Dive to Berachain #1. Journey to Proof of Liquidity
Key takeaways
- PoS (Proof-of-Stake) is a popular consensus method but creates an imbalance between liquidity and network security.
- Berachain enhances both liquidity and security through the PoL (Proof-of-Liquidity) model, fostering a symbiotic relationship among users, validators, and the network.
Intro
Is PoS a perfect consensus algorithm? It has a simple structure where the more tokens you hold in the network, the more influence you have. PoS plays a crucial role in maintaining network security and generating blocks, and while it has seen slight variations, the fundamental framework has remained unchanged and has been adopted by many projects.
“The more tokens you have, the more tokens you get.”
PoS, which started with a simple principle, reached its peak during the DeFi summer of 2020, leading to numerous liquidity mining projects. It wasn’t just about PoS in the block verification process but also a deep exploration of the inherent nature of capital, where the rich get richer, and the poor get poorer. A representative project in this regard is Curve Finance. Curve reduced impermanent loss in asset trading within liquidity pools, providing economic benefits to users and stable returns to liquidity providers. Within the Curve ecosystem, it is possible to maximize returns based on the amount of $veCRV. This led to various DeFi services competing to hold more $CRV tokens, establishing a revolutionary token incentive model through the Curve War..
Curve created demand in two major areas: system governance and incentives. However, as competition among DeFi projects and the demand for Curve decreased, it led to a completely different phase. The decline in demand caused a price drop, and the price drop led to a further decline in demand, creating a death spiral. This was evidenced by the liquidation of a position worth over $100 million held by the founder of Curve last June.
In this situation, a new solution was needed to address the issues of PoS. Berachain, emerging as a new horizon for PoS, has garnered attention in the market due to the aforementioned problems.
What is PoL?
There are several keywords to describe Berachain, but the most important concept is undoubtedly PoL (Proof-of-Liquidity). The biggest issue with PoS is that the tokens responsible for network activation and stability are directly tied to the rewards for network participants. This creates a significant imbalance between liquidity and network security.
- User & Validator: Tokens are liquidated to generate revenue (liquidity).
- Network Protocol: Limits liquidity through staking methods to maintain security (security).
This explains why PoS networks tend to show an upward trend in token prices during boom periods due to a positive feedback loop and a downward trend during declines due to a vicious cycle. PoL proposes a new governance token instead of using the network’s gas tokens as staking assets, thereby providing potential additional rewards to staking participants. In practice, PoL operates as follows:
- Initial validators and staking participants provide $BERA tokens to qualify for block generation.
- When a selected validator proposes a block, $BGT tokens are rewarded and stored in the reward vault.
- $BGT tracks users who provide liquidity on the network, calculates their contributions, and distributes rewards accordingly.
- Validators encourage users to delegate more $BGT to them, increasing the weight of the reward vault and the actual rewards returned to users.
This new role of deciding how to distribute rewards generated during block creation encourages a stronger symbiotic relationship between validators and the protocol.
BGT Token
While the aforementioned PoL shares similarities with Curve’s approach, it fundamentally proposes important ideas to address PoS’s issues:
“Non-transferable $BGT (Berachain Governance Token).”
Various research articles and official documents emphasize Berachain’s Tri-Token model, with $BGT being the most crucial element. Berachain created $BGT as a non-transferable token that cannot be bought or exchanged, solely for system stability. $BGT can only be earned by providing liquidity to the network and can be delegated to validators to earn rewards. This design prevents $BGT from being sold for profit, which could compromise network stability.
One of $BGT’s key features is that it can be burned and converted to $BERA at a 1:1 ratio, but $BERA cannot be converted back to $BGT. This mechanism encourages users to actively contribute to PoL and obtain governance rights.
Conclusion
Berachain’s PoL model addresses the issues of traditional PoS by offering an innovative approach that provides both liquidity and security. The non-transferable design of the $BGT token maintains network stability while encouraging user participation. Berachain strives to enhance cooperation among network participants and build a sustainable ecosystem. Future articles will delve deeper into Berachain’s technical features and unique ecosystem. We will explore how Berachain’s Tri-Token model, EVM compatibility, Comet Consensus, and various dApps and cooperative protocols interact to develop the ecosystem.
Author : Harvey
Reviewer : Luis
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