Arweave TX
BM!
There is a clear imbalance between the amount of economic activity on a blockchain, which can be measured as DeFi TVL (Total Value Locked), and some may measure as bridge TVL, relative to the amount of economic security that the chain is paying for. In practice, let's take a step back before delving into the PoL system.
In Proof of Stake (PoS) systems, validators are rewarded at a rate uncorrelated with the chain's economic activity. There is some amount of stake and a rate curve that releases tokens, which also depends on the amount of stake, but at the end of the day, neither of those variables has any correlation with the chain activity. As a result, many chains are overpaying for economic security. For example, if you have a $4 billion FDV chain and 50% of the supply is staked, that means there is a $2 billion staking market cap. If that chain has a 10% base rate, you are paying $200 million annually in inflation to stakers for economic security. In practice, you will see many of these chains have $50-$100 million of DeFi TVL, effectively spending more than 200% (there are real examples) of your actual economic value on the chain in the form of security, which is a huge imbalance. Chains should not treat dApps and users, which is the economic activity component, as separate from economic security from stakers and validators.
SMOKEY THE BERA: "Berachain mechanistically incentivises the flow of rewards towards applications and rewards of block production."
Essentially, there is no need for the voting of DAO governance/organisations deciding where the rewards/incentives are placed. There is a core set of logic that defines how people are incentivised on the chain, and it's done in a consistent and quantified way. This removes the wait time for proposals to be made and all the confusion that comes with it. Time is sometimes the most crucial aspect when launching applications, as well as ensuring the rewards are there for those applications that actually bring users consistently. Validators do not have to deal with anything that's not systematic; it's all built into the core logic of Berachain.
At a high level, PoL has two components, with two token models: $BERA (gas token and the stake token) and BGT (Governance token). When you spin out a new Validator, you seed it with $BERA. BGT is non-transferable and redeemable 1:1—you can burn $BGT for $BERA and vice versa. That token is only earned by providing liquidity in the ecosystem.
Within a validator, there are effectively two components to the rewards. In a normal PoS system, you only earn rewards in the gas token. In Berachain, you effectively get $BERA and $BGT emissions. The $BERA inflation is designed only to cover the validator operational costs. How do you get them to parity? No more than that, so the base incentive is ensuring these validators have a reason to continue to validate, regardless of what happens to $BGT.
With $BGT, validators are directly forced to interact with the ecosystem and invest in applications. The end result, because of this burn mechanism, is that the $BERA inflation plus $BGT inflation equals standard PoS inflation. There is never any other risk where you have to ramp up hyperinflation from $BGT burn. At the end of the day, if you were to take all the $BGT emitted on an average timeframe and burn it all to $BERA, you end up with a normal PoS chain. The only difference is how the rewards are structured.
If you are only breaking even with your base inflation, you need to interact with the ecosystem as a validator. You need to talk with applications, allocate the $BGT rewards in exchange for native tokens from the dApps. Validators are effectively only going to be really profitable when they are participating with the native ecosystem and allocating effectively. If you, as a validator, don't want to deal with PoL, you will not be very good. The validators that contribute the most to the ecosystem on the application side will have the most success. They will be able to optimize different elements on how they are distributing their rewards.
As an application, you define a minimal rate for your spend. For example, let's say you have 100 of your native tokens, and that token is worth $1. If $BGT is also worth $1, you would not accept a rate lower than 1:1 between $BGT for your native token. So, you put a minimal threshold for your bribe at exactly the fair market price. If a validator is ever going to emit $BGT to your gauge, it will always be more profitable for the applications relative to traditional farming. This is crucial to keep in mind; it’s always optimal for the application and for the validators to work this way, otherwise, they will simply not partake.
An application has a gauge, and they offer a validator some tokens in exchange for $BGT. The validator emits 20% more $BGT to the gauge than they receive, which means that from a dollar value perspective, the application gets 20% more $BGT emissions than they would have got in their native token. 90% of people that hold liquidity in that liquidity pair stake their assets in $BGT and can claim their $BGT and earn the rewards.
The protocol efficiency: you have $100 in tokens, which becomes $120 in $BGT effectively. You have $120 of $BGT, with only 90% staked, which means you have $133 in effective emissions. The end result is that, as an application, you have improved your spend by 33% by participating in Proof of Liquidity. From an application perspective, it’s beneficial!
As a validator, it's beneficial because you are forced to interact with your ecosystem to create value for the ecosystem to actually earn your keep. For users, whether they are a liquid staker or traditional staker or a liquidity provider, it increases the amount of rewards available, creating alignment between the three different groups that has not been seen before in other proof systems.
People need to think about infrastructure differently from how it has been spoken about and currently being used.
The current status quo: if you are an app deployed on a blockchain, they give you two things: marketing support and/or a grant. The larger the grant you get, the less developed the chain is. This means they rely on you as the application to bring more value to the ecosystem with a decent product, further legitimising them as a chain that you should use. The tech could be amazing, but if you don't have real value applications, then it’s goodbye and DED chain. In some capacity, they are extracting value from apps despite giving grants. This lessens network effects, providing less space for the application itself to boost itself and generate value. When these grants are given to you in the chain's native token, you are reliant on the success of this native token/chain for your distribution. You are betting doubly while having value extracted from you, a big caveat in all of this. If I have a token that I am being incentivised in, which is also overvalued and then dips 50%, you have taken a huge risk with exposure and loss of funds that could make your protocol bankrupt. Furthermore, why would users want your token incentives when they are worth 50% less? It may force you to increase APR, leading to a death spiral of token plummeting. It’s a big F YOU!
My personal example, no hate to Arbitrum, but they messed up! They were the DeFi giant and the home of the best DEXs and innovative protocols. They then decided to distribute grants and incentives in such a way that lessened the value and products on the chain. Instead of honing in on DeFi and derivatives, their own DAO was swayed towards GameFi, which is one of the biggest scams that don’t need to be built. They just sell the token to raise the funds, damaging the chain ecosystem. No one wants card games, clash of clans on-chain, etc. Arb would probably be at $8 if it was not dumping its tokens. Personally, I would have taken loans in USDT/USDC/ETH, but I'm no expert, just a DEGEN.
A chain that derives value mechanistically from successful apps, your success as an app is not predicated on chain success, but rather the chain will be successful if those SEXY dApps being built are successful! Berachain is about creating genuine dApps that offer rewards, incentives, validator contribution to the ecosystem, as well as OOOOGGAAA BOOOOGA. Everything I have mentioned above makes Berachain the place for the next era of building. It’s all predicated on developing successful protocols.
The Berachain team consists of some of the most based individuals in the space who are looking for innovators and the right apps to be built on Berachain, incorporating the inherent advantages offered compared to other consensus mechanisms.
Chains allocate incentives slowly and inefficiently. You should not need to be in insider groups and trying to be in the first rounds of incentive programs, go through DAOs, and deal with the inefficiencies to make the round successful. It’s unfair on some projects that don’t have larger connections. It’s not very pragmatic for the whole process.
This is all solved on Berachain by the proof of liquidity consensus mechanisms. When you put PoL to the core elements, it’s a chain-level grants program. The more successful your application is, the more rewards it gets, the more value it gains, and the more validators will be incentivized to interact with the ecosystem. Better BGT bribes as well as multipliers. Validators are rewarded in real-time; no wait on grants, etc. You get your bribe outcome in the next block in the chain. As a result, all these things that currently operate in chains, running really slowly and inefficiently, are optimised in a very unique way on Berachain.
(all images from berachain official account and community)
Crypto Goblin
