Overview of the Berachain Ecosystem
Introduction to the Report
This report explores the various components of the Berachain ecosystem, covering its technical framework, including Proof-of-Liquidity (Pol), the BeaconKit consensus layer, and its innovative three-token economy.
Alongside these foundational elements, we also spotlight some of the ecosystem's standout projects that are shaping the future of decentralized finance and web3.
Berachain is a cutting-edge blockchain ecosystem designed around a unique Proof-of-Liquidity consensus model, empowering users to stake, borrow, and trade assets while simultaneously supporting network security and liquidity.
What is Berachain?
Berachain is a Layer-1 blockchain that originated from the Bong Bears NFT project but has since transformed into a serious attempt to address fundamental issues in blockchain ecosystems, particularly around liquidity and security. The inspiration behind Berachain came from recognizing the misalignment between these two aspects in many existing blockchains. The team, led by an anonymous co-founder known as Smokey the Bera, saw an opportunity to design a new blockchain where liquidity provision directly enhances network security, creating a more decentralized and secure system.
What sets Berachain apart from other Layer-1 blockchains is its innovative Proof of Liquidity (PoL) consensus mechanism. Unlike traditional Proof of Stake (PoS), which secures the network through staked tokens, Berachain's PoL rewards users for providing liquidity to the network. Participants who contribute liquidity earn the network's governance token, $BGT, which cannot be bought or sold but grants governance rights and boosts decentralization.
This mechanism ensures that network security scales with the activity on the network, aligning the incentives of validators, liquidity providers, and participants.
Berachain operates a unique 3-token system: the native token $BERA is used for gas fees, $BGT is the non-tradable governance token earned by providing liquidity, and $HONEY is a stablecoin that can be minted by depositing collateral. This structure creates a positive feedback loop, where users participate in liquidity provision, earn governance power, and contribute to the network's security and growth. Validators also earn fees for producing blocks based on the $BGT delegated to them and can offer customizable rewards to incentivize participation.
In terms of use cases, Berachain's architecture is particularly suited for decentralized finance (DeFi), offering built-in functionalities for decentralized exchanges, lending, and perpetual trading. Its modular design makes it adaptable and scalable, addressing common challenges faced by Layer-1 blockchains, such as transaction speed and throughput, while also ensuring it can integrate assets from other chains seamlessly.
Though still in its testnet phase as of 2024, with the mainnet launch expected by the end of the year, Berachain has already garnered attention for its novel approach to solving liquidity and security issues in blockchain ecosystems. It represents a promising step forward in aligning economic incentives with network stability, making it an intriguing platform for developers and users alike.
Berachain Tokens
Berachain's three-token model offers several key advantages over traditional one- or two-token models, enhancing both the ecosystem's stability and security. The three tokens—$BERA (the native gas token), $BGT (the governance token), and $HONEY (the native stablecoin)—each serve distinct roles, allowing the system to optimize its functionality in a way that wouldn’t be possible with a simpler token structure.
In a one- or two-token system, tokens often need to serve multiple roles simultaneously, such as securing the network, powering transactions, and managing governance. This dual or singular role can lead to conflicting incentives and reduce the overall effectiveness of each function.
The unique three-token model can be argued to be superior to traditional one- or two-token systems because it ensures that tokens are not overloaded with multiple roles, increasing the network’s efficiency, security, and decentralization.
The integration of a native stablecoin ($HONEY) adds further value by reducing reliance on external, centralized stablecoins like USDC or USDT, providing a more stable and controlled monetary environment within the ecosystem. The model's alignment with Berachain’s Proof of Liquidity (PoL) mechanism ensures that liquidity provision is rewarded, governance remains decentralized, and the ecosystem thrives through efficient resource utilization.
$BERA
The $BERA token serves two main purposes on the Berachain network:
- Paying for transactions on the blockchain ($BERA also referred to as the "gas token");
- Staking for activating validator nodes. The economic value of all $BERA tokens staked adds up to form the base layer security of the chain with $BGT building on top of it for enhanced security.
$BGT
Proof of Stake blockchains have a governance token that is used to secure the network through staking with validators. Oftentimes, this is the main network token and is used for gas, staking, governance, and economic incentives.
However, because of Berachain's three-token Proof of Liquidity model, the functions of governance and economic incentives are separated into its own token. This token is $BGT (Bera Governance Token).
$BGT is non-transferable and can only be acquired by providing liquidity in PoL-eligible assets (e.g., liquidity on Bex). It can be burned 1:1 for $BERA.
$HONEY
$HONEY is a fully collateralized stablecoin which is soft-pegged to the US Dollar. $HONEY can be backed by (and minted from) a diverse range of crypto collateral. This multi-collateral approach to $HONEY's backing enhances its stability and resilience.
Stability is a desirable property in a medium of exchange, in contrast to transacting with volatile crypto assets. $HONEY is Berachain’s native stablecoin, designed to provide a stable and reliable means of exchange within the Berachain ecosystem and beyond. $HONEY aims to maintain a peg to 1 USD.
What is PoL?
Proof of Liquidity (PoL) is a distinctive consensus mechanism introduced by Berachain, designed to enhance blockchain security by prioritizing incentives for liquidity provision. PoL builds on the foundational elements of the Proof of Stake (PoS) model, where participants stake the network’s native token to secure the chain. However, instead of focusing solely on staking native tokens, PoL incorporates a separate governance token, $BGT (Berachain Governance Token), that plays a key role in securing the network and managing rewards.
In Berachain's PoL model, participants earn $BGT by providing liquidity to the network. Unlike most tokens, $BGT is soulbound (non-transferable) and must be actively earned, especially through liquidity provision. This governance token serves as the basis for the reward weight within the system. Holders of $BGT can delegate their voting power to validators, who vote on the allocation of rewards to specific liquidity pools. This setup drives a powerful incentive structure, encouraging active participation and strengthening the chain’s security.
A key incentive for Berachain validators and delegators comes from protocol fees, which include both transaction fees and Block Captured Value (BCV). Transaction fees reward validators and their delegators, who also earn additional BCV rewards—a category that includes fees generated by Berachain’s native DEX, stablecoin, and perpetual futures exchange. These protocol fees are distributed proportionally among $BGT delegators based on their share of a validator’s total delegated $BGT.
Beyond protocol fees, $BGT emissions act as a unique incentive, akin to inflationary staking rewards seen in PoS chains but distributed differently within the PoL structure. Validators "earn" $BGT proportional to their delegation weight, yet neither validators nor their delegators directly claim $BGT rewards.
Instead, validators direct these $BGT "earnings" to their chosen Reward Vaults, creating a secondary layer of incentives; reward vaults are Berachain smart contracts where users can lock specific assets (e.g., an LP token from a certain liquidity pool) to earn a share of the $BGT directed to that vault by validators.
These reward vaults effectively separate $BGT emissions earners (liquidity providers and vault depositors) from those who direct emissions (validators and delegators). To claim their directed $BGT rewards, validators and delegators must lock assets in the reward vault that receives their validator’s emissions. Thus, the amount of $BGT a participant can earn depends on the vault(s) they lock assets in, their share of the assets within each vault, and the total $BGT allocated to those vaults.
Applications on Berachain can also create reward vaults, adding a marketplace dynamic for $BGT emissions. With limited $BGT available over any period, applications compete for validator emissions to boost user activity, such as liquidity provision. Any application establishing a reward vault may also offer incentives—a contract-based exchange rate between the $BGT directed to the vault and some other asset. For instance, a DEX might set a reward vault for LP token depositors with an incentive to distribute five of its native tokens for every one $BGT emitted. Validators then evaluate the value of each reward vault’s incentive to determine where to allocate $BGT.
The combined effect of these rewards generates a PoL Flywheel within the Berachain ecosystem, aligning all participants. Users who lock assets in application reward vaults receiving validator emissions are rewarded with $BGT. They can then delegate these emissions to validators, further earning protocol fees, BCV, and other incentives while also increasing their influence over $BGT emissions allocation.
Validators, in turn, compete for delegation not just based on fees or reputation but on their emission direction strategies, the percentage of vault incentives shared with delegators, and alignment with specific applications.
Through this PoL Flywheel, applications can tap directly into the consensus protocol to incentivize user activity, leveraging $BGT emissions for user rewards while relying solely on inflationary incentives, reinforcing both security and engagement in Berachain’s decentralized ecosystem.
Roles and Participation in PoL
Proof of Liquidity (PoL) serves as a powerful catalyst for Berachain, uniting users, protocols, and validators to scale liquidity and security in tandem. Users contribute by staking liquidity provider (LP) tokens, earning $BGT and LP fees based on staked assets and $BGT allocated to specific gauges. Validators earn block rewards influenced by the amount of $BGT delegated to them and can direct a portion of these rewards to designated gauges through their “berachel” settings (in Berachain docs).
Applications can propose new gauges to receive $BGT emissions, setting up rewards vaults tied to single-asset smart contracts, such as liquidity pools on Berachain’s BEX exchange. This structure enables applications to drive engagement while building a sustainable rewards system across the ecosystem. PoL incentivizes participation at every layer, fostering an environment where liquidity and utility reinforce each other for sustained network growth.
Incentive Diagram
Proof of Liquidity (PoL) on Berachain aligns the interests of validators, dApps, and users, creating a collaborative ecosystem where rewards fuel growth and participation.
By leveraging the delegation of $BGT, PoL incentivizes network activity with tailored benefits. Validators receive commissions that increase with $BGT delegations, alongside opportunities to earn native tokens from dApps. dApps, in turn, can utilize reward vaults to distribute $BGT, creating incentives for user engagement and bootstrapping token liquidity on Berachain exchanges like BEX.
This mechanism enhances the traditional staking model by adding layers of value for each participant. Users who delegate their $BGT to validators not only share in validator rewards but also receive fees collected by dApps in the form of $HONEY, Berachain’s native asset.
PoL fosters a sustainable growth cycle, or “flywheel,” by rewarding participants predictably, encouraging long-term engagement, and supporting the overall economic health of the ecosystem. This combined approach, known as PoL², integrates Protocol Owned Liquidity (POL) with PoL, reinforcing liquidity and aligning all participants’ incentives.
Consensus Layer
BeaconKit is a modular consensus client and framework designed for building EVM-compatible blockchains, particularly suited to Layer 1 (L1) and Layer 2 (L2) chains like Berachain.
Leveraging CometBFT for consensus, BeaconKit interfaces with any EVM-compatible execution environment, facilitating consensus through modularity and a standardized Engine API, which enables seamless communication between consensus and execution clients.
The modular architecture of BeaconKit adheres to Eth2 principles, separating consensus and execution to promote execution client diversity, allowing support for EVM upgrades without maintaining custom forks.
This framework supports Single Slot Finality (instant finality) for fast block confirmation, significantly faster than Ethereum’s 13-minute finality, and it offers compatibility with various execution clients, including Geth, Erigon, Nethermind, Besu, and Reth.
BeaconKit’s modularity extends to supporting additional functionalities, such as custom block builders, rollups, and data availability layers, enhancing flexibility.
Developers benefit from injecting custom logic at multiple stages, enabling unique staking mechanics, block validity rules, and streamlined chain customization. Notable features include Immediate Execution and Optimistic Payload Building, where validators confirm StateRoot quickly, speeding up block verification.
BeaconKit also supports SSZ encoding, facilitating EIP-4788, crucial for consensus layer data proof on the execution layer, and EIP-4844, which broadens its adaptability for Layer 2 rollups and data availability.
Its compatibility with existing EVM tools ensures robust integration with the Ethereum ecosystem, making it a flexible and future-proof choice for developers building EVM chains.
Consensus Layer Diagram Explanation
Berachain’s network infrastructure operates through validator nodes and RPC nodes, each configurable as either a full node or an archive node. Each node type combines an execution client and a consensus client to maintain network integrity and functionality.
As an Ethereum-compatible Layer 1 blockchain, Berachain’s execution layer supports any standard EVM execution client, enabling robust compatibility across the Ethereum ecosystem.
These execution clients work in tandem with Berachain’s proprietary consensus framework, namely the aforementioned BeaconKit, which provides the consensus layer and facilitates seamless communication between consensus and execution.
Primary Ecosystem
Berachain developed a comprehensive suite of native tools to provide users with a seamless, integrated experience on the chain, eliminating the need for third-party platforms. Unlike most chains, which rely heavily on external tools like decentralized exchanges (Uniswap on Ethereum) or third-party stablecoins (like USDT), Berachain offers everything natively—ensuring a smoother, more secure user journey.
By creating BEX for token trading, BGT Station for reward and validator management, and native assets like $HONEY for stablecoin use, Berachain allows users to access and manage their assets directly within its ecosystem.
Borrowing and lending are handled through BEND, and leveraged trading through BERPS, without requiring external services. Tools like Beratrails and the Testnet Faucet further enhance accessibility, offering users native guidance and easy access to tokens for testing.
This integrated approach is revolutionary because it shows Berachain’s commitment to user convenience and security, ensuring that all critical functions can be managed natively. This eliminates dependence on potentially risky third-party platforms and simplifies the entire experience, allowing users to focus on the benefits of the ecosystem rather than navigating external tools.
Ooga Booga
Henlo,
This report delves into the intricate fabric of the Berachain ecosystem, focusing on its innovative technical framework, from the Proof-of-Liquidity (PoL) consensus model to the BeaconKit layer and the pioneering three-token economy.
Beyond these core elements, we also highlighted standout projects within the ecosystem, each contributing uniquely to the evolution of decentralized finance (DeFi) and web3.
Berachain is set to redefine blockchain innovation. Its ecosystem, designed around a user-centric PoL model, empowers participants to stake, borrow, and trade assets while reinforcing network security and liquidity.
With unparalleled community support, Berachain has ignited excitement and involvement, evidenced by tens of thousands of testnet participants and a vast, engaged audience eagerly awaiting the mainnet launch.
Given the intense anticipation surrounding Berachain, we expect it to establish new standards in blockchain interaction and architecture, impacting the entire cryptocurrency space.
A special thank you to Berasearch, Renegade, Berabadies, and Beraborrow for their invaluable contributions and support during the research process and after the research process.
This report aims to serve as a definitive guide for both newcomers and seasoned followers of Berachain, offering a comprehensive overview of the ecosystem’s technical and community-driven foundations.
We aim to keep producing quality reports to shine a light on all aspects of this industry.
Yours truly,
Simplicity Group
Disclaimer
This document, along with the accompanying materials, has been produced by Simplicity Group—exclusively for informational purposes. It does not constitute financial advice, nor should it be construed as such.
The content herein is intended solely to present research and assessments from individuals who are not certified financial advisors. It is an effort to share perspectives and should not be perceived as professional financial guidance.
Furthermore, this document should not be considered a comprehensive resource for investing or related decisions. It is not exhaustive and does not cover all potential risks or factors of investment opportunities.
Investors are advised to conduct their own thorough research and assessment of all associated risks before making any investment decisions. This document is not intended to serve as a sole or primary basis for any investment strategy or decision-making process.
Additional Disclosures:
- Regulatory Information: This material has not been reviewed by any regulatory authority. The opinions of this document do not reflect those of Berachain itself or all ecosystem members. Nothing contained within should be taken as compliance with regulations or obligations for any particular reader.
- Disclaimer on the Use of Projections: Projections rely heavily on the conditions in which the research was conducted. Simplicity Group is not liable for the accuracy or applicability of these projections should conditions shift dramatically.
- Accuracy: The information is provided "as is," while all efforts were made to ensure the information supplied is reliable and timely. Simplicity Group does not accept responsibility for any errors or misstatements unless arising through negligence or willful misinformation.
- Third-Party Materials: Some sections of this document were built using external sources, including collaborations with contributors within the Berachain community. While Simplicity Group has made every effort to verify the contributions, external sources remain liable for the content accuracy of their input.
This report was prepared in good faith, with a steadfast commitment to unbiased representation and thorough research of the emerging technology discussed herein. It has no association with Berachain. Its aim is to utilize best research methodologies to maintain transparency and allow readers to understand how conclusions have been drawn.