Can Berachain challenge Ethereum? Or is it another fleeting chain?

Author: Stacy Muur Source: substack Translation: Shan Ou Ba, Golden Finance

The biggest news in the past 24 hours is that Berachain Mainnet is going live on February 6th. Does this mean we finally have a new public chain that can challenge the dominance of Ethereum and Solana?

Why is the launch of Berachain referred to as one of the most anticipated events in the history of the chain? Will it completely change the liquidity landscape? Can their innovative PoL (Liquidity Consensus Mechanism) really bring disruptive changes to the economic model?

Let me share my point of view.

Data of Berachain

• Total Financing Amount: $1.42 billion (two rounds of financing), estimated valuation $15 billion.

• Liquidity before mainnet launch: $3.3 billion (data from Boyco + official Dune data), with a total of 16.6 thousand independent wallets providing liquidity.

• Testnet data (from Bartio B2 launch to the end of 2024):

• 31.8 million independent addresses

• 5.13 billion transactions

• 2.5M addresses deployed 201.2 million contracts

Even considering only the liquidity before the mainnet launch, the TVL (total value locked) of Berachain upon entering the market has already exceeded ZKsync, Starknet, Linea and Blast.

The core innovation of $BERA: Liquidity Consensus Mechanism (PoL)

Before delving into the potential of Berachain, we need to understand its Proof of Liquidity (PoL) mechanism, which will be key in comparing Berachain with modern L1.

Most blockchains, such as Ethereum and Solana, use PoS (Proof of Stake), where validators secure the network by staking native tokens.

However, Berachain has pioneered the PoL (Proof of Liquidity) model, which integrates liquidity provision directly into the network security mechanism. Under the PoL mechanism, participants stake assets into the liquidity pool, which safeguards network security and enables decentralized trading and lending. This dual functionality enhances security and ensures that liquidity within the ecosystem is fully utilized, creating a more efficient and dynamic financial environment.

In other words, in the PoL system of Berachain, liquidity providers, validators, and ordinary users can all actively participate in the network through economic incentives.

This model is in sharp contrast to Ethereum’s PoS, where most of the transaction fees are destroyed or distributed in a way that does not directly benefit active participants.

Token Economics: Key Pillars

Berachain’s token economics is built around three core tokens:

BGT (Berachain Governance Token)

• Non-transferable governance tokens used for staking and securing the chain**.
• When users provide liquidity to the selected pool, they earn rewards through emissions.
• Determine how to distribute the issuance of new tokens to different liquidity pools, similar to Curve’s veTokenomics.

BERA ( Berachain Gas Token )

• Used to pay for transaction fees within the network.
• By irreversibly burning an equivalent amount of BGT created, ensure a deflationary mechanism tied to network usage.

HONEY (Berachain Stablecoin )

• Pegged to USDC and used as the primary borrowing asset in Berachain’s Bend lending protocol.
• Minting currency by exchanging with USDC, incurring fees charged by the blockchain.

How are they used in PoL?

• Users delegate BGT to validators, who decide which liquidity pools receive emission rewards.
• This creates a bribery market where DeFi projects incentivize BGT holders to direct emissions towards their pools.
• Liquidity providers in the pool, (LP), receive a certain share of BGT emissions and actively participate in governance.
• Over time, governance rights are allocated to LPs, reinforcing the chain’s core function: DeFi.

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1. BEX (Berachain Exchange): A decentralized exchange (DEX) that rewards liquidity providers with BGT, aligning incentives with PoL.
2. Berps (Berachain Perpetuals): A perpetual contract trading platform that uses HONEY as the main collateral and liquidity token.
3. Bend (Berachain Lending): A lending protocol where users can borrow and lend assets using HONEY as the primary lending asset.

So, how efficient is the Berachain model?

Advantages:

High TVL Attraction: The model aims to attract high Total Locked Value (TVL) as early as possible, as LPs are incentivized to provide liquidity through BGT emissions.

Capital Efficiency: Unlike PoS chains, where staked tokens are idle, Berachain ensures that secure assets remain liquid and available in the ecosystem.

Compatibility of EVM and Cosmos Interoperability: Berachain’s Polaris EVM ensures Ethereum compatibility while benefiting from Cosmos’ cross-chain functionality.

Deflationary BERA Model: The irreversible BGT to BERA destruction mechanism provides a sustainable supply control method.

Cons:

Centralization Governance Risk: Due to the inability to purchase BGT and must be obtained through emissions, governance rights may be concentrated in early large LPs.

Hurdles to new protocols: Since Berachain includes core DeFi protocols (DEX, perps, lending), it may lose momentum to launch new protocols.

Lack of active capital flow: This model attracts passive LP capital, but it may be difficult to generate substantial income outside of emissions, reflecting Curve’s inefficiency.

Final Thoughts

The token economics of Berachain is a well-thought-out system that directly links liquidity supply with network security. While its PoL model effectively attracts liquidity, its long-term sustainability depends on improvements in governance distribution, protocol diversity, and scalability.

If Berachain successfully expands and nurtures a vibrant ecosystem beyond its established protocols, it could potentially challenge dominant Layer-1 and Layer-2 solutions.