Berachain's Proof of Liquidity

Addressing the downsides of POS. A more efficient consensus to promote liquidity, security, centralization and incentive alignment on a chain.

Beras Cant Read TLDR:

Proof of Stake creates a fight between security and liquidity, limiting how much TVL protocols can tap into, and it has an extremely limited role for validators. End result is a constant fight for liquidity and protocols competing against Chain APR, creating high opportunity costs for users.

Proof of Liquidity combines security and liquidity, providing protocols with open TVL and uses an incentive layer where validators and protocols interact to fully tap into liquidity and incentives are directly aligned. The result is a flourishing network of protocols that collaborate with validators and one another and share liquidity, removing the opportunity costs for users and maximizing utility for all the chain's liquidity.

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The Proof of Stake Consensus

Proof of Stake (POS) is a consensus mechanism that provides a more scalable and energy-efficient solution to Proof of Work. POS works by allowing users to stake their tokens in validators across the network to provide security. "Staking" tokens translates to using your liquidity as collateral to secure the network. The amount of tokens you have is equivalent to the amount of voting power and security you can provide the network. Your tokens are delegated to validators, which are essentially node operators that leverage your stake to produce blocks, verify transactions and allow the functioning of the chain.

POS enables chains to work, but it also has some less than ideal consequences. The greatest of these being that staked tokens are removed from circulation and valuable liquidity is lost as Defi protocols lose access to it.

Validators in POS

In traditional Proof of Stake chains, the role of the validator is to secure the network by verifying transactions, participating in governance, creating blocks, participating in the consensus mechanism of the chain and allowing users to stake.

As a reward for these services, validators get paid chain issued rewards, that generally come from inflation.

Validators also participate in on-chain governance, which helps decide the future of the chain and allows token holders to vote on how they want this future to look like. Aside from network security and some participation in governance, the role of a validator in POS is limited. This is not to say that validators are not important, but the extent to how they are allowed to operate is certainly restrictive.

Protocols in POS

POS doesn't have an incentive system to help protocols access liquidity. In a sense, protocols compete with the chain for liquidity, as users have the option to access native staking APRs or to use their tokens in Defi.

This presents a challenge for Defi protocols, as they are essentially left to fend for themselves and they require external incentives to attract liquidity, or a strong enough value proposition that can compete with the chain's inflation APRs. In many cases, protocols face an issue, as they often need to compete with 10-15% APRs generated natively in the chain, which means that bootstrapping liquidity is often capital intensive. Even when they manage to secure TVL, every protocol on the chain is aggressively fighting for whatever liquidity is left outside of staking and this slows down how fast protocols can expand.

Proof of Liquidity (Beracain)

Proof of Liquidity (POL) emerges as an alternative to Proof of Stake and with its design, its aimed at fixing some of the downsides of this consensus.

POL is a state-of-the-art governance system and consensus that directly targets the biggest challenges in decentralized networks. Through POL, Berachain manages to fix liquidity issues with staking, alleviates stake centralization and expands on how protocols and validators interact with one another to better align incentives.

In simple terms, Berachain deprecates staking and replaces it with a completely liquid solution that enables consensus to be formed, while also helping protocols leverage existing liquidity to bootstrap their own, and uses incentives to steer the chain on a merit based system.

Validators in POL

Berachain does it different. POL expands the role of a validator to become one of the principal actors in guiding the future of the chain. Aside from this, POL fixes the staking liquidity issue by changing how their security consensus works.

In Berachain, instead of users having to lock their tokens in staking to secure the network, they can instead use their tokens to provide liquidity in special pools that allow the proof of liquidity consensus to work. In this scenario the liquidity of the "staked" tokens is not lost and instead is readily available for Defi protocols to leverage.

When providing liquidity, users receive Berachain's governance token $BGT, and they can use this token to stake to validators and gain voting power. Instead of trapping liquidity in staking, Berachain uses a token dedicated to governance.

$BGT governance controls future emissions of $BGT and is only emitted to liquidity providers. With staking, users delegate their BGT and control to validators, which means validators control future emissions of the chain.

As a validator, you can decide where to target $BGT emissions, which means validators play a direct role on incentives and growth of TVL. In addition, Berachain uses validator bribes in a Curve style mechanism, where protocols and users can bribe validators to target emissions to specific LPs. As a result, Berachain as an ecosystem self regulates, and incentives/emissions are sent to the protocols that actually drive demand for the chain and the ones that bring the most value to users.

With incentives built into the chain, grants and other external capital injections are not needed, as the chain has an intelligent designed that promotes sustainable growth and helps protocols with good PMF to reach their full potential.

Protocols in POL

In POS, every protocol is on its own and even though collaboration certainly happens, the restricted amount of liquidity left in the chain as a direct cause of staking limits how much TVL protocols can access. In a sense, it doesn't matter if your chain has $500 million in TVL if all of these tokens are locked in a validator as no one can use this. The only thing you achieve is to dilute the chain through inflation and for users and validators to get paid from chain emissions regardless of actual usage.

In Berachain, things are different. Emissions are done purely to actual contributors of the chain, as POL creates an incentive layers where merits and demand are the drivers for incentives.

Put simply, if your protocol generates revenue and has high usage, validators will aim BGT emissions at your pools as these are the most profitable, or you can use your revenues to bribe validators for these same incentives and you create a flywheel where you continue growing TVL. By having this built on-chain, you don't have to go through weeks of governance to beg for community pool sponsored incentives and hope they last long enough for your protocol to take off.

Berachain is extremely efficient with its emissions and it only rewards usage of the chain. No more locked tokens inflating TVL, but rather fully liquid tokens that every protocol can tap into.

This availability of liquid tokens also creates different dynamics between protocols, where they are not fighting with one another but instead they collaborate to find ways to better take advantage of TVL. Validator, protocols and users work together to grow they chain and allocation of incentives is purely market driven, which means everything is driven by merit and results. Free markets are the single best solution for asset allocation and POL applies exactly this.