The entire flywheel around Berachain will continue to operate.

Written by: hitesh.eth

Translated by: Luccy, BlockBeats

Editor's Note:

Berachain is a Layer 1 blockchain built on the Cosmos SDK and compatible with EVM, adopting the Proof of Liquidity consensus mechanism for protection. The Berachain token economy introduces the Bera network, which consists of three tokens for the first time, including the network gas token BERA, the ecosystem algorithmic stablecoin HONEY, and the non-transferable Bera governance token BGT.

Currently, the Berachain project's Discord community has over 50,000 members, with over 100 teams building new and existing protocols on the recently released development network (Devnet) local version.

Cryptocurrency researcher @hmalviya9 analyzes the mechanism and token economics of Berachain starting from DeFi liquidity.

Berachain is a mysterious project, and the vast majority of cryptocurrency Twitter users have no idea what they really want to build. This article will express my true thoughts on Berachain.

DeFi faces an endless liquidity problem. New protocols often struggle to attract liquidity, leading to many new infrastructures failing and ultimately becoming a neglected area.

The liquidity problem in DeFi is very similar to economic security issues. Before Eigenlayer appeared, providing economic security for new web3 service protocols was very difficult. It has now become easier because Eigenlayer has built a coordinating layer that connects ETH validators with web3 service protocols.

Now, ETH validators can directly provide security for new web3 services on Eigenlayer, and projects can simply focus on innovation and product design, essentially solving security issues.

Regarding DeFi liquidity, if we find a way for the liquidity pool of new DeFi applications to directly obtain liquidity through token pools staked by validators, and as a staker, you can receive rewards through token inflation, transaction fees, exchange fees, and block capture fees, it's like a 4x reward boost.

That would be crazy, right?

As a staker, I wouldn't refuse such a reward boost. As a DeFi project owner, I would be happy to integrate my application into such blockchain infrastructure, which can handle my liquidity directly through validators. Berachain is the infrastructure needed to solve the DeFi liquidity problem.

They have established a consensus mechanism called Proof of Liquidity, where stakers delegate their staked tokens to validators and receive rewards, and they can only retrieve their staked tokens after providing liquidity in the supported asset pools.

Berachain has 3 tokens:

• BGT (staking and governance token)
• BERA (gas fee token)
• HONEY (stablecoin pegged to USDC)

BGT plays a role as a staking and governance token in the Berachain ecosystem. In fact, you cannot mint BGT, but you can exchange BGT for BERA.

BGT is a non-transferable token, similar to SBT. The only way to earn BGT is by providing liquidity in the local DeFi applications of the Berachain ecosystem. Currently, they have 3 local DeFi applications:

• BEX - a decentralized exchange based on AMM, similar to Uniswap
• BEND - a lending protocol similar to Aave
• BERPS - a Perps exchange similar to GMX

To receive BGT rewards, you need to provide liquidity in any assets supported by these dapps. It will be up to governance to decide how much BGT to distribute to which liquidity pools, and as a DAO member, you will play a crucial role in this.

Validators can also bribe you to approve their expected token inflation for certain liquidity pools. Once you stake BGT, you can become part of the governance, earning bribes, as well as token inflation rewards and capture fees for BGT.

As a staker, you may receive fee rewards from BEX, BPerps, BEND, and block capture fees. Your basic token inflation rewards will receive a 4x boost, and you will also have a say in determining how much of the token inflation to allocate to the liquidity pools.

Transaction fees on Berachain will be paid in BERA, and Berachain will burn 100% of the transaction fees, prioritizing fees to be passed on to validators, similar to Ethereum and Polygon.

Berachain is building its own parallel EVM called Polaris, which will provide a gateway for the ETH DeFi ecosystem to access Berachain.

As long as people maintain enough motivation to provide liquidity, the entire flywheel around Berachain will operate effectively, as long as they continue to receive profitable annualized returns, they will remain motivated.

It will be interesting to see how the whole thing works when the mainnet goes live. I like this concept and am eager to further explore this ecosystem.

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