BGT Yield: Where Does it Come From?

In a previous blog post, we provided an overview of what the Berachain Governance Token (BGT) is and how it works. In this blog post, we’ll cover BGT’s yield, where it comes from, and how Infrared will make accessing this yield as easy as possible.

Note: Berachain is still on testnet. This information is based on what we currently know about the network specifications and details are subject to change before mainnet launch.

Note 2: This has been edited in light of the Berachain V2 release and its associated changes.

Quick BGT Overview

In case you didn’t read our longer BGT overview, here’s a brief summary.

BGT is one of Berachain’s three native tokens (BERA, HONEY, BGT). Unlike most tokens, it is unique in that it is “soulbound” to the address that earns it, meaning it cannot be transferred. This design aims to support its primary role in governance and allows holders to delegate their voting power to validators.

BGT’s primary role will be to influence liquidity on the network through its emissions. These emissions are determined by validators who vote with their BGT (and the BGT delegated to them), making it crucial for attracting builders and users.

BGT Delegation

While the exact mechanics of BGT delegation aren’t important for this blog post, users should have a basic understanding of how it works to understand where their yield comes from.

After earning BGT, users can delegate their tokens to validators on the network. Think of delegation as lending your BGT voting power to a validator, which increases their total BGT stake weight. A validator’s BGT stake weight determines the percentage of future BGT emissions they can control. Validators vote on these emissions on a recurring basis, directing them to specific BGT whitelisted pools to incentivize liquidity.

For instance, a validator with 1% of all staked BGT controls 1% of future BGT inflation, and decides which liquidity pools receive these emissions.

BGT Yield

BGT emissions are crucial for boosting liquidity on Berachain. Projects that attract significant BGT emissions to their pools will likely gain considerable traction on the network. Luckily for validators and users, with great power comes great… yield.

Projects can encourage validators to use their BGT stake weight to vote for specific pools by offering incentives (i.e. “bribes”). For example, if a project wants to increase their liquidity on the BEX, they would use their own BGT holdings to vote for higher emissions towards their token’s pools. To further boost liquidity, they could offer a $10,000 incentive to encourage other validators to vote similarly.

Validators who vote to increase emissions to the project’s desired pools would receive a share of this $10,000 incentive. These validators can, and should, share some of this incentive with any users who delegated BGT to them.

This design benefits everyone: the project’s pools get more BGT emissions and liquidity, validators earn rewards for their votes, and delegators receive a share of the incentives.

You can already begin to imagine that many of the projects on Berachain will want to incentivize validators in this way — making it a profitable endeavor to hold BGT.

iBGT and staked iBGT

Infrared takes all of this a step further by simplifying activities around BGT with iBGT and staked iBGT. Unlike BGT, which is soulbound and non-transferable, iBGT is liquid and transferable wrapper, allowing users to realize the value of their BGT (through iBGT) without burning it for BERA.

Users earn iBGT by depositing into Infrared vaults for BGT-earning pools. Behind the scenes, their liquidity is deposited into the corresponding BGT emitting pool, and in return the earned BGT is held with the Infrared smart contact vaults which are then delegated to multiple validators, not just our own, to maintain a decentralized network. Infrared’s smart contracts then distribute iBGT to the user, ensuring that all iBGT is backed 1:1 by BGT.

Note: Infrared ensures that native BGT remains non-fungible, preserving the integrity of Proof of Liquidity (PoL).

While iBGT itself doesn’t earn yield from its underlying BGT, it enables users to provide liquidity, use it as collateral, and engage in various DeFi activities. This capability, made possible by Infrared, opens up many more use cases for BGT on Berachain — promoting innovation that would allow for an entire ecosystem to be built around iBGT.

To earn BGT yield, users can stake their iBGT. This allows them to earn incentives from their BGT without needing to decide where to delegate. Infrared’s smart contracts handle the entire process, ensuring users receive their rewards.

Yield Maximization

Everyone wants yield. And choosing to earn iBGT through Infrared offers flexibility and new yield-earning opportunities for users and protocols alike.

The flexibility of iBGT means users can decide how they want to earn yield. They can either participate in DeFi use cases, depositing their iBGT to liquidity pools, money markets, and other financial products, or they can stake their iBGT to earn rewards directly from the underlying BGT. This dual approach allows users to tailor their yield strategies to their preferences and risk appetites.

This system creates an efficient market around BGT, benefiting both users and protocols. Users gain more control and opportunities for yield, while protocols benefit from increased liquidity and participation in their ecosystems.

The yield opportunities for Infrared don’t end with iBGT and staked iBGT, but we’ll save that for a future blog post.