating more efficient smart contracts.

Precompiles

Precompiles, also known as precompiled contracts, constitute a class of smart contracts with functionalities directly integrated into the EVM rather than executed as bytecode. Each precompile is assigned a specific address, and the associated Gas fees for executing these contracts are predetermined. In the context of Berachain, this mechanism is primarily used to provide enhanced functionalities on-chain, enabling direct interaction with various Cosmos modules that would otherwise be inaccessible outside the EVM. Berachain's precompiles include some EVM precompiled contracts from Polaris and add additional functionalities to further enhance capabilities.

Proof of Liquidity

The economic model of Berachain represents an innovative approach to blockchain governance, aimed at addressing key challenges faced by decentralized networks. This model revolves around three objectives:

• Establish liquidity
• Decentralize stakes
• Align protocols and validators

Proof of Liquidity is built on top of the classic proof-of-stake mechanism, addressing common issues faced by PoS networks: stake centralization, minimal opportunities to enhance chain security, and limited incentives for validators. Let’s take a closer look.

Users can earn BGT, the governance token for liquidity delegation proof, by providing liquidity to the BEX liquidity pool. Subsequently, users delegate their BGT to validators. The block production is determined by the proportional weight of the BGT delegated to them, and validators generate rewards from the chain for both delegators and themselves. Additionally, validators participate in voting on future BGT inflation in various liquidity pools, with any bribes distributed to their delegators (if created by the validators).

From the above chart and the architecture of Berachain, we can describe how PoL addresses the issues of PoS blockchains.

Proof of Liquidity addresses the initial challenges of proof of stake through two key mechanisms:

• Separating delegated tokens (BGT) from the chain's Gas token (BERA)
• Restricting the purchase of new BGT to provide liquidity for BEX

This means that the tokens used for various on-chain activities are different from the staking tokens. Moreover, the only way to acquire new governance tokens is to contribute liquidity, thereby incentivizing more liquidity provision.

Proof of Liquidity effectively addresses the second issue of proof of stake by distributing newly minted BGT to liquidity providers. Unlike traditional proof-of-stake networks, where stakers directly receive new stakes, proof of liquidity allocates it to different market participants engaged in common on-chain activities. This leads to a more equitable distribution of token inflation.

Finally, proof of liquidity encourages collaboration between protocols and validators. This collaboration is incentivized to allow validators to promote the protocol's LP pools through BGT and enables protocols to assist validators in accumulating BGT stakes through bribes.

Three-Token Model

The Berachain token model includes three tokens: $BERA, $BGT, and $HONEY.

• BERA: The native token of Berachain, serving as the Gas token
• BGT: The governance token
• HONEY: The native stablecoin

While the roles of $BERA and $HONEY are quite intuitive, BGT is less straightforward. After all, why is there a need for separate tokens for Gas and governance?

BGT Management

BGT is non-transferable and can only be obtained through three methods:

• Providing liquidity for LP pairs on the Berachain DEX (decentralized exchange), which receives BGT emissions
• Borrowing HONEY on Bend (Berachain lending)
• Providing HONEY for the bHONEY vault in Berps (Berachain perpetual contracts)

Once acquired, users continue to delegate their BGT to validators in the network. The BGT stake weight of a validator plays a crucial role in determining two key aspects:

• The proportion of blocks produced by a validator among all validators
• Their voting influence on the percentage of future BGT emissions

When BGT is delegated to a validator, it becomes eligible to initiate and vote on governance proposals. These proposals may include decisions on allocating BGT emissions to specific LP pools. Delegating BGT also triggers the commencement of various rewards from the network.

Additionally, BGT can be burned at a 1:1 ratio for BERA. It is important to note that this process is one-way; BERA cannot be converted back to BGT.

The amount of BGT inflation controlled by validators is determined by the amount of BGT delegated to them. Let’s consider a scenario: as a validator, you delegate 10% of all staked BGT to yourself. With the 10% BGT weight allocated to you, you effectively control the direction of future 10% BGT inflation. Specifically, this BGT inflation targets the native BEX liquidity pools, allowing you to decide which LP pools provide incentives for users to deposit tokens. This typically increases liquidity in those pools.

Protocol Rewards

Proof of Liquidity brings rewards to BGT holders. These rewards come from diverse on-chain activities and are allocated to BGT holders based on the amount of BGT they have delegated. There are three types of rewards: BGT inflation, block capture value, and Gas fees.

Each block generates new BGT, determined by Berachain's inflation rate. These newly created BGT units are allocated to liquidity providers in specific BEX pools. The allocation is based on the total amount of new BGT emissions decided by validators' votes in the current period.

Block capture value comes from fees generated by Berachain's native DApps (such as BEX, Honey, and Perps). Transactions within each DApp may trigger fees, which are designated as block capture value (BCV). Whenever validators include a transaction that generates fees in their blocks, they receive that fee as a reward. Validators receive a portion of the BCV as a commission, with the remainder distributed to BGT delegators.

History and Fundraising

The origin story of Berachain is quite unique, involving a journey from meme-driven NFTs to potentially becoming the most distinctive L1 blockchain. It all began in August 2021 with the launch of the NFT series BongBears by three anonymous co-founders: Dev Bear, Papa Bear, and Smokey the Bera. The minting of Bong Bears on August 27, 2021, featured 100 Beras, each priced at 0.069 ETH. The minting process was very unique, allowing buyers to view and select specific bears on OpenSea before purchasing.

During that time, the team drew inspiration from the protocol OlympusDAO, which was rapidly gaining popularity in the crypto community. Leveraging the experience of OlympusDAO, Bong Bears pioneered the creation of a series of unique NFTs, paving the way for subsequent series. These cartoon bears quickly gained attention in the crypto community. The Bong Bears project was not just about art; it was the first phase of a series of bear-themed NFT collections, including Bond Bears, Boo Bears, Baby Bears, Band Bears, and Bit Bears. Each iteration was built upon the previous one.

• On October 16, 2021, OG Bong Bear holders received an airdrop of a rebasing NFT, the Bond Bear, making Bong Bears the first rebasing NFT ever.
• On October 29, 2021, Boo Bears' rebasing brought 271 festive bears celebrating Halloween. Notably, some bears appeared in costumes representing popular protocols like TempleDAO and Rome.
• The Baby Bears series launched on December 16, 2021, just in time for the Christmas holidays, featuring 571 baby bears. Many events were themed around Christmas and the holidays, adding to the festive atmosphere. However, there was a hidden twist—each bear from the previous collection had a corresponding baby version, creating a "family reunion" quest for owners.
• Band Bears was a series of 1,175 bears released on April 20, 2022. Each musical bear was designed in the style of a musician, providing compelling incentives for users to purchase bears that suited their tastes. Crazy off-market trades became commonplace, such as Johnny Cash for Bob Dylan or Future for George Michael. Each artist had both OG and baby versions, allowing collectors to pursue both versions simultaneously.
• The next rebasing occurred on August 24, 2022, when Berachain surprised the community with the secret release of 2,355 Bit Bears. This batch featured a unique art style, replacing Papa Bear's design with PixelBera's pixel bears.

Few NFT projects dare to venture into L1, establishing an ecosystem with a dedicated community without incurring marketing expenses. It is hard to imagine that an anonymous team, starting with an NFT series at the end of 2021, would raise a round of funding two years later at an astonishing valuation of $420 million, led by top industry fund Polychain. Other investors include Shima Capital, dao5, Hack VC, Robot Ventures, Tribe Capital, GoldenTree Asset Management, and more.

Some of the most notable angel investors include Mustafa Al-Bassam (co-founder of Celestia), Zaki Manian (co-founder of Tendermint), Georgios Vlachos (co-founder of Axelar), and others.

Ecosystem

Berachain is a relatively new player in the blockchain world, and certainly, it cannot be directly compared to mature ecosystems like Ethereum or second-layer protocols. However, some of its projects play a foundational role in ensuring the proper implementation of the proof of liquidity consensus mechanism. Let’s explore three of the most promising ecosystem projects.

Infrared

++Infrared++ is a liquidity staking solution built on proof of liquidity within the Berachain ecosystem. Infrared simplifies bribing and the validator layer by introducing BGT liquidity and streamlining BGT distribution, providing an excellent user experience.

Infrared makes it easy for everyone to access the Proof of Liquidity (PoL) ecosystem. It focuses on user-friendly experiences, offering liquidity providers a simple platform to earn iBGT (the liquidity version of BGT for Infrared).

Liquidity providers from Berachain's native DApps and other BGT-eligible venues can earn trading fees, native emissions, and claim liquidity iBGT. Infrared does not charge deposit or withdrawal fees, only a minimal performance fee, which is distributed to $IRED holders. Through iBGT, Infrared aims to explore use cases for BGT that were previously impossible on Berachain. They are supported by the Berachain Foundation and the Build-a-Bera incubator program, aiming to become a leading validation network.

Kodiak

Kodiak is a liquidity hub on Berachain that brings centralized liquidity and automated liquidity management to the ecosystem. It is suitable for traders and liquidity providers. To better understand Kodiak, it is important to know that its architecture allows for vertical integration of different DEX layers.

• Kodiak DEX is a decentralized exchange that utilizes a centralized full-range AMM to provide users with a non-custodial and highly capital-efficient trading and liquidity provision experience.
• Kodiak Islands is an automated concentrated liquidity strategy vault primarily used to attract liquidity within the Berachain ecosystem. Kodiak Islands provides automated LP strategies through concentrated liquidity. User deposits create an automatically rebalancing concentrated liquidity range that stays "in range" with price movements. Kodiak Island LP positions are eligible for PoL BGT rewards and use BEX liquidity for rebalancing.
• Sweetened Islands, an integrated incentive layer, utilizes Berachain's proof of liquidity (PoL) mechanism to provide sustainable incentives for liquidity on Kodiak Islands.
• Panda Factory, a no-code token deployment factory, simplifies the permissionless creation of new tokens (such as meme coins) and their initial liquidity on Kodiak's full-range AMM. This is particularly applicable for highly volatile assets that have yet to discover price characteristics.

Additionally, Kodiak is the only DEX supported by Berachain's Build-a-Bera project. Working closely with the Berachain Foundation, Kodiak Islands is compatible with Berachain's proof of liquidity, ensuring the liquidity of BGT as PoL matures.

Beradrome

Beradrome serves as the ecosystem incentive coordinator for Berachain, offering a unique approach to liquidity mining, token management, and on-chain governance. The platform introduces a three-token structure: BERO, hiBERO, and oBERO, each providing users with different advantages. The supply of BERO tokens is controlled by a joint curve mechanism algorithm, ensuring stability and market-driven liquidity.

Beradrome draws inspiration from the Solidly system in terms of liquidity provision, rewards, and token issuance. Solidly focuses on its AMM LP tokens, primarily generating income from swap fees and incentivizing veSOLID holders to vote in favor of specific metrics to earn those fees. In contrast, Beradrome is an inclusive version of Solidly, supporting any income-generating asset and allowing for diversified income streams such as token emissions, swap fees, interest, or gaming revenue.

Key features of Beradrome include:

• Joint curve mechanism
• Bullish option emissions
• Liquidity owned by tokens
• Single-sided liquidity reserves (eliminating impermanent loss)
• Deep liquidity and low slippage
• Risk-free lending collateralized by hiBERO

Beradrome has also created an NFT series called "Tour de Berance." This is a collection of 6,900 unique Berachain bears riding bicycles for liquidity competitions on Arbitrum.

Tour de Berance NFTs will provide exclusive features on Beradrome within the Berachain ecosystem, such as:

• More hiBERO allocations through NFT ownership
• Priority participation in events within the Berachain ecosystem
• NFT rebasing after Berachain's launch
• Priority access to token sales on the Berage launchpad through whitelisting
• Access to upcoming Beradrome video games

Testnet Launch

On January 11, 2023, Berachain announced the launch of its public testnet "Artio." Developers and users can interact with the faucet to receive $BERA tokens while engaging with the network and its applications. Currently, five types of activities can primarily be conducted on the Artio testnet:

• Swapping tokens on ++BEX++
• Minting $HONEY, Berachain's native stablecoin, on ++Honey++
• Borrowing or lending tokens on ++BEND++
• Trading perpetual contracts on BERPS
• Delegating $BGT to BGT stations

Within 48 hours of the testnet launch, Berachain successfully attracted over 300,000 users and facilitated over 1 million transactions.

Conclusion

In this article, we have delved into Berachain, starting from the technology behind it to one of the most recognizable communities in the crypto space. Who would have thought that the NFT collection Bong Bears would ultimately lead to the creation of an L1 with a novel consensus mechanism, raising a valuation of $420 million?

Currently, we are witnessing a plethora of protocols beginning to develop on Berachain, along with impressive statistics from the testnet launch. Berachain has achieved two outstanding accomplishments: establishing a robust community supporting "beras" and implementing a carefully designed and proposed architecture for protocols. The combination of these two factors makes Berachain one of the most unique L1s in the current crypto market.