Most newer blockchains in the crypto space usually focuses on scalability issues where the developers create a new consensus mechanism or an infrastructure that makes the blockchain faster and cheaper than older generations blockchain

This is because the narrative of blockchain is always centred around Bitcoin and Ethereum which is known as having scalability issues since it is considered an older generation blockchain that has high transaction fees and slow transaction time.

While this might not be true anymore because of innovations around those two blockchains, most developers are still trying to find ways to develop a new blockchain based on the idea that most blockchains are unscalable.

Rarely do developers focus on other things aside from scalability issues when creating a new blockchain. But now, there is a new project that is creating its own blockchain without the focus on improving scalability issues, rather, focusing on another issue which is liquidity shortage on newer blockchains.

The project is Berachain, a new Proof of Liquidity Blockchain, which is a new project that we will be talking about in this article!

What is Berachain?

Berachain is a new blockchain that is trying to solve the problem of liquidity shortage among newer generation blockchains.

Liquidity shortage is a condition where a new blockchain suddenly gets a huge influx of liquidity after a blockchain is launch usually because there are airdrops or incentives offered by the developer so that investors transact a lot of money on it, but then go to another new blockchain that is also doing the same after that particular blockchain is done giving incentives.

For example, let’s say that Blockchain A has just launched on February 1st and they are currently doing airdrops with tasks that investors must do by using the blockchain frequently. The snapshot will be done on February 20th and the airdrop will be distributed on February 28th.

But then, on March 1st Blockchain B is launching and is also doing airdrops with tasks to also use the blockchain as frequently as possible.

In this scenario most investors will chase the airdrop on Blockchain A and then immediately use the airdrop from them to use at Blockchain B, leaving Blockchain A with a liquidity shortage because most of investors money has gone into Blockchain B.

This is what liquidity shortage is, and it is now pretty common on newer blockchains, considering most are promoting their blockchains with airdrops of themselves or ecosystem on it.

Berachain wants to fix this problem by introducing a three token mechanism and a Proof of Liquidity consensus.

Before this innovation however, Berachain only started as an NFT collection called Bong Bears which received success because of how strong the community is and how the NFT collection evolved into some other NFT collections as well that brought the community even closer.

After realising how strong their community was, the developers decided to capitalise on it by creating a clearer project.

They started building Berachain using the Polaris EVM which is a modular infrastructure for developers to create their own modular blockchain. Modular in this sense means that the developers can use it to build a blockchain that has multiple chains for multiple purposes or a chain that can connect with other blockchains through multiple inside chains of its infrastructure.

Berachain uses this infrastructure so that it can process its three token mechanism while being able to communicate with other EVM blockchains. EVM or Ethereum Virtual Machine, is a standard that lets the blockchain communicate with other EVM blockchains such as Ethereum itself.

Berachain uses the Polaris EVM because they want to capitalise communications with the biggest liquidity blockchain of all, which is Ethereum.

With this infrastructure, they also used the CometBFT which is a consensus engine that uses Byzantine Fault Tolerance mechanism so that the blockchain rarely shuts down and can continue to run even if some of the validators are down.

Both of these mechanisms are used by Cosmos Blockchain, which is currently the stronger modular framework blockchain according to the Berachain developers, which is why they take inspiration from it.

The developers of Berachain also used the Cosmos SDK or Software Development Kit to create their project.

Right now, the blockchain still does not have its own SDK for developers to build Decentralised Applications (DApps) on it, but they have a tool called precompiles which are precompiled code to use as templates to build higher functions DApp on Berachain. Berachain also has its own Berachain EVM for developers to launch DApps on it.

All of this is pretty similar to most blockchains, but what differentiates it is the Proof of Liquidity  (PoL) consensus mechanism that has not been implemented anywhere else.

How Does Proof of Liquidity Work?

The Proof of Liquidity consensus mechanism is an innovation that is developed from the Proof of Stake (PoS) and the Delegated Proof of Stake (DPoS) consensus mechanism.

PoL’s main goal is to combat three things which are to solve the problem of stake centralisation, build security via liquidity, and aligning protocols with validators to create harmony in the blockchain.

Stake centralisation is a condition where all the utility token of the network is centralised towards validators.

This is because most blockchains emit their token into the network through validators, leaving validators having huge control of the token itself, causing centralisation.

Stake centralisation is a problem mostly found in PoS and DPoS blockchains where stakers who are validators receive new token first, creating centralisation of token distribution.

To alleviate this problem, Berachain uses a three token consensus mechanism that also creates alignments between validators and protocols while also increasing security through liquidity incentives.

This mechanism is created to also combat the liquidity shortage problem that was first being talked about in this article. Through PoL, investors on the Berachain are given incentives to hold their token and not leave the blockchain, making sure that the blockchain does not experience liquidity shortage.

On the validator side of things, Proof of Liquidity is similar to Delegated Proof of  Stake, where investors can delegate their token to validators so that they can contribute to the security of the network and get rewards.

But the difference is, with the three token mechanism, delegators are faced with some constraints to sell their rewards, making it harder for them to leave the network and essentially solving the liquidity shortage problem.

Also when validating the network, validators are chosen randomly based on their staked amount, just like most PoS blockchains out there. The higher the staked amount the higher likelihood the validator will be chosen to validate the network, hence giving them higher rewards.

Economics of Berachain’s Token Ecosystem

To understand how the Proof of Liquidity works, investors need to know the token ecosystem of Berachain.

There are three tokens on the Berachain ecosystem, which are the BERA, BGT, and HONEY. Each of them have different use cases which will be explained below.

HONEY is the stablecoin of the Berachain ecosystem where it will be used for various Decentralised Finance (DeFi) activities including borrowing, redeeming, transacting, and paying fees.

It is still unclear how the pegging mechanism works because the developers of Berachain are still developing it as the explanation of it seems to be non-existent on their whitepaper. But, one clear thing is, the developer said the value will be aimed to approximate 1 USDC.

BERA is the gas token of the Berachain ecosystem which is only used as transaction fees on the blockchain and to pay for transaction fees on some protocols on the Berachain ecosystem.

Lastly is the BGT which is the governance token of the Berachain ecosystem that is used for almost every incentive on the ecosystem.

The BGT Token can only be received through incentives on the network and cannot be bought. It also cannot be sold but it has a burn mechanism to trade it with BERA at a value of 1:1 meaning for every 1 BGT burned, the user will receive 1 BERA.

To acquire BGT, investors can do three things, which are depositing liquidity on Berachain and receive BGT through emissions, borrowing HONEY to receive BGT on BEND DApp, and through rewards from providing HONEY in the bHONEY vault on BERPS DApp.

BGT is the sole token that is keeping the liquidity shortage problem away from Berachain, as investors will have a hard time trading it, essentially keeping them from leaving the network since most of the incentives are received in BGT.

Coming back to Proof of Liquidity the way that the blockchain works is through a five step mechanism involving BGT.

First step is setting up validator nodes. When setting up to be validators on Berachain, users need to stake liquidity with any token pair available on the DApp or protocol on the Berachain ecosystem, for example through the BEX DApp.

The token supplied does not have to be BERA, BGT, or HONEY, as it can be any other pair for example, ETH and USDC.

After that they will receive BGT as rewards, which will be then used to stake or delegate to existing validators to support the network through the BGT Station DApp.

After validators are set and the delegation process has been completed, the validator can now try to get a chance to validate the blockchain.

The blockchain will then receive transactions from users and select random validators to validate those transactions and store them into blocks, based on how much the validators staked BGT amount is. The higher the staked amount, the higher chance of getting picked to validate, hence higher rewards.

Regarding validators, since there is a delegation mechanism, validators can also bribe holders of BGT to stake their BGT on them so that they have more power over others. The bribe is done by giving more tokens  or rewards to them.

But Berachain specified in their whitepaper that the bribe can be lies, meaning validators can all of a sudden not fulfil their promise during bribes to investors of BGT they are bribing.

After that the validation process is completed, users who transact pay a gas fee with BERA but the validators will receive BGT as block rewards plus some BGT to emit into the blockchain.

Validators will now vote through the governance process to choose how much percentage of the BGT new emissions each protocol on the Berachain will receive. For example, validators will vote for BEX to receive 80% of new BGT and 20% for BERPS which are both DApps on the ecosystem.

Lastly BEX and BERPS will distribute those new BGT to liquidity providers that have provided or staked tokens on its platform, essentially giving rewards to them through BGT making it harder for them to leave the network because BGT is harder for them to trade to their original staked tokens.

This mechanism solves the three problems that was talked about before, because the centralisation no longer exists as DApps and Protocols are the ones emitting the new token, validators and protocols are more aligned, and the more staking being done the higher security the blockchain has because more staked liquidity equals more or stronger validators.

Berachain’s Native DApps and Ecosystem

As you can see, the Berachain is a complex blockchain with several DApps and tokens supporting its ecosystem.

The berachain itself has six DApps supporting its ecosystem with each having its own purposes supporting the continuation of the blockchain.

The first one is the BEX which is their decentralised exchange used to swap tokens and stake tokens on liquidity pools to earn rewards in the form of BGT.

Another DApps that supports trading is BERPS which is their platform for decentralised derivatives trading, offering leverage as high as 100x. They also have vaults to stake to stake HONEY to receive bHONEY, the reward token which the amount is based on transaction fees on that platform.

Speaking of HONEY, Berachain also created a protocol focused on providing minting and redeeming of the HONEY stablecoin with STGUSDC which is their version of USDC on the blockchain.

Users can also borrow and lend HONEY through the BEND DApp, which is their own DeFi lending and borrowing platform specifically used for HONEY.

The rewards earned from lending HONEY is also in the form of BGT, still keeping the liquidity shortage solution for Berachain.

Last is the BGT station that can be used to manage BGT to delegate it to other validators, to redelegated them to other validators from the previous validators, or to unbond it which is to take the BGT back after delegating it to validators.

This DApp can also be used to submit governance proposals on the blockchain and to vote on upcoming changes in the blockchain.

Overall all these DApps work together to keep the blockchain alive because it has its own individual features.

Through all of this, Berachain has managed to attract a lot of DApps and Blockchains to connect with their blockchain. As Berachain has an interoperability feature, it can accommodate transactions of tokens from other blockchains and send or receive tokens from them, making its ecosystem bigger.

But note that all of these ecosystems are still EVM base, as Berachain cannot communicate to other non EVM blockchains yet. But looking at the connected partners in its ecosystem, it is safe to say that Berachain has gained massive popularity in the EVM space.

Progress and Future Plans

Currently, Berachain is still in testnet phase and has no clear launch date yet, which is why users are heavily invested in it as they predict a high price increase of their two native tokens.

As of right now a lot of users are testing the Berachain as well, in the hopes of receiving points that will get them airdrops after the blockchain has officially launched.

Berachain has also provided a BERA faucet as well so that users can try the network for free with BERA Token as gas fees token payment.

Overall the ecosystem has been a success but still has a lot of uncertainty around it because it is still new and is still being developed.

The success is also backed by numerous venture capitals in the crypto space, including Polychain Capital, Shima Capital, and Robot Ventures.

They have also received fundings from big ventures such as OKX Ventures recently which made them have multi-million in capital to grow their ecosystem.

The community is also growing at a rapid pace from only around 50,000 members in 2023 to now standing at more than 400,000 members according to its Discord community.

So it is no surprise that the popularity is growing at a rapid pace, as you can see they have a huge community with overflowing capital, ready to take on the crypto market and be one of the most popular projects on the EVM space.

Conclusion

Overall the project is looking good, but there are some things to consider before supporting it or buying BGT or BERA in hopes of long term gains.

The first one is complexity, as the blockchain Proof of Liquidity and three token mechanism has a high complexity that might hinder adoption of it if not being published, marketed, and educated properly towards the market.

Another thing that can hinder growth is the limited use cases of the BGT and BERA token right now. But overtime, this can be fixed by partnering with bigger blockchains to have more incentives by holding or using BGT or BERA.

Currently though, by only holding BGT investors can receive fees from transactions on the blockchain in the form of HONEY or BGT, it is not clear yet because the mechanism is still being developed in the testnet.

That is another thing to highlight which is uncertainty where a lot of things is still unclear because it is still arguably new and being developed.

But looking at the backers and the community, all of the uncertainty can be solved by simply providing clear information when the mainnet launch comes.

So overall this project has a lot of potential in the future and might potentially be one of the leading blockchain in the EVM space.