Written by Arnav’s Musings
Compiled by: TechFlow
A team that attended crypto conferences wearing giant and hilarious bear masks and successfully raised seed funding at a $420.69 million valuation, all to build another L1, but this time themed around bears smoking marijuana Yes, I totally understand the skepticism about this idea, in fact, I also thought it was pretty stupid when I first heard about it.
It wasn’t until I took the time to understand Proof of Liquidity and the power of the Bera community that my perspective changed — not only on Berachain, but on how communities can fundamentally be nurtured, sustained, and independently thrive.
Introduction
Berachain is an Ethereum Virtual Machine (EVM) compatible L1 built on the Cosmos SDK and originated from the Bong Bears NFT series in 2021. From these memes was born Proof of Liquidity, which is at the core of Berachain’s mission.
Before you get skeptical about Berachain, ask yourself why you would invest in other tokens? Why do some tokens maintain ridiculously high fully diluted valuations (FDV) despite having only a handful of users? The answer is simple, I think all tokens fall within this range:
Cult = the time + effort + money a community invests in an asset
PMF = ongoing demand for a given protocol (or a guess at PMF)
Quadrant A = Send to Valhalla
Quadrant B = Most of the high FDV coins in the current cryptocurrency
Quadrant C = You should probably turn to AI
Quadrant D = Many of the upcoming middleware/infrastructure tokens
Many cryptocurrencies have billions of dollars in FDV simply due to strong community support. Take Cardano for example, despite having no users and total locked value (TVL), it has a high FDV of about $18 billion, but the Cardano community has somehow continued to grow and gain acceptance in the retail market. Other examples of assets that are mainly focused (besides memes) include Litecoin, Cronos, etc.
Is this a bad thing? Just like the protocols of the Internet (HTTPS, TCP/IP, etc.), blockchain itself will eventually become synonymous, which means that the main difference in launching a successful blockchain is the brand. People trust brands, so blockchain can either become a brand or die.
Bera Community
It goes without saying that Berachain has one of the strongest brands in the cryptocurrency space. But how strong is it?
The market capitalization of the Bong Bear Genesis Series and its newer versions is approximately $150M+, with price, volume, and holdings continuing to grow over the past 2 years.
One interesting thing to note is that early holders are rewarded handsomely (e.g. Chainlink, Axie, etc.), and your community thrives autonomously, almost forming a life of its own. Take “The Honey Jar” for example, a Berachain community run project led by Janitoor. Jani started out as a big Bong Bear holder and now runs a team of over 20 people and has attracted over 100,000 users to the Berachain ecosystem.
The Honey Jar
The Honey Jar, or THJ, is the core of the Berachain community and was founded by Jani in January 2023. During the bear market, THJ worked as hard as any other project, creating countless legendary articles, competitions, podcasts, spaces, NFT casting, etc., gradually building one of the most prolific communities in the crypto space. The core of this community is an NFT collection called "Honeycomb", with a total of 16,420 NFTs, which serves as a "welfare aggregator" for the THJ ecosystem.
An interesting statistic about NFT collection: 4229 people received NFT for free, of which 1569 held it for more than a year even though the price reached more than 0.6 ETH. In addition to NFT collection, the community also ran many social experiments on Mirror and Zora, where community members could mint THJ legendary articles/assets. THJ quickly became the highest-earning author on Mirror, with more than 25% of all Mirror fundraising being THJ assets.
The THJ community also dominated Base and Optimism on Zora
Basically, THJ’s community (and by extension Berachain) has demonstrated a higher “cult” index than any other project: they are willing to spend a lot of time, energy, and money.
But why go through all this trouble before mainnet?
Janitoor (@deepname99) said “THJ’s strategy has always been to create outposts in large communities and protocols and L1s, creating wormholes to Berachain (‘Berachain is the destination chain’) by letting others experience Beraculture and Berapil and giving them a chance to get some fur in the game”
Jani made this argument more than a year ago, that it is crucial to be prepared for the influx of new users and capital and provide them with rich content. A year later, this thesis has been proven.
What's the takeaway? All I can say is that few projects, if any, have a superweapon like THJ.
ecosystem
There is a rich community of over 60 Berachain exclusive projects: from re-staking protocols, indie games, money markets, NFT AMMs, liquidity aggregators, launchpads, etc. In addition, there are many venture-backed Berachain native projects, including Infrared Finance, Kodiak, Beraborrow, Gummi, Beratone, etc.
Examples of other Berachain community efforts include The HoneyCast, a Berachain native podcast that has been recording shows for about 2 years; Beraland, a community-run Berachain Discord hub/project aggregator, etc.
In addition to the thriving Bera native ecosystem, any existing EVM dApp can be easily ported to Berachain. Some multi-chain deployments include Ambient, Thetanuts, Concrete... and more are yet to be announced.
Of course, it’s hard to talk about the Bera ecosystem without mentioning Berapalooza, the hottest event at ETH Denver, which is now a core hotspot for Framework, co-leading its latest funding round.
Okay, Berachain has a meme, so what?
I’m not going to sit here and sell you a groundbreaking EVM-compatible CometBFT chain. I think building EVM compatibility and integrating with the existing tech stack is key. However, I can say that Proof of Liquidity (PoL) is a generational experiment in DeFi.
ELI5 Liquidity Proof
PoL is a novel reward mechanism for aligning users, dApps, and validators. In short, users hold/mint LP tokens and earn BGT, which can be delegated to validators, who receive block rewards commensurate with their BGT stake. Therefore, security is directly tied to liquidity. More specifically, please refer to:
There are still some limitations of Proof of Stake (PoS) networks:
Increasing the economic security of a chain will reduce ecosystem liquidity
Concentration of interests in a few players (LSTs/NoOps)
Lack of coordination between dApps and underlying protocols
PoL aims to solve the problems associated with PoS by introducing a dual token model that separates the network token (BERA) and the governance token (BGT). With this separation, we can:
Systematically building liquidity while improving security, which helps facilitate efficient transactions and sustainable network growth
Aligning protocols and validators to enable superior alignment of incentives via LP pools, bribes, governance tokens, etc.
The most exciting part about PoL is that it enables any dApp to “accelerate” its growth in a utilitarian way, with the decision being made by the people who initially provide “value” or liquidity to the ecosystem, i.e. BGT holders (i.e. users).
It is important to clarify that the goals of ETH and Berachain are fundamentally different. ETH aims to be the WW3 censorship-resistant layer where all value is deposited, while Berachain aims to be the canvas for infinite economic games. In addition, Berachain has stated that it is an ETH adjacent chain.
This is great, but won’t the chain suffer greatly from impermanent loss?
I’ve heard many people who know about PoL say that Berachain won’t be hit hard by impermanent loss because the network security relies on staking/minting LP tokens?
First, let me say that there is no silver bullet solution to the LP profitability problem. DEX designs are improving rapidly, and we are also seeing the rise of MEV-aware designs that return value to the application layer, but the LP profitability problem remains fundamentally unsolved.
So will Berachain collapse over time? I think not, for the following reasons:
In addition to providing liquidity to DEXs, there are other ways to earn BGT. Various venues will be whitelisted (WL) for BGT emission, whether it is a money market, options protocol, etc. *Note that any dApp (whether native or not) can be WLed for BGT emission.
Contrary to the MEV-Boost paradigm on ETH where there is a proposer monopoly, PoL incentivizes validators (and even protocols) to return most of their profits to users. So, while LPing itself may not be profitable, LPs may receive enough kickbacks through bribes from validators or increased block rewards. Therefore, I believe Berachain is a canvas for infinite economic games because the user's money will eventually return to the user.
Finally, there are options to hedge temporary losses on LPs generated by BGT. Smilee Finance and GammaSwapLabs have already committed to providing such products on Berachain.
*Note that there will also be stability pools providing a secure source of yield.
What if most of the liquidity leaves the ecosystem?
BGT will not stop being produced. Instead, it will flow to a smaller, more concentrated group of LPs at a very high annual interest rate. Therefore, speculators are likely to keep Berachain in some kind of balance.
In contrast to PoS networks, where network rewards are primarily accrued by experienced actors, PoL brings value to its users, thereby promoting the long-term health of the DeFi ecosystem as liquidity attracts liquidity.
So will Berachain work? Doubtful of 0.1 trillion FDV
Honestly, I don’t know if Berachain will work. I have several concerns:
I believe PoL can only work as intended in an efficient market.
Similar to the LRT, I wonder how much behind the scenes dealing goes on to get more BGT authorizations/emissions.
There may be concentration of interest around a single LST provider.
But here’s what I will say. As someone who has been working in the DeFi space for over 6 years, Berachain is one of the largest and first DeFi experiments I’ve seen. While we don’t know what games will be played yet, I’m very much looking forward to seeing what these Beras push for crypto.