In this podcast, we discuss Berachain’s unique aspects and transformative potential in the blockchain ecosystem with Smokey, co-founder of Berachain. Smokey details how Berachain’s Proof of Liquidity model enhances security and incentivizes liquidity, Berachain’s EVM consistency features, single-slot finality using Comet BFT consensus, and the dual-token system of $BGT and $BERA. Smokey also highlights Berachain’s journey from the NFT community, challenges and innovations in airdrop design, and the role of native dApps in setting a quality benchmark for the ecosystem. The conversation ends with a discussion of Berachain’s positive flywheel effect and the future.
The audio-to-text conversion uses GPT, so there may be errors. Please listen to the full podcast:
YouTube：
https://youtu.be/gVgCFrU8jq0
Microcosm:
https://www.xiaoyuzhoufm.com/episodes/669a60b037236c546e575a1e
Berachain Introduction and Background
Berachain is an EVM-consistent Layer 1 blockchain based on Proof of Liquidity, allowing users to turn liquidity into security and support network applications. Unlike many recent copy-paste L1s, Berachain stands out with its unique technology stack. It is the first truly EVM-consistent L1 outside of Ethereum, meaning it maintains full EVM compatibility from beginning to end and can run on a variety of clients such as Reth, Nethermind, and Aragon. Therefore, anything built on the Ethereum mainnet can be seamlessly integrated on Berachain.
Berachain leverages Comet BFT consensus for single-slot finality, combining the best features of different modular systems for chain building. A key aspect of Berachain is its Proof of Liquidity mechanism, which ties block rewards to the liquidity introduced into the system. This approach aligns liquidity incentives with network security at the chain level, providing a meaningful economic reason to build applications on Berachain. Block rewards flow from validators to applications and ultimately to users, creating an ecosystem where applications are directly incentivized to attract liquidity and improve capital efficiency.
Proof of Liquidity and Incentive Markets
Berachain follows the ETH 2.0 spec, allowing an unlimited number of validators to launch over time. It starts with a relatively permissioned set and can scale over time. There are two tokens: $BGT, which is a non-transferable soul-bound token used for governance, and $BERA, which is the base gas token used for network transactions and fees. Validators deposit staked $BERA tokens to activate and go live.
When a validator wins a block, the proportion of the block reward, or $BGT, it earns is based on the amount of $BGT delegated to it. $BGT is provided by users who have contributed liquidity in the past. So, while not directly one-to-one, if a validator has more $BGT delegated to it, its block reward size will be larger. Validators act as allocators, choosing which pools and applications to allocate block rewards to, creating a flow of value from validators to applications and ultimately to users.
Validators can work directly with protocols to bootstrap liquidity, allowing protocols to lower the cost of capital through a free market approach. Rather than just paying more of their own tokens as an incentive, protocols can distribute their tokens to a validator and its delegators in exchange for $BGT rewards. Validators may choose to support early-stage protocols that are riskier but have higher potential rewards, or focus on specific categories of projects or applications that they believe will bring new users or interest to the chain.
The design can also adapt to different types of applications, such as GameFi or NFT, which may not require a large amount of TVL but have higher risk. Over time, the system can evolve to support a microtransaction format where rewards are proportional to the transaction volume or fees generated by the application. This adaptability ensures that a variety of applications can benefit from the existing incentive structure.
Evolution from NFT community to L1 unicorn
The best technologies often become very viral. Memetics as a means of distribution become most important after a product reaches a minimum barrier to entry. Projects like Eigenlayer or Celestia, despite their technical complexity, have meme elements that allow people to understand and participate.
In the early days, Berachain was really just an NFT project in a fun way, creating 100 NFTs of a smoking bear and distributing them among the community of DeFi OGs. This was a self-selected group of people with strong technical skills and good at spreading memes. As the community grew, they added mechanisms to NFTs, such as rebases, to reward initial holders and distribute more widely. This kept the community engaged and provided a foundation to explore the potential of real blockchain projects.
By talking to community members and builders, Berachain identified a gap in the market. Many users choose between running an ETH validator and providing liquidity in DeFi protocols. Berachain came up with the idea of combining liquidity and security, making them complementary rather than opposing forces. They aim to support applications built on the chain with proof of liquidity, enabling those who contribute the most value to guide incentives across the network.
In order for cryptocurrencies to scale to millions of users, there must be applications that can only exist in a crypto environment. Berachain acts as an accelerator at the application layer, lowering the barrier to entry for protocols and helping them bootstrap liquidity to attract meaningful consumer adoption. The goal is to enable the next breakthrough application to be built in the Berachain ecosystem.
The community rallies around Berachain because it is both interesting and ambitious. The project started as an NFT community and evolved into building a blockchain driven by the desire to create something unique and valuable. Berachain aims to foster a meaningful ecosystem with core primitives and a variety of ready-to-deploy projects, ensuring that the chain is not an empty wasteland when it launches.
Venture capital firms are increasingly interested in projects with strong meme culture and solid foundations. Berachain’s strategy is to avoid simply copying existing blockchain projects and instead focus on developing unique core technologies that can attract retail investor interest and drive growth for the entire ecosystem.
Airdrop Design Challenges and Innovations
I think designing airdrops is very difficult and may require some innovation. I think airdrops are becoming more and more like part of liquidity mining or developer acquisition rather than any other use. However, I disagree with the first half of this point. If you look at the last cycle, L2 projects like Optimism, Arbitrum, etc. conducted very successful airdrop activities and they still have high market capitalizations.
Because you need some way to distribute and get initial circulation anyway so you don't have a super high FTV low circulation project. However, I think we're seeing more money coming into the private markets, which is causing a lot of projects to launch at pretty high valuations, which means that this effect is more pronounced when there aren't many marginal buyers.
Airdrop Practicality and User Retention
I do think the average utility of airdrops has gone down, and they have much lower user retention than they used to have. I also think that institutional airdrop farmers and these effective farm operations have become more complex and more sophisticated and more professional than they used to be, which adds another burden.
In the future, we may see airdrops become more of a more tangible source of value accumulation for projects. Right now, people think of airdrops as a means to get distribution, but in many cases don't actually get the distribution they want. In addition to this, people also think of airdrops as a way to improve the market's perception of the project. Somehow, giving people free money has become an industry standard, which logically strikes me as strange.
Our approach is that we care a lot about a couple different groups. One is the original community that helped get us to where we are today, they've been with us for two and a half, almost three years now. Without them, the project wouldn't exist, so we care a lot about them. Second, we care a lot about the developers and the people who are actually building in the ecosystem. We're lucky that there are a lot of people who want to build on Berachain and have taken the time and effort to deploy on the testnet and do a lot of work. They help us improve the software and build a better ecosystem, proving that people want to use this thing.
We also care about those who help test different products and participate in the network at the earliest stages. This process requires a lot of effort and is never very simple or pleasant. In addition, we also care about new liquidity and new entrants into the ecosystem.
An elegant airdrop could be designed to reward those who contribute the most. There will always be people who complain about not getting free money, but you can’t please everyone. Look at projects that have successfully airdropped, like Celestia, Gitcoin, and Ethena. In many cases, they didn’t expect much from the airdrop and have built products with significant use cases. All of these are critical solutions for different parts of the stack.
Airdrops can be terrible, but if you build a good product, it becomes easier to do a good airdrop.
Berachain’s Dual Token System
I hope that Berachain's dual token system will succeed in the long term. While I'm not sure if this is necessarily related to the airdrop, I think it is a long term perspective. Berachain's dual token system actually allows people to choose what they care about most. This choice is embedded in the protocol itself. To be clear, setting up two tokens is not for the purpose of simply having two tokens. If we want to maintain the structural principles of proof of liquidity, $BGT must be non-transferable and soul-bound. Otherwise, people can just buy it directly, which would defeat the purpose of providing liquidity to earn block rewards.
I emphasize this because some people ask why we have two tokens. The focus of proof of liquidity dictates this. The dual token system allows users to choose based on their risk appetite or focus. On the one hand, you can hold $BERA, speculate on its liquid price movements, and use it to pay for gas. On the other hand, you can hold $BGT, and by holding $BGT, you can compound your rewards to the pool you deposited into. For example, if you provide liquidity in a stable pool and earn some $BGT, you can choose to delegate $BGT to validators who distribute most of the rewards to the same stable pool, and potentially earn more than if you just held or sold the liquid $BERA.
There is an element of game theory here. You can also delegate $BGT to a different validator, or to a validator that receives incentives for the protocol you want exposure to, effectively getting a call option without having to buy or pay for it. You can participate in a variety of $BGT-powered applications while enjoying the benefits.
This system allows for a longer term compounding perspective rather than a short term price action perspective which can be healthier in the market. It allows the user to find their play style.
How do you think the positive flywheel for Berachain will happen?
I think we’re likely to see a couple of things happen. Initially, a few protocols will launch, and we’ll likely see a massive influx of capital into native applications. These participants will earn a lot of $BGT and will likely do the things I mentioned earlier — — providing liquidity in certain less high-risk pools like the Stability Pool and the Main Pool. They will compound these LPs by directing more $BGT to the pools they provide liquidity to.
As more protocols come online and submit governance votes to ensure their protocol vaults or pools receive $BGT rewards in the chain's DEX, I expect people will start moving to these pools. Validators will start working with the protocol, starting an incentive flywheel that allows people to make higher-risk bets on mid- or small-cap tokens. I've even heard plans for meme coins backed by proof of liquidity, which might be paired with massive rewards from validators, further enhancing the positive flywheel.
In short, the positive flywheel starts with protocols working with emerging validators, and users delegating their $BGT to those validators, incentivizing new protocols. For those protocols that ultimately succeed and scale significantly, we will see this effect circulate throughout the ecosystem. The real big gains or alpha will come from people betting on the right protocols early on with lower risk, by working with validators who are incentivized by those protocols.
The ideal metagame we want to create rewards those who put in more effort or time. We want a system that forces participation and ensures that if you do the work, you can get outsized rewards. This concept is already seen in ecosystems like Blur and Pendle, where people can do better than average when they choose the right strategy.
Here’s how the basic flywheel works: You provide liquidity in a given pool, which pays you $BGT, generating more fees. You hold $BGT longer, which automatically compounds into your pool, and the cycle of fees, more liquidity, and repeats continues.
This creates a new way to speculate, where you can speculate on the activity and popularity of a project or token without the high risk of traditional methods such as MEV or direct token purchases. This approach brings processes that usually take place under the table into a free market environment, allowing for more transparent and attractive speculation.
Another mental model is to think of it as Curve at the chain level, without the vote lock multiplier. It allows you to direct your rewards to any given pool in the DEX, but also to any protocol on the chain. This creates a flexible and modular system at different layers of the stack, combining liquidity provision with governance and decision-making power.
What projects on Berachain currently excite you?
1. Puffpaw: A DePIN for quitting smoking and earning money while vaping on Berachain. It incentivizes healthier behaviors that reduce nicotine intake and has a strong team that has sold millions of e-cigarettes worldwide.
2. Exponents: A new directional trading layer, a bit like Uniswap’s moment in the derivatives space. It combines Uniswap’s spot arbitrage mechanism with a bribery layer to incentivize long or short positions.
3. Gaming Projects: These include a farming game similar to Animal Crossing and Stardew Valley, as well as teams like Shogun, which raised funds from Polychain and Binance Labs to build a solver network for cross-chain asset trading.
4. Gummi: A marketplace that allows lending and borrowing between any assets, with a shared liquidity profile and isolated risk profile.
5. Kodiak: Provides centralized liquidity and automated liquidity management strategies, aiming to become the preferred choice for community and altcoin DEX.
6. Over Under: Uses ML and computer vision algorithms to speculate on outcomes and generate odds on Twitch streams, allowing real-time betting on in-game action.
7. Concrete Finance: Build credit default swaps and clearing-as-a-service on-chain to meet the more complex and detailed stage requirements of DeFi.
8. Infrared: Provides a liquid form of $BGT across different protocols as a yield-generating primitive, aiming to be the Convex, LIDO, and Blockchain building layer for Berachain.
For more information on the ecosystem and upcoming projects, you can visit the Berachain Foundation page and follow the associated Twitter account for the latest updates. The mainnet is expected to go live before the end of the year, and the focus is on making sure it is tested and ready for immediate activity from dozens of companies.
Why did the Berachain team also directly develop DeFi applications such as lending and AMM?
The Berachain team's first batch of defi applications aims to serve two main purposes. First, they aim to start the $BGT generation flywheel and ensure that the process is safe and not dependent on third-party dApps from the beginning. This is crucial to securely control the block rewards of the entire chain.
Secondly, these native dApps are designed to kickstart the fee generation flywheel, allowing $BGT to earn fees from these applications. Additionally, they set the quality bar for the ecosystem. In the beginning stages of a new ecosystem, there is usually a large number of low-quality forks of popular dApps, such as Uniswap and Aave. By building strong foundational functionality on-chain, Berachain aims to avoid this problem, ensuring that liquidity is concentrated in high-quality applications from the beginning.
These native dApps serve as a stable baseline and are not the ultimate solution. The goal is to have better applications replace these native dApps over time. However, they need to be strong enough initially to remain stable and set a high standard for future development.
Users earn $BGT by providing liquidity and participating in native dApps, such as providing liquidity in DEXs or borrowing through lending protocols. This is how most $BGT is initially intended to be generated.
For those interested in Berachain, we plan to expand our presence in the APAC ecosystem, including China, Singapore, Hong Kong, South Korea, and Southeast Asia (Vietnam, Thailand, Indonesia, Malaysia, Philippines). We are excited to expand our impact through a hands-on approach, working with the protocols building these ecosystems, and interacting with various exchanges and farm groups.
If you are a builder or interested in getting involved with Berachain, please follow our social channels and feel free to reach out to our team. We strive to be as responsive and helpful as possible, making sure people understand what we are building and how it can benefit them.