Berachain Analysis: Could Innovative Mechanism Design Lead a New Direction for Decentralized Finance?

Berachain is an EVM-compatible L1 public chain focused on Decentralized Finance, built on top of the Cosmos SDK, and adopting the proof of liquidity ( PoL ) consensus mechanism. The project was launched at the end of 2021, originating from the meme chain of the smoking bear NFT.

The Berachain team, after experiencing the ups and downs of the crypto market, has deeply realized the importance of liquidity to Decentralized Finance. They believe that, compared to factors such as decentralization, scalability, security, and interoperability, liquidity is the foundation of Decentralized Finance. Based on this concept, the team has designed a unique liquidity proof mechanism, laying the groundwork for Berachain's three-token model.

In November 2023, Berachain began internal testing. On January 11, 2024, its public testnet "Artio" officially launched. It is reported that over 30 native protocols are currently in development, and several well-known projects such as Pendle, Redacted, Sudoswap, and Abracadabra also plan to deploy on the Berachain network.

In April 2023, Berachain secured $42 million in funding led by Polychain, with a valuation of $420 million. Participating institutions include Hack VC and OKX Ventures, among others. This funding reflects the industry's optimism about Berachain's prospects.

Berachain was founded by an anonymous team, core members include Smokey the Bera, Papa Bear, Homme Bera, and Dev Bear, among others. Most team members are early participants in the crypto space who entered around 2015, with in-depth research on Decentralized Finance and public chain development. Although the team remains anonymous, their successful financing demonstrates their influence and resources within the industry.

The core design concept of Berachain is to solve the on-chain liquidity problem. Co-founder Smokey the Bera stated that if a chain loses liquidity, it will quickly become a "ghost town." This perspective stems from the team's deep reflection on the DeFi Summer.

Berachain is built on Polaris EVM, which is an EVM-based operating system for building on top of the Cosmos SDK. Polaris connects EVM and Cosmos SDK through messaging, separating block construction, processing, and storage from execution. This design provides developers with a more efficient and powerful smart contract development environment.

The advantages of the Polaris EVM framework are: first, it is friendly to Ethereum developers, which helps attract developers from other EVM chains; second, as a Cosmos subchain, Berachain has strong cross-chain interoperability, thanks to the support of the IBC protocol.

Berachain innovatively proposed the Proof of Liquidity ( PoL ) mechanism, aimed at attracting liquidity from mainstream assets. Under the PoL mechanism:

1. Users provide liquidity to the native DEX BEX and receive governance token BGT.
2. Users delegate BGT to validators, and validators generate blocks based on the delegation weight.
3. The delegator and validator receive BERA and HONEY rewards from the chain.
4. Validators can vote on the inflation situation of BGT in any liquidity pool.
5. Validators distribute rewards to delegators

Compared to traditional PoS mechanisms, PoL has the following advantages:

1. Incentivize liquidity while enhancing security.
2. The distribution of inflation is more decentralized
3. Coordinated the relationship between asset issuance agreements and validators.

Berachain adopts a three-token model: BGT( governance token ), BERA( Gas Token ), and HONEY( stablecoin ).

BGT: Non-transferable, can only be obtained by providing liquidity on BEX. BERA: Can be obtained through BGT 1:1 one-way burning or received as verification rewards. HONEY: Native over-collateralized USD stablecoin, serving as a medium for the distribution of protocol revenue.

This model constructs on-chain liquidity more systematically:

1. The governance token BGT is separated from the gas token BERA.
2. The only way to obtain BGT is to provide liquidity to BEX.

This means that Berachain's staking supports a more diverse range of assets, further stimulating liquidity. The model incorporates the experiences of multiple DeFi projects, such as borrowing from Curve's decentralized governance and the native stablecoin concept from Terra.

Important projects in the Berachain ecosystem include:

1. the honey jar: As an ecological entry point, responsible for user education, project incubation, and collaboration matchmaking.

2. Beradrome: DEX and Restaking liquidity market, using ve(3, 3) token economics.

3. Beradoge: A highly anticipated Meme project with two NFT series.

4. Sudoswap: A full-chain NFT AMM liquidity market, planned to be deployed after launching on the Berachain mainnet.

5. Beramonium: A blockchain game project has launched the "Gemhunters" idle role-playing game.

6. Redacted Cartel: Decentralized Finance yield protocol, covering the bribery market trading and LSD liquidity staking field.

Berachain's tri-token economic model separates gas and governance, maximizing liquidity release while avoiding harm to the rights of active users. This design is expected to lead DeFi innovation, creating protocols with high liquidity and high capital efficiency.

As the number of users grows and transaction fee revenue increases, Berachain may attract more users and projects to settle in. Coupled with its unique governance reward mechanism, it is expected to form a positive growth flywheel.

However, the actual performance of Berachain remains to be seen. Investors need to pay attention to the future development of the project, including the progress of the project itself, the growth of the ecosystem, and the security of the protocol. Maintaining a rational and cautious attitude is crucial.