What Is Berachain?

Berachain is an EVM-identical Layer 1 blockchain that uses Proof-of-Liquidity, which separates gas tokens from governance tokens. By introducing PoL, Berachain aims to encourage users to provide liquidity to DeFi applications and create a synergy between validators and the ecosystem of projects.

Key Takeaways

• Berachain is an EVM-identical Layer 1 blockchain network built with the Cosmos SDK. 

• It runs on the Proof-of-Liquidity (POL) consensus mechanism, which calculates rewards based on the amount of provided liquidity and separates gas tokens from governance tokens. 

• Berchain utilizes BERA, which is used for gas fees, and BGT, which is the blockchain’s soulbound governance token. 

• Berachain also presents fast transaction finality, relatively cheap transaction fees, and an overall agile, scalable, and modular blockchain network.

• Berachain is in the public testnet phase at the time of writing with the public mainnet launch set for later in 2024. 

Proof-of-Stake (PoS) blockchains are emerging as the most popular consensus mechanism due to its scalability; however, it affects the liquidity of the network as it requires network validators to lock away the network’s native tokens on the consensus layer. 

As a response to the on-chain liquidity problem, Berachain, a Layer 1 blockchain project proposes a novel native liquidity solution implemented at the consensus level. It aims to solve a key blockchain and DeFi liquidity problem by allowing users to stake assets on Berachain while letting them use those assets in DeFi protocols. 

On June 9, 2024, Berachain announced the launch of the latest version of its public testnet with a public mainnet planned for later in 2024. As the project nears its official launch, we review how it works and what it offers.

Berachain’s Public Testnet bArtio B2 is now live.

Hot Bera Summer begins at:

🐻 https://t.co/Wozhn32KfW 🐻 pic.twitter.com/jwv4IQNoPB

— Berachain 🐻⛓ (@berachain) June 9, 2024

Introducing Berachain

Berachain is an EVM-identical, modular Layer 1 blockchain network that utilizes Proof-of-Liquidity (POL) as its consensus mechanism. With Proof-of-Liquidity, users that provide liquidity to the chain gain a soulbound governance token (BGT) that determines the potential reward weight for a staker, providing applications with a liquidity-rich ecosystem to build on. 

These protocols can create reward vaults, where users can stake POL-eligible assets to earn a portion of the BGT emitted to the vault. These vaults are chosen by the validators based on the incentives offered by the protocol, which usually take the form of offering an exchange rate between BGT emitted to the vault and another token.

Through this, Berachain envisions the creation of an incentive flywheel that brings together all network participants:

Users who lock their assets into the reward vault will receive BGT emissions from the validators, and these emissions can be delegated to validators to earn more rewards. Meanwhile, applications can incentivize user activity with BGT emissions.

Berachain is also EVM-identical, which means that any EVM (Ethereum Virtual Machine) applications can be deployed on the Berachain network ‘as-is’. Berachain is built with BeaconKit – a modular framework that enables the creation of L1 and L2 chains. As a result, this means Berachain can also support the improvements in the upcoming Dencun upgrade.

Funding

Berachain started as an NFT project called BongBears in 2021, and the bear theme continues with Berachain and also the founding team’s names: Smokey the Bear, Homme Bera, and Dev Bear.

Berachain has raised $142 million over two funding rounds. In April 2023, the project raised $42 million led by Polychain Capital at a valuation of $420.69 million. A year later, in April 2024, Berachain raised another $100 million in a Series B round led by Framework Ventures and the Abu Dhabi branch of Brevan Howard Digital (BH Digital), with other notable investors including Polygon’s Sandeep Nailwal and Samsung Next.

Based on reports, investors are backing Berachain through a simple agreement for future tokens (SAFT).

 How Does Berachain Work?

The idea behind Berachain is the development of a cost-effective, secure, high-performance, and user-friendly blockchain network that is liquidity-rich. This is reflected in Berachain’s execution and consensus layer design. Berachain is built on the BeaconKit framework – a highly modular framework for developing EVM-identical consensus and execution layers. 

 Execution Layer: EVM-Identical

Berachain offers an EVM-identical execution environment that allows developers on Ethereum and other EVM networks to port their applications to the networks without making any changes to their code base. Compared to EVM-equivalent and EVM-compatible execution layers, which may require developers to make changes before deploying their apps on these chains, Berachain mirrors the execution environment on Ethereum. This also means that when the EVM is upgraded, Berachain can easily adopt the latest version.

Consensus Layer: Proof-of-Liquidity (POL)

Berachain’s approach to solving the on-chain liquidity is its novel Proof-of-Liquidity (POL) consensus mechanism. POL is an adaptation of the established POS consensus mechanism with significant modification in the staking process, asset management, and reward distribution. 

For one, it introduces a multi-token structure to separate the security and governance systems. It also aims to support the network’s economy while building a sufficient value layer for the consensus system.

BGT emissions are similar to staking rewards on POS chains; however, the distribution method differs in Proof-of-Liquidity. While validators emit BGT based on their BGT delegation weight, neither they nor their delegates earn BGT rewards directly. Instead, they only earn the right to choose which reward vault they want to direct their BGT emissions to. 

In these reward vaults, users can lock supported assets to earn a share of the BGT emissions the vault receives from validators – for example, a supported asset could be an LP token that represents a liquidity position. 

This separates those who receive BGT emissions from those who allocate BGT emissions, and it also creates a marketplace for applications to vie for a share of these BGT emissions. Applications will offer incentives, which establishes an exchange rate between BFT emitted to the vault and a certain amount of a different asset. For example, a reward vault may offer an incentive to validators, where they will receive 30 USDC for every 1 BGT emitted to the vault, while a DEX may offer 10 of its native tokens for every 1 BGT emitted to its vault. 

Berachain Tokens

Berachain operates a multi-token economy that separates the key areas of the network: economy, security, and on-chain governance. 

BERA

BERA is the native token of the Berachain network. It is the gas token of the blockchain, where fees for regular and smart contract transactions are settled in BERA. Beyond utility, BERA also plays a role in the network’s security and governance, as BERA holders can stake their tokens in the reward vault to get BGT, which is the network’s soulbound governance token. 

Berachain Governance Token (BGT)

BGT is the governance token of the Berachain network and powers network security. It is a (non-transferable) soulbound token obtained by staking BERA and other accepted assets in the reward vaults. Validators are required to stake BGT tokens and receive BGT emissions as a reward for validating a block, although they can’t earn these emissions directly and can only allocate them to reward vaults in exchange for incentives. 

As a governance token, BGT will also be used by the project’s DAO to decide on improvement proposals via community votes. BGT holders can vote individually, or delegate their voting powers to any other address. The DAO decides on issues such as assets to be accepted in the reward vault and proposals related to the native decentralized applications.

BGT can be redeemed for BERA through a burn process in a 1:1 ratio.  

HONEY

HONEY is the native stablecoin of the Berachain network. It is ‘soft-pegged’ to the US dollar. According to the project, it is designed to provide a stable and reliable means of exchange within the Berachain ecosystem and beyond. HONEY is minted through a dynamic procedure controlled by the vault router – a smart contract on the Berachain network that accepts collateral stablecoins to mint HONEY and manages deposited collateral. 

Berachain operates multiple vaults for the accepted stablecoins; the vault router moves collateral to the appropriate asset vault and mints the equivalent HONEY. The minting rate, fee, and the accepted collateral for minting HONEY could change over time as decided by the Berachain DAO. HONEY can be used just like any other stablecoins – it can be used for P2P transfer of value and integrated into DeFi protocols like lending and perpetual trading platforms.

Berachain Native dApps

Berachain already has a few native dApps set up on the DeFi front, which utilize the network’s unique features and are prototypes of how applications on Berachain could work. Some native dApps in the Berachain ecosystem include,

BEX – Native Decentralized Exchange on Berachain

BEX is Berachain’s native decentralized exchange. It is an AMM-powered application that uses liquidity pools to serve trade requests by users, and its pools can be upgraded to Proof-of-Liquidity Reward Vaults, where the LP token can be staked in the corresponding POL reward vault for BGT rewards.

Some additional features of BEX includes:

Gas saving and gasless transactions: According to the project, BEX will offer low gas fees for swap transactions. However, trading fees apply; BEX will charge a range of fees from 0.05% to 1% of the swapped value depending on the volatility of the asset swap. An extra 0.1% fee applies, this will be allocated to BGT holders. 

BEX’s gasless transaction feature will enable users to pay for transactions using the exchanged asset instead of the native BERA gas token.

Account abstraction: BEX will also implement account abstraction to improve user experience. Users can run off-chain transactions using relayers. This enables users to set up transactions to be executed later and also save on fees.

Permissioned pools: In addition to the permissionless pool that can be created and used by anyone, BEX will also operate a permissioned pool. Permissioned pools restrict user access through specified actions or parameters.

Surplus Collateral: Surplus collateral is a smart contract implementation that allows users to hold idle assets on the DEX. Assets held in the surplus collateral contract are not tied to any liquidity pool and therefore not used by the DEX; consequently, they return no yield. They are used in instant settlements to perform swap transactions. Surplus collateral presents an easier way to transact on the DEX as it saves users the cost of transferring tokens for every transaction.

BEND – Native Lending Platform on Berachain

BEND is a money market natively developed for the Berachain, allowing users to obtain stablecoin loans using their crypto assets. BEND adopts HONEY, the network’s native stablecoin as the exclusive token for borrowing. HONEY holders can commit their tokens to the lending pool in return for passive income according to the presiding interest rate, while borrowers can submit any accepted crypto asset as collateral. 

Borrowers on BEND receive BGT as an incentive for borrowing HONEY, which aims to increase the utility and demand for the chain’s native stablecoin. Unlike BEX, where users have to deposit supported LP tokens into a reward vault to claim BGT, borrowers on BEND can claim their BGT on BEND directly. 

BERP – Perpetual Trading Platform on Berachain

BERP is a perpetual trading platform that utilizes features of the Berachain network, including the native HONEY stablecoin as the base token and allowing liquidity providers to deposit HONEY in the Berps Vault and to receive BGT in exchange. This HONEY is then borrowed by traders to create and settle trades.

Final Thoughts

Berachain’s Proof-of-Liquidity consensus system aims to strike a balance between network security and liquidity for the protocol on the network, in contrast with traditional Proof-of-Stake platforms, where a fraction of the token’s overall liquidity is locked away for every asset staked on a POS chain. It tackles liquidity fragmentation through its multi-token approach, where users are encouraged to participate in liquidity provision in exchange for BGT, while validators receive incentives from protocols for allocating BGT.

Berachain is still in the testnet phase, and there is also the opportunity for users to interact with the platform in anticipation of a potential Berachain airdrop. However, always do your own research before investing or committing any capital to any protocol. 

Finally, note that this article is only for informational and educational purposes and should not be taken as financial or investment advice.