Killing the points system, will Berachain's Proof Of Liquidity mechanism be the future?
After the blast, the points system is dead; POL has arrived, and Berachain is on the rise.Author: Wenser, Odaily Planet Daily
On June 24, the Infrared Finance, a liquidity staking protocol in the Berachain ecosystem, announced the completion of a new round of financing, with Binance Labs participating, though the specific amount has not been disclosed. According to Infrared's anonymous co-founder and CEO Raito Bear, this financing is a strategic round with Binance Labs as the sole investor.
In May, former Polygon Labs DeFi lead Jack Melnick joined Berachain to oversee DeFi ecosystem development; in April, Berachain announced that its Series B financing scale had increased to $100 million, co-led by the Abu Dhabi branch of Brevan Howard Digital and Framework Ventures, with participation from institutions like Polychain Capital, Hack VC, and Tribe Capital, bringing its valuation to over $1 billion.
After the curtain falls on many L1 and L2 network dramas, Berachain, based on the recently proposed Proof Of Liquidity (POL) mechanism, may become a key player in "reviving the glory of L1 public chains." Odaily Planet Daily will provide a brief analysis of this in the following article for readers' reference.
Market Status: "The World Has Long Suffered from Points Systems"
In a previous article titled "The World Has Long Suffered from Points Systems: A Review of the Rise and Fall of Points Models," written by senior author Nan Zhi from Odaily Planet Daily, we can see that the emergence of points systems is due to specific market conditions.
Firstly, regarding the timing of emergence, Blur was born during a bear market when the market was cooling down, and the points system is an effective means to extend the project lifecycle. At least in terms of time, it can delay the expectation of token issuance and alleviate the urgency of issuing tokens.
Secondly, regarding project differences, projects that typically involve trading, order operations, and liquidity locking are more inclined to adopt points systems. On one hand, it clarifies users' behavior trajectories and investment costs; on the other hand, it provides users with relatively intuitive and clear "numerical incentives." Many people have experienced the visual stimulation brought by the continuous increase in points values. Although it is not a change in balance, it is indeed more advantageous than the previously static interfaces.
Thirdly, from the perspective of user virality, points systems can achieve a broader social virality through invitation links. Moreover, the creation of leaderboards can bring more significant conversion effects for project marketing and operations. Many times, large whales invest substantial funds for the title of "top player," which bears some similarity to the psychological effects and marketing advantages of ranking on Web2 live streaming platforms.
Finally, from the perspective of over-the-counter trading, points systems also provide price guidance for token listings. Whether it is over-the-counter trading platforms like Aevo and Whales Market or OTC trading groups using dual collateral models, they can gather a certain amount of liquidity through points systems. Additionally, insiders know that due to time differences and anonymity factors, over-the-counter trading sometimes has a certain premium effect, which can easily drive up the price of project points.
In addition, recently, Robinson Burkey, co-founder of the Wormhole Foundation, expressed his views on the points system regarding the progress made since the launch of the W token a few months ago. "I believe the best airdrops are those that are unexpected for users. However, I think we can no longer return to that simple era and have to enter points activities and witch wars. Points activities are like a tacit understanding between the protocol and 'new users,' where airdrop farming is acceptable. The question becomes whether the protocol can provide a good environment for farmers to farm. I personally support points programs because they can alleviate the workload of the protocol team (i.e., reduce the time related to anti-witch work)."
Of course, after an overwhelming number of project points activities, the current points system has led to aesthetic fatigue and even a backlash, primarily due to:
- The restrictions on liquidity locking imposed by points systems. The funding lock-in restrictions of Blast have become a glaring case of public disdain.
- The unfriendly nature of points systems towards market retail investors. Large whales gain substantial returns through large amounts of capital, while retail investors reap very little.
- The long-term harm to the ecological network caused by points systems. Many times, points systems create a false prosperity for projects, as seen after the LayerZero airdrop ended, where daily trading volume plummeted over 95% compared to its peak. After the points activities end, all that remains for the project is a mess.
Therefore, the market is calling for innovations in points systems, and Berachain's Proof Of Liquidity (POL) has emerged in response.
Proof Of Liquidity: Rewarding Liquidity Provision and Feeding Back to the Ecosystem
Previously, Berachain's co-founder Smokey stated: "Berachain is the first chain to vertically integrate liquidity into the base layer. Block rewards from validators flow to applications on the chain, ultimately benefiting their users, bringing liquidity to DApps in the Bera ecosystem. Berachain is an application layer aggregation."
Illustration of the POL mechanism
So, what is the POL mechanism, and what are its characteristics and advantages? Here is a detailed introduction.
What is the POL Mechanism?
According to the latest explanation released by Berachain, the POL mechanism is essentially an accelerator for the Berachain application layer—achieving liquidity and security expansion for the ecosystem through the joint efforts of users, protocols, and validators.
In this process, the roles played by the three parties differ:
(1) Users: Provide liquidity and stake LP, accumulating BGT rewards and LP fees (the BGT rewards of the liquidity pool are calculated based on the global weighted average of the validator's liquidity pool).
Users' BGT (Berachain governance token) income is based on two factors: 1. The total assets staked; 2. The amount of BGT sent to the dashboard.
(2) Validators: Take turns building blocks and receive block rewards based on the amount of BGT delegated to them.
Validators will direct a portion of the BGT earned from block building through their "berachef" into the liquidity pools of projects they choose.
The berachef interface can be viewed at: https://bartio.station.berachain.com/validators/0x40495A781095932e2FC8dccA69F5e358711Fdd41
(3) Application Projects: Create proposals to establish new liquidity pools, making the reward treasury eligible for BGT contributions from validators.
Since liquidity pools are merely smart contracts that accept single asset staking, they can exist in the form of DEX pools in the Berachain ecosystem or any other asset pool.
Illustration of roles and participation in the POL mechanism
How Are the Advantages of the POL Mechanism Reflected?
If the above version sounds a bit complex, the simpler version is that Berachain's POL mechanism introduces the intermediary role of "validators" to match BGT liquidity with rewards from different application tokens:
- Users stake assets to the dashboard built by validators;
- Validators mobilize BGT assets to support different applications and receive corresponding application rewards;
- Application projects need to attract validators' support through proposals and reward them, allowing for distribution between validators and users.
At the same time, in this process, users and validators can flexibly enter and exit assets, while users, validators, and application projects form a "community of interest," enabling positive feedback loops through accelerated liquidity circulation, thereby promoting the overall development of the Berachain ecosystem. Specifically:
- Users: Maximize the benefits of staked assets by providing liquidity to application projects and delegating BGT to unified validators;
- Validators: Gain rewards through more BGT delegation and service protocol liquidity bonuses, effectively collaborating with application projects to create greater profits;
- Application Projects: Improve the liquidity funding circulation efficiency compared to conventional liquidity mining by guiding liquidity through collaboration with validators and directly incentivizing users through BGT token issuance.
In this process, BGT becomes the main circulating asset within the ecosystem, while application projects can issue their own assets to facilitate the exchange and circulation with BGT assets, ultimately achieving a win-win situation for all parties. Additionally, the POL mechanism decentralizes the generation and distribution rights of incentives, allowing users, validators, and application projects to decide the flow of BGT, making it undoubtedly the best choice for efficient liquidity circulation and mutual benefits.
Conclusion: A Community of Interest Can Propel an Ecological Community, Not the Other Way Around
Unlike points systems, the POL mechanism allows different roles within the Berachain ecosystem to find their "ecological niche," thus forming a relatively complete "community of interest," rather than forcing the three parties together, compelling different roles to participate due to points rewards.
Compared to the Blast ecosystem, which treats points and golden points as "carrots dangled in front of users" and arrogantly dilutes early liquidity investments and rewards through various mechanisms, Berachain's POL mechanism is undoubtedly more transparent and fair, likely attracting more users, validators, and application projects to join.
As a meme-rich L1 public chain known as a "playground for infinite economic games," Berachain may grow into another distinctive blockchain network.
