Proof Of Liquidity Series Pt. 2 | Value Flow
In part one of this series we covered the basics of Proof of Liquidity (PoL) — including how PoL works and the role that the Berachain Governance Token (BGT) plays in the system. We then closed out part one by describing how PoL is not only designed to create value for users, but also to create value for the protocols building on the network.
In this blog post we’ll explore that value flow in more detail.
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.
Aligning Protocols and Validators
The design of PoL acknowledges two key issues with Proof of Stake:
- Protocols play little-to-no role in improving the security of the chain they’re building on.
- Validators hardly see any benefits from the protocols leveraging their infrastructure.
PoL aims to fix these issues by incentivizing protocols and validators to work together. PoL allows validators to boost a protocol’s desired liquidity pool(s) using BGT emissions (covered below), and in turn, protocols can help validators earn more rewards through bribes. This setup creates a win-win-win: proper incentives for teams building on the network, more security, and more rewards for those keeping the chain running.
BGT Emissions
Central to PoL’s incentive mechanism is the emission of BGT, which will play a critical role in bootstrapping liquidity for projects. After mainnet launch, these rewards will be doled out through interaction with the Berachain native apps (BEX, Bend, and Berps) and will expand to any smart contract deployed on the chain, with validators directing the flow and intensity of these emissions.
It’s essential to understand that many protocols on Berachain will launch their own tokens, ranging from governance tokens to stablecoins, to synthetic assets. Liquidity is paramount for these assets, as it directly impacts user experience and the protocol’s ability to integrate seamlessly across the DeFi ecosystem. It’s no secret that a project’s success is largely contingent on its liquidity.
With liquidity as a priority, projects are naturally driven to maximize their BGT emissions. This creates a strategic relationship where protocols incentivize validators through bribes, encouraging them to allocate BGT emissions favorably. This mechanism serves a dual purpose: it increases liquidity for protocols, attracting more users, while providing validators with additional rewards for their essential role.
It’s a clever way to ensure everyone’s pulling in the same direction, driving the whole Berachain ecosystem forward.
How Infrared Ties it All Together
As we’ve highlighted throughout this series, the value flows enabled by Proof of Liquidity (PoL) benefit everyone on Berachain. Users earn rewards and get a say in governance through BGT; protocols gain the liquidity needed for growth; validators secure the network and receive rewards for their role.
This flywheel is completely unique to Berachain and plays a big role in why we’re choosing to build here. In part three of this series we’ll explore how Infrared leverages the PoL flywheel to enable novel use cases on Berachain and to further increase potential rewards for protocols and users.