Berachain (it’s real).
In just a couple of months we will witness the launch of Berachain which has seen incredible organic traction for it’s testnet. Bera is more than just another L1 but a collective of hyper-connected degens and builders who’ve congregated around NFT’s of “absolutely zooted” bong-smoking bears that has evolved into a novel liquidity availability layer for DeFi.
That’s why we were so excited to bring Smokey the Bera on this week’s episode of Flywheel to discuss the upcoming rollout and launch, what to expect built on the network and how Frax and Berachain could potentially collaborate.
The origins of Berachain can be traced back to their NFT project, Bong Bears that were hand drawn by Smokey’s co-founder Papa Bear. As Smokey world tell us:
“We were just like it'd be kind of funny if we made some NFTs just like for shits and gigs to see what happens, right? Who knows exactly where this will go, but it could be fun to see where it takes us. So we decided to make a hundred NFTs of bear smoking weed. I wish I could say there was some giga brain vision. There really wasn't. We just thought bears smoking weed were funny.”
At the time, Olympus was the hot narrative and so they set out to create the first-ever collection of rebasing NFTs.
“Why don't we employ a familiar rebasing mechanism, let's have these collections expand over time. Instead just having a 10k profile picture drop. Then we made the Bong Bears rebase into the Bond Bears with a slightly larger collection size. Then Boo Bears into the Baby Bears, then Band Bears, and then the BitBears after that. Along the way, I think we found that we were just growing this community base that had interesting ideas and interesting problems to solve.”
But once they pushed out the NFT’s, they noticed that their community started filling up with the best and brightest in DeFi. It didn’t take long for enough people to come together that they started playing around with protocol design ideas, leading eventually to Berachain.
“We built a community first, then used that to find our way towards what a good product should look like. The largest product that crypto can offer at times. Is actually that community slash social angle, um, which was interesting to see here at the intersection of NFTs and infrastructure to start.”
And so Bera evolved into more than just a NFT as a movement of degens who wanted to create a better environment to degen in. From countless hours listening to the community and brainstorming, what the Bera boys realized is that in a sea of tech-focused L1s, they could separate themselves from the pack while coming up with their own innovation through an entirely new consensus, which was…
Proof-of-Liquidity
The primary question that Bera wanted to solve with Berachain was the dialectical challenges of gas tokens on monolithic blockchains like Ethereum. Nearly all EVM blockchains have a design where the gas token serves a dual role for both paying for transactions and also being used as the asset which is staked to provide validator services for the network.
ETH is both an asset, and a utility token, and also a crypto native bond. Bankless first came up with this idea of ETH as a Triple Point asset back in 2021 when the transfer to PoS was first proposed. ETH is used to pay for transactions, but it also has value as collateral asset in DeFi, and also can be staked in a validator to earn yield.
The problem with this though is that each additional operational capability for ETH detracts from the other. The more ETH that is staked, the less ETH is available for liquidity and gas. Increased ETH liquidity leads to deteriorating security for the network. I don’t know if this “Trilemma” has been formalized anywhere, but the conflict of interest between gas, staking, and liquidity has led to the emergence and acceptance of Liquid Staking Tokens widely substituting ETH in DeFi. Anons prefer to have their cake, earning ETH rewards while at the same time owning a LRT that can collateralize trades in DeFi.
Bera’s solution to this trilemma is to separate governance, gas and liquidity, prioritizing the latter into what they call “Proof of Liquidity.” Their philosophy is that liquidity begets power, which begets security.
Proof of Liquidity is a sybil resistance mechanism designed to align incentives between security and liquidity. Instead of compelling users to choose between contributing to network security through staking or providing liquidity, users can now do both.
Bera’s first principles start with on-chain liquidity by providing liquidity which will be proliferated to the chain-enshrined dex, BEX. DeFi can’t exist without liquidity and there are countless existing L2s which have already launched, have a valuable gas/governance token, but have yet to attract significant liquidity and deposits. Bera starts with the idea that users must “do the work” of committing liquidity first, then governance power and validator security will flow into the hands who bring the most value (consistently provide liquidity) to the ecosystem.
Berachain’s model uses a three token system to accomplish this feat. BERA is the gas token and is tradable but has no governance power. BGT is a non-transferrable token that can only be earned through participating in Proof of Liquidity and does have governance power. HONEY is a stablecoin collateralized by USDC which can be both minted or earned as fees for being a validator.
BGT is earned exclusively by providing liquidity to the system. It is inherently illiquid and soulbound, meaning it cannot be purchased on the open market but must be obtained through active participation in the network's liquidity provisions. BGT is used to delegate “stake” to validators providing security for the network. Users who delegate their BGT tokens are also eligible to earn fees in the form of HONEY. Additionally, they may receive bribes from their chosen validator, further incentivizing participation in the network.
All BGT will be redeemable through a one way burn for BERA. This process is irreversible – once BGT is burned, it cannot be recovered. This mechanism offers a strategic choice between holding a liquid token or a token that enables them to earn stablecoin fees, influence reward distribution, and benefit from applications powered by BGT emissions.
Similar to Curve’s gauge system, validators have the power to direct new BGT emissions to liquidity pools. The network's approximately 100 validators collectively determine the Annual Percentage Yields (APYs) of each pool through their weighted average distributions. While Bera’s system is similar to Curve, the key difference is the use of the average weighting and distribution of BGT across the validator set to determine rewards rates.
We could readily imagine Frax setting up their own validator on Berachain and also providing liquidity through an AMO. The protocol could use the same playbook it used for Curve/Convex to gain a large share of voting power on Berachain using bribes and other liquidity mechanics if the DAO votes for it. If Frax wanted to bootstrap their pools and DApp’s on Berachain, they could have a governance proposal pass for their LP’s and services that would provide BGT emissions and potentially BERA and HONEY as well. We know how well Frax was able to use this model to gain power within Curve, and only Frax has the ability to use their AMO to create new large scale LP’s from their own protocol owned liquidity. It’s a system designed perfectly for Frax’s growth. The one major roadblock that is preventing this from happening right now is a native bridge between Frax and Berachain. This could likely be solved with a FraxFerry or Fraxtal integration, which will ultimately come down to community will. Either way, the synergies are clearly there, it’s just how to do it safely is what needs to be figured out.
As the Bera team writes:
Validators are first class citizens in Berachain, controlling economic incentives and reward rates across the ecosystem; an unprecedented role and set of responsibilities for validators across crypto.
And in our interview with Smokey, he said that he’s already been in discussions with Sam K about Frax and Berachain working together. So we might see this play out in 2024 when the mainnet is to be launched sometime in Q2. Until then, it’s worth paying attention to what is cooking with our Bera friends.
