Liquidity has been the spine of DeFi (decentralized finance) since its inception. Nevertheless, securing liquidity by mounted capital is detrimental to DeFi in the long term. This realization acted because the catalyst behind the creation of Berachain’s Proof-of-Liquidity (PoL).
The standard Proof-of-Stake (PoS) mechanism has sure irreversible disadvantages. It gives an unfair benefit to community contributors on the time of TGE (token technology occasion), laying the groundwork for enormous sell-offs. PoS additionally results in a discount in liquidity for LP swimming pools and transactions if the safety of the chain have been to be improved. As a result of PoS chains comply with a single-token financial mannequin, protocols should not have the flexibleness to fund progress with their token holdings as this might result in a drop within the token’s worth.
To deal with these challenges, Berachain makes use of the PoL mechanism.
Enter proof of liquidity (PoL).
Like PoS, PoL makes use of a gasoline token to incentivize validators to safe the community. Nevertheless, PoL is introducing an extra token known as governance token to incentivize liquidity suppliers and decide the potential reward for stakers who safe the community.
Berachain builds on PoL and introduces two tokens: $BERA – the native gasoline token, and $BGT – the governance token. Through the use of PoL, Berachain can entice liquidity by handing out $BGT as incentive. Liquidity suppliers can contribute liquidity to BEX swimming pools and earn $BGT (Bera Governance Token). $BGT holders then delegate their tokens to validators.
These validators then produce blocks proportional to the $BGT delegated to them. Each delegators and validators are rewarded by Berachain for strengthening the community. Validators even have the voting rights to resolve on the inflation of $BGT.
What makes PoL so efficient for Berachain?
This is how PoL responds to PoS’s shortcomings:
Particular person tokens: PoL separates the functionalities of the delegation token and the visitor token ($BGT and $BERA within the case of Berachain), guaranteeing enhanced community safety and adequate liquidity.
Incentivized Liquidity Assortment: The one approach to earn $BGT is by offering liquidity to the BEX swimming pools. It ensures adequate liquidity for the pool, making commerce settlements and on-chain transactions extra environment friendly.
Cross-Alternate Market Formation: Fragmented liquidity is a key problem in DeFi, resulting in underutilization of accessible belongings. PoL additionally permits bigger exchanges to function main market makers for rising exchanges, facilitating the creation of an interconnected buying and selling ecosystem inside Berachain.
However there are a couple of challenges…
Customers collaborating in PoL are required to lock their belongings. Whereas this gives liquidity initially, it additionally implies that these customers might be desperate to unlock their belongings and promote them in the marketplace shortly after TGE to guide earnings.
Right here, liquidity energy is determined by the willingness of those customers to lock of their belongings for an extended time frame. Since $BGT is a non-transferable token, these customers have restricted choices to generate extra earnings. Therefore the reluctance to tie up belongings for an extended interval.
If not sufficient tokens are locked up, a liquidity disaster is rarely too far-off, creating a dangerous situation for your complete Berachain ecosystem. And the answer for this needed to come from the ecosystem.
Meet FTO: the driving pressure behind Honeypot’s flywheel mannequin
Honeypot Finance’s FTO (Honest Token Supply) mannequin design shares comply with the identical mechanism as Berachain’s PoL. Whereas the top purpose of each FTO and PoL is similar: to cut back promoting strain on the time or after TGEs, FTO is hyper-focused on constructing liquidity by provider quantity fairly than agency quantity.
The Honest Token Mannequin proposes the next:
100% deep liquidity: The FTO mannequin ensures that each one tokens are within the pool on the time of launch, which prevents market manipulation.
Create LP token: As a substitute of buying the precise token, buyers buy LP (liquidity supplier) tokens on the time of launch, creating liquid markets from day 1.
Honest costs: Each the protocol and the contributors are handled the identical and the allocation of LP tokens is cut up 50-50 between them, eliminating the possibility of an unfair benefit for both get together.
LP gross sales with out worth drop: Protocols could promote the LP tokens to acquire funding for operational functions. Nevertheless, this sale is not going to have an effect on the token worth in any means.
Constructed on Berachain, Honeypot’s FTO is poised to speed up exercise and improve liquidity throughout the ecosystem.
Most significantly, FTO unlocks extra makes use of for $BGT by integrating it into Honeypot’s Flywheel mannequin. This is how:
- $BGT holders who delegate to the BeeHive node (Honeypot Finance’s node) will obtain $HPOT (Honeypot’s governance token) as a bribe.
- The bribery mechanism is immediately tied to voting rights, growing the incentives for the $HPOT and $Honey token swimming pools.
- In return, $HPOT holders can gather $BGT earnings by collaborating in PoL mining.
PoL vs FTO: FTO acts as an accelerator for PoL
Customers who personal $HPOT, $Bera or $Honey can spend money on the $HPOT-$Honey-$Bera liquidity pool to earn $BGT. Most significantly, they solely have to personal one among these three tokens to be eligible to earn $BGT.
Collectively, $BGT and $HPOT create a profitable revenue flywheel mannequin, resulting in:
- Important improve in platform income and group node dimension
- Enhance in buybacks of $HPOT, inflating market worth
- Encourage the variety of $HPOT bribes and incentives, additional growing the demand for $HPOT
Each time a person unlocks their tokens to take away liquidity, they lose their potential to generate income by $BGT emissions. In the end, they will burn their $BGT belongings to accumulate $BERA. The FTO mannequin encourages extra customers to offer liquidity because it minimizes the possibility of loss, with customers getting 50% of their invested tokens again within the LP type.
Remaining verdict
As soon as Honeypot good points prominence and helps rising protocols entice liquidity by its Dreampad, the necessity to stake $BGT may improve considerably to energy each the community and the liquidity pool. Technically, FTO is required to advertise PoL whereas addressing the issue of fragmented liquidity with environment friendly use of capital.
Proof of Liquidity (PoL) stimulates on-chain exercise, accelerating the circulation of tokens. This permits PoL networks to attain related and even higher economies of scale with fewer tokens in comparison with Proof of Stake (PoS) programs, the place many tokens are locked up by validators, lowering circulation pace.
Honest Token Supply (FTO) additionally improves token circulation by offering quick liquidity after launch. This available liquidity makes buying and selling the token simpler, additional strengthening the PoL system’s potential to attain substantial economies of scale. Collectively, these mechanisms complement one another, bettering the general performance and sustainability of the DeFi ecosystem on Berachain.