DeFi
Berachain Launches Proof of Liquidity to Sustainably Strengthen DeFi
Liquidity has been the backbone of decentralized finance (DeFi) since its inception. However, securing liquidity through locked capital poses long-term challenges for DeFi. This realization has spurred the development of Berachain’s Proof of Liquidity (PoL).
Traditional proof-of-stake (PoS) mechanisms have irreversible drawbacks, including an unfair advantage for network participants during token generation events and potential liquidity reductions for liquidity pool (LP) transactions. PoS chains, which typically adhere to single-token economic models, struggle to fund growth without risking a token price crash.
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Berachain’s PoL mechanism aims to address these challenges. Like PoS, PoL uses a gas token to incentivize validators to secure the network. However, PoL introduces an additional governance token to incentivize liquidity providers and determine staker rewards. Berachain uses two tokens: $BERA, the native gas token, and $BGT, the governance token. By distributing $BGT as an incentive, Berachain attracts liquidity to BEX pools, where liquidity providers can earn $BGT and delegate their tokens to validators. These validators produce blocks based on the $BGT delegated to them, with delegators and validators rewarded for strengthening the network. Validators also have voting rights to decide $BGT inflation rates.
PoL addresses the shortcomings of PoS by separating delegation and gas tokens ($BGT and $BERA, respectively), ensuring enhanced security and abundant liquidity. Liquidity collection is incentivized since $BGT can only be earned by providing liquidity to BEX pools, thus promoting efficient trade settlements and on-chain transactions. Additionally, PoL allows larger exchanges to act as primary market makers for emerging exchanges, creating an interconnected trading ecosystem within Berachain.
Despite its benefits, PoL faces challenges. Participants must lock up their assets, which can lead to massive selloffs after token generation events as users seek profits. The liquidity strength of the ecosystem depends on users’ willingness to lock up assets for the long term, hampered by the non-transferability of $BGT and limited profit-generating opportunities. An insufficient number of locked tokens could precipitate a liquidity crisis, compromising the stability of Berachain.
Honeypot Finance’s Fair Token Offering (FTO) model is designed to solve these issues by focusing on provider volume rather than locked volume. The FTO model ensures deep liquidity at launch, preventing market manipulation. Investors purchase liquidity provider (LP) tokens, creating liquid markets from day one. Fair pricing distributes LP tokens equally between the protocol and participants, preventing unfair advantages. Protocols can sell LP tokens to fund without affecting token prices.
Built on Berachain, Honeypot’s FTO increases liquidity within the ecosystem and integrates $BGT into Honeypot’s Flywheel model. $BGT holders delegating to Honeypot Finance’s BeeHive node receive $HPOT (Honeypot’s governance token) as bribes, tying bribes to voting rights and strengthening incentives for both $HPOT and $Honey token pools. $HPOT holders can collect $BGT profits via PoL mining.
Users holding $HPOT, $Bera, or $Honey can invest in the $HPOT-$Honey-$Bera liquidity pool to earn $BGT, requiring only one of these tokens to be eligible. Together, $BGT and $HPOT generate a lucrative revenue flywheel model, increasing platform revenue, community node size, $HPOT buybacks, and $HPOT kickbacks, thereby driving demand for $HPOT.
Unlocking tokens to remove liquidity causes users to lose their ability to generate income from $BGT issuance. Eventually, $BGT holdings can be burned to acquire $BERA. The FTO model encourages more users to provide liquidity by minimizing the probability of loss, allowing users to get back 50% of their invested tokens as LPs.
As Honeypot gains prominence and helps emerging protocols attract liquidity through its Dreampad, the need to stake $BGT could increase significantly, fueling both the network and the liquidity pool. FTO is poised to promote PoL while tackling fragmented liquidity with efficient capital utilization.
Proof of Liquidity (PoL) accelerates on-chain activity, speeding up token circulation and enabling PoL networks to reach or exceed PoS economies of scale with fewer tokens. Fair Token Offering (FTO) improves token circulation by providing immediate liquidity after launch, facilitating swaps, and enhancing the PoL system’s ability to achieve substantial economies of scale. Together, PoL and FTO mechanisms complement each other, improving the overall functionality and sustainability of the DeFi ecosystem on Berachain.