Proof Of Liquidity Series Pt. 1 | The Basics

At the center of the Berachain network is a mechanism called Proof of Liquidity (PoL). With the goal of moving beyond Proof of Stake (PoS), PoL rewards users for providing liquidity, decentralizes token distribution, better aligns network participants, and creates more value flow on chain.

We’re building a product (iBGT) that simplifies the way users interact with PoL to ensure simplicity and accessibility. However, we are still striving to build a well-informed community and believe that a high level understanding of the network’s inner workings is important.

Throughout this series, we aim to demystify all aspects of PoL, enabling readers to grasp the mechanics, make informed decisions, and engage with our product more effectively.

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

What is Proof of Liquidity?

Proof of Liquidity is a sybil resistance mechanism designed to enhance network security by increasing liquidity and ensuring fair power distribution on Berachain. Unlike PoS systems, where basic token ownership dictates one’s influence, PoL rewards participants for performing certain actions in authorized dapps such as providing BEX liquidity, borrowing HONEY, or providing HONEY to the Berps bHONEY vault.

These contributions earn Berachain Governance Tokens (BGT), which are then used to delegate to validators responsible for securing the network. This system not only incentivizes liquidity but also democratizes network governance by distributing decision-making power based on active contribution rather than mere wealth.

Key to Berachain’s design is the separation of the governance token (BGT) from the network’s gas token (BERA), which mitigates the risk of stake centralization and encourages a balanced distribution of control. This approach aims to create a cooperative ecosystem where validators and protocols work together to support the network.

The Role of BGT

Participating in Proof of Liquidity rewards users with BGT, a non-transferable governance token that’s forever bound to the address that earns it. Holders of BGT can delegate their tokens to network validators, an important part of network participation. The more BGT that is delegated to a validator, the higher their chances of being selected to propose new blocks — and, consequently, earn more rewards.

But why delegate one’s BGT to others? The incentive lies in Berachain’s bribe mechanism. Bribes create a mutually beneficial relationship between validators and delegators. As validators propose blocks and earn rewards, they can choose to share a portion of these rewards with BGT holders who delegated to them.

This creates a flywheel: users increase network liquidity and gain governance power by participating in PoL, delegate this power to validators who, in turn, secure the network and earn rewards, a share of which flows back to the delegators. Altogether, this aligns incentives, and encourages ongoing participation in the network.

Aligning Protocols and Validators

Unsurprisingly, the value flow on Berachain isn’t limited to users and validators. PoL is also designed to create value for the protocols building on the network. The system has mechanisms that incentivize protocols and validators to work together, but we’ll cover that in depth in part two of this series.