ELI5: Proof of Liquidity (PoL)
On a typical Proof of Stake (PoS) blockchain, the process for participating in network security is straightforward. You buy the network’s native token and stake it with your validator. Your validator “uses” your staked tokens to help secure the network by participating in block production, and you earn rewards in return. While effective for security, the only real benefit for participants in this system is earning staking rewards. Beyond that, there’s little interaction between users, validators, and the protocols deployed on chain.
Now, imagine a system that doesn’t just reward you for staking but for actively contributing to the network's growth. Instead of being limited to locking tokens in a validator, you can also get rewarded by the network with governance power for providing liquidity across various use cases on chain. This is the fundamental idea behind Proof of Liquidity (PoL).
Token primer
Berachain’s three native tokens are BERA, BGT, and HONEY. BERA is used for validator staking and paying transaction fees. BGT, the governance token, is used by validators to direct emissions and earns a share of native dapp fees (e.g. BEX, Bend, Berps). HONEY is Berachain’s collateral-backed stablecoin. For PoL, our focus is on BGT.
How PoL works
In PoL, liquidity is king. Users who contribute liquidity receive BGT (Berachain Governance Token), which they can delegate to validators who influence where future BGT rewards are directed. Validators manage these emissions by allocating rewards to specific liquidity pools or protocols, amplifying yield opportunities in areas that matter most to Berachain. This creates a feedback loop where rewards are directed where they’re needed most.
We’ve already seen a similar, but worse model work in DeFi. Liquidity mining is by far the most popular bootstrapping mechanism in our industry. However, it’s always outsourced to the protocols, and the network doesn’t contribute at all to the growth of the applications building on it.
Why PoL matters
We’ve all seen DeFi ecosystems suffer from opportunistic farming cycles, where users chase short-term rewards, leaving protocols—and entire chains—with fleeting liquidity. PoL fixes this with sticky liquidity by ensuring that users get incentivized by the protocols they’re using and the network.
By tying network rewards to liquidity contributions, PoL aligns users, validators, and applications under a shared incentive structure. Users earn competitive rewards and governance power, validators secure the network while driving ecosystem growth with emissions, and applications gain access to reliable liquidity to bootstrap and scale.
The bigger picture
The dynamic introduced by PoL makes Berachain unique in the wave of L1s and L2s that users have been subject to in recent years. Most networks offer no new benefits to users besides “cheaper fees and faster block times” — two things that on their own don’t solve core issues with DeFi today. With the launch of Berachain, we’ll finally see new DeFi experiments and new use cases enabled by Proof of Liquidity.
Infrared & iBGT’s role
At Infrared, we aim to make PoL accessible to everyone. Our flagship product, iBGT, simplifies earning PoL rewards by offering reward vaults that issue iBGT—a liquid, transferable version of BGT.
Ordinarily, BGT is soulbound to a user’s wallet, limiting its potential use cases. By earning iBGT through Infrared vaults instead, users unlock additional liquidity against their BGT, enabling a whole range of possibilities. This has already unlocked all kinds of use cases, liquidity flywheels, and more on the network—and mainnet isn’t even here yet!
If you’ve followed along, you might be wondering what happens to the BGT rewards we mentioned in the token primer section. Here’s the answer: staking iBGT in the iBGT rewards vault offers the same, or even higher, rewards than regular BGT.
Why the potential for higher rewards? Not every iBGT holder will stake their tokens; some will use them in various Berachain applications (e.g. to provide liquidity, borrow another asset, etc). This reduces competition in the rewards pool, creating a yield boost for those who do stake in the iBGT vault.
If you’re interested in trying it out, you can do so on bArtio here. Otherwise, you can explore some of our other content here to learn more.