Editing | Wu Talks Blockchain
In this podcast, we discussed the unique aspects and transformative potential of Berachain in the blockchain ecosystem with Smokey, co-founder of Berachain. Smokey detailed how Berachain's Proof of Liquidity model enhances security and incentivizes liquidity, the EVM consistency features of Berachain, the use of Comet BFT consensus to achieve single-slot finality, and the dual-token system of $BGT and $BERA. Smokey also highlighted Berachain's journey from the NFT community, the challenges and innovations in airdrop design, and the role of local dApps in setting quality benchmarks for the ecosystem. The conversation concluded with a discussion on Berachain's positive flywheel effect and its future.
The audio-to-text transcription was generated using GPT and may contain errors. Please listen to the complete podcast:
YouTube:
https://youtu.be/gVgCFrU8jq0
Xiaoyuzhou:
https://www.xiaoyuzhoufm.com/episodes/669a60b037236c546e575a1e
Introduction and Background of Berachain
Berachain is an EVM-consistent Layer 1 blockchain based on Proof of Liquidity, allowing users to convert liquidity into security and support network applications. Unlike many recent copy-and-paste L1s, Berachain stands out with its unique technical stack. It is the first L1, apart from Ethereum, to be truly EVM-consistent, meaning it maintains complete EVM compatibility from start to finish and can run on various clients such as Reth, Nethermind, and Aragon. Therefore, anything built on the Ethereum mainnet can seamlessly integrate into Berachain.
Berachain utilizes Comet BFT consensus to achieve single-slot finality, combining the best features of modularized systems for chain construction. A key aspect of Berachain is its Proof of Liquidity mechanism, which ties block rewards to the liquidity introduced into the system. This approach aligns liquidity incentives with network security at the chain level, providing meaningful economic reasons for building applications on Berachain. Block rewards flow from validators to applications and ultimately to users, creating an ecosystem where applications are directly incentivized to attract liquidity and improve capital efficiency.
Proof of Liquidity and Incentive Market
Berachain follows the ETH 2.0 specification, allowing an unlimited number of validators to be activated over time. It starts from a relatively permissioned set and can expand over time. There are two tokens: $BGT, a non-transferable soul-bound token used for governance, and $BERA, the basic gas token for network transactions and fees. Validators deposit $BERA tokens to activate and go online.
When a validator wins a block, the proportion of block rewards or $BGT earned is based on the amount of $BGT delegated to it. $BGT is provided by users who have contributed liquidity in the past. Therefore, while not a direct one-to-one relationship, if a validator is delegated more $BGT, its block reward scale will be larger. Validators, as allocators, choose where to allocate block rewards to pools and applications, creating a value flow from validators to applications and ultimately to users.
Validators can collaborate directly with the protocol to guide liquidity, allowing protocols to reduce the cost of capital through a free-market approach. The protocol not only pays more of its own tokens as incentives but also distributes its tokens to a validator and its delegators in exchange for $BGT rewards. Validators may choose to support early protocols with higher risk but potential returns, or focus on specific categories of projects or applications they believe will bring new users or increase interest to the chain.
This design can also accommodate different types of applications, such as GameFi or NFT, which may not require a large TVL but have higher risks. Over time, the system can evolve to support micro-transaction formats, where rewards are proportional to the transaction volume or fees generated by applications. This adaptability ensures that various applications can benefit from the existing incentive structure.
Evolution from NFT Community to L1 Unicorn
The best technologies often become highly contagious. Memetics, as a distribution method, becomes most important once the product reaches a minimum threshold. Projects like Eigenlayer or Celestia, despite their technical complexity, also have meme elements that allow people to understand and participate.
In the early days, Berachain actually started as an NFT project in an interesting way, creating 100 smoking bear NFTs and distributing them in the DeFi OG community. This self-selected a group of technically capable and meme-savvy individuals. As the community grew, they added mechanisms to the NFT, such as rebase, to reward initial holders and distribute more widely. This maintained community engagement and provided a foundation for exploring the potential of real blockchain projects.
Through conversations with community members and builders, Berachain identified a market gap. Many users were choosing between running ETH validators and providing liquidity in DeFi protocols. Berachain proposed the idea of combining liquidity and security, making them complementary forces rather than opposing ones. They aimed to support applications built on-chain through Proof of Liquidity, allowing those who contribute the most value to guide incentives across the entire network.
To expand cryptocurrency to millions of users, there must be applications that can only exist in a crypto environment. As an accelerator at the application layer, Berachain lowers the barrier to entry for protocols, helping them guide liquidity to attract meaningful consumer adoption. The goal is to build the next breakthrough application within the Berachain ecosystem.
The community rallied around Berachain because it was both fun and ambitious. The project started as an NFT community and evolved into building a blockchain, driven by the desire to create something unique and valuable. Berachain aims to cultivate a meaningful ecosystem with core primitives and a variety of projects ready for deployment, ensuring that the chain is not a barren wasteland at launch.
Venture capital firms are increasingly focusing on projects with strong meme culture and a solid foundation. Berachain's strategy is to avoid simply replicating existing blockchain projects and instead focus on developing unique core technologies that can attract retail investor interest and drive ecosystem growth.
Challenges and Innovations in Airdrop Design
I think designing airdrops is very difficult and may require some innovation. I do agree that airdrops are becoming more like a part of liquidity mining or developer acquisition, rather than anything else. However, I disagree with the first part of this view. If you look at the previous cycle, L2 projects like Optimism and Arbitrum conducted very successful airdrop campaigns, and they still have very high market values.
Because in any case, you need some way to distribute and gain initial circulation, so you don't have a project with super high FTV and low circulation. However, I think we are seeing more funds entering the private market, leading to many projects launching at fairly high valuations, which means this effect will be more pronounced when there are not many marginal buyers.
Practicality and User Retention of Airdrops
I do believe that the average practicality of airdrops has decreased, and their user retention rates are much lower than before. I also believe that institutional airdrop farmers and these effective farming operations have become more complex and sophisticated than in the past, adding another burden.
In the future, we may see airdrops become a more tangible source of value accumulation for projects. Currently, people see airdrops as a means of obtaining distribution, but in many cases, they do not actually receive the distribution they desire. Additionally, people still see airdrops as a way to improve the market's perception of projects. For some reason, giving people money for free has become an industry standard, which logically seems strange to me.
Our approach is that we care deeply about several different groups. First, we want to help the original community that has been with us for two and a half to almost three years. Without them, the project wouldn't exist, so we care deeply about them. Secondly, we care deeply about developers and those who are actually building in the ecosystem. We are fortunate to have many people wanting to build on Berachain and who have spent time and effort deploying and doing a lot of work on the testnet. They help us improve the software and build a better ecosystem, proving that people want to use this thing.
We also care about those who help test different products and participate in the network at the earliest stages. This process requires a lot of effort and is never very simple or pleasant. Additionally, we care about new liquidity and new entrants entering the ecosystem.
An elegant airdrop can be designed to reward those who contribute the most. There will always be complaints about not getting free money, but you can't please everyone. Look at successful airdrop projects like Celestia, Gitcoin, and Ethena. In many cases, they had low expectations for the airdrop and have built products with significant utility. All of these are key solutions for different parts of the stack.
Airdrops can be terrible, but if you build a good product, then doing a good airdrop will become easier.
Berachain's Dual-Token System
I hope that Berachain's dual-token system will be successful in the long run. While I'm not sure if this necessarily ties into airdrops, I think it's a long-term view. Berachain's dual-token system actually allows people to choose what they care about most. This choice is embedded in the protocol itself. Setting up two tokens is not just for the sake of having two tokens. If we want to maintain the principles of Proof of Liquidity, $BGT must be non-transferable and soul-bound. Otherwise, people could simply buy it, which would defeat the purpose of providing liquidity to receive block rewards.
I emphasize this because some people have asked us why we have two tokens. The focus of Proof of Liquidity determined this. The dual-token system allows users to choose based on their risk preferences or focus. On one hand, you can hold $BERA, speculate on its liquidity price movements, and use it to pay gas. On the other hand, you can hold $BGT, and by holding $BGT, you can compound your rewards into the pool you deposited into. For example, if you provide liquidity in a stable pool and earn some $BGT, you can choose to delegate the $BGT to validators who allocate most of the rewards to the same stable pool, potentially earning more than just holding or selling the liquid $BERA.
There's an element of game theory here. You can also delegate $BGT to a different validator or to a validator you want to receive incentives from a protocol you want to be exposed to, effectively gaining a call option without buying or paying fees. You can participate in various applications supported by $BGT while enjoying returns.
This system allows for a longer-term compounding view rather than a short-term price action view, which may be healthier in the market. It allows users to find their game style.
How do you think Berachain's positive flywheel will occur?
I think we may see several things happen. Initially, some protocols will launch, and we may see a large influx of capital into native applications. These participants will earn a lot of $BGT and may do what I mentioned earlier—provide liquidity in some less risky pools, such as stable pools and major pools. They will compound these LP by directing more $BGT to the pools they provide liquidity to.
As more protocols go live and submit governance votes to ensure their protocol treasuries or pools receive $BGT rewards in the chain's DEX, I expect people to start migrating to these pools. Validators will start collaborating with protocols, initiating an incentive flywheel, allowing people to take higher-risk bets on medium or small tokens. I've even heard plans for meme coins supported by Proof of Liquidity, which may be paired with significant rewards from validators, further enhancing the positive flywheel.
In short, the positive flywheel starts with protocols collaborating with emerging validators, and users delegating their $BGT to these validators, incentivizing new protocols. For those protocols that ultimately succeed and see significant growth, we will see this effect cycle throughout the entire ecosystem. Real significant returns or alpha will come from people betting correctly on protocols in low-risk situations early on, by collaborating with validators incentivized by these protocols.
We want to create an ideal metagame that rewards those who put in more effort or time. We hope for a system of mandatory participation, ensuring that if you do the work, you can get extraordinary returns. This concept has been seen in ecosystems like Blur and Pendle, where people can do better than average when choosing the right strategy.
The basic flywheel works as follows: you provide liquidity in a given pool, which pays you $BGT, generating more fees. You hold $BGT for a longer time, automatically compounding it into your pool, and continue deepening fees, more liquidity, and a repeated cycle.
This creates a new speculative way where you can speculate on the activity and popularity of projects or tokens without the high risk of traditional methods like MEV or direct token purchases. This method brings a process that typically occurs under the table into a free-market environment, allowing for more transparent and attractive speculation.
Another mental model is to see it as a chain-level Curve without the voting lock multiplier. It allows you to direct rewards to any given pool in the DEX and also to any protocol on the chain. This creates a flexible and modular system at different levels of the stack, combining liquidity provision with governance and decision-making power.
Which projects currently on Berachain are exciting to you?
Puffpaw: A DePIN for quitting smoking and earning while smoking on Berachain. It incentivizes healthier behavior by reducing nicotine intake and has a strong team that has sold millions of e-cigarettes globally.
Exponents: A new directional trading layer, somewhat like Uniswap in the derivatives space. It combines Uniswap's spot arbitrage mechanism with a bribery layer to incentivize long or short positions.
Gaming Projects: Including a farm game similar to "Animal Crossing" and "Stardew Valley," and teams like Shogun, which raised funds from Polychain and Binance Labs to build a solver network for cross-chain asset trading.
Gummi: A market that allows borrowing and lending between any assets, with shared liquidity profiles and isolated risk profiles.
Kodiak: Providing centralized liquidity and automated liquidity management strategies, aiming to be the preferred DEX for the community and altcoin DEX.
Over Under: Speculating on outcomes and generating odds using ML and computer vision algorithms on Twitch streams, allowing real-time betting on actions in games.
Concrete Finance: Building on-chain credit default swaps and clearing as a service to meet the more complex and nuanced needs of DeFi.
Infrared: Providing a flow form of $BGT across different protocols as a revenue-generating primitive, aiming to be Berachain's Convex, LIDO, and block-building layer.
For more information about the ecosystem and upcoming projects, visit the Berachain Foundation page and follow the relevant Twitter accounts for the latest updates. The mainnet is expected to launch before the end of the year, with a focus on ensuring it is tested and ready to accommodate immediate activity from dozens of companies.
Why did the Berachain team also directly develop DeFi applications such as lending and AMM?
The Berachain team's direct development of the first batch of DeFi applications serves two main purposes. First, they aim to kickstart the $BGT generation flywheel, ensuring that this process is secure and not reliant on third-party dApps from the start. This is crucial for securely controlling the entire chain's block rewards.
Secondly, these native dApps are designed to kickstart the fee generation flywheel, allowing $BGT to earn fees from these applications. Additionally, they set quality standards for the ecosystem. In the early stages of a new ecosystem, there is often a proliferation of low-quality popular dApp forks, such as Uniswap and Aave. By establishing strong foundational capabilities on-chain, Berachain aims to avoid this issue and ensure that liquidity is concentrated in high-quality applications from the start.
These native dApps serve as a stable baseline and are not the ultimate solution. The goal is for better applications to replace these native dApps over time. However, they need to be initially robust enough to maintain stability and set high standards for future development.
Users earn $BGT by providing liquidity and participating in native dApps (such as providing liquidity in DEX or borrowing through lending protocols). This is the primary way most $BGT was initially expected to be generated.
For those interested in Berachain, we plan to expand our presence in the APAC ecosystem, including China, Singapore, Hong Kong, South Korea, and Southeast Asia (Vietnam, Thailand, Indonesia, Malaysia, the Philippines). We are excited to expand our influence through practical operations, collaborating with protocols building these ecosystems, and interacting with various trading and farming communities.
If you are a builder or interested in participating in Berachain, please follow our social channels and feel free to reach out to our team at any time. We strive to be as responsive and helpful as possible, ensuring that people understand what we are building and how it can benefit them.
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