A brief analysis of Berachain v2: what upgrades have been made to the original PoL mechanism?

Berachain itself is a distinct Layer 1 Blockchain project, with its most recognizable innovation being the adoption of the PoL (Proof of Liquidity) Block Reward distribution mechanism. This mechanism transforms the chain's Block Rewards into an internal economic mechanism that drives ecological growth, by directly distributing the majority of rewards to users and liquidity providers within the ecosystem, thereby driving application growth and on-chain liquidity accumulation.

In this model, all ecological assets involved in staking will directly provide on-chain liquidity support for Berachain. The rewards generated from PoL liquidity mining come from the chain's native incentive mechanism, which aims to build a more capital-efficient and incentive-driven underlying structure.

Berachain recently upgraded its PoL consensus mechanism and officially released the new V2 version. This mainly involves the introduction of a brand new token economic model, further granting clearer revenue rights and value support to the $BERA token.

1. Let's first talk about the PoL consensus mechanism.

In fact, the operational logic of PoL is both simple and interesting, as it integrates the PoS consensus mechanism, liquidity mining, and the veCRV liquidity game model introduced by Curve, creating a new paradigm for on-chain governance and incentive distribution.

Berachain currently designs two types of core on-chain native assets:

BGT: The native governance token and the leading asset for incentive distribution.

BERA: The staked asset for validators, which also bears the function of on-chain Gas fees.

Meanwhile, the main participant roles in the PoL model include: the on-chain protocol on Berachain, validators in the network, and liquidity providers (LP).

In this mechanism, any protocol or DApp that wishes to obtain BGT incentives must first apply to join the PoL rewards treasury whitelist pool and provide a sufficiently attractive bribe to attract validators' BGT allocation. The validators of Berachain are the Block producers in the network (to become a validator, one must stake BERA tokens). When a validator successfully produces a Block, the system provides them with BGT token rewards, which consist of two parts:

A portion is the basic Block Reward for validators,

Another part is called "variable rewards", which means that the system allocates different amounts of BGT tokens to validators based on their "Boost" value (calculated as the percentage of $BGT delegated to the validator out of the total delegated $BGT across all validators). The higher the "Boost" value, the more BGT token rewards are given, and after reaching a peak, it will decay to ensure a fair distribution of BGT.

After successfully producing a block and receiving rewards, the validator will allocate most of this variable reward to the governance-approved whitelist PoL pool according to its own strategy through the BeraChef contract. In fact, for validators, when allocating variable BGT rewards to the Reward Vaults, they will also receive incentives at the rate set by the vault owner, such as HONEY, USDC, or the yield provided by the vault.

Protocols that can usually provide higher returns for LPs tend to offer better returns for validators, so for validators, they are also more likely to allocate more BGT rewards to PoL pools that can provide higher protocol incentives.

The PoL pool of the protocol will distribute BGT rewards to LP users after receiving them, so you will see that some projects' PoL pools on Berachain allow you to become an LP. In addition to the regular Farming rewards (such as fee sharing, governance token rewards from the protocol itself, etc.), you will also receive native incentives in the form of the protocol's underlying BGT tokens, with APY usually being very high.

For BGT stakers, they can delegate their BGT tokens to validators to help improve the validators' "Boost" value. In return, the validators will periodically distribute the aforementioned protocol rewards they receive to the BGT delegators who support them according to a predetermined ratio.

Therefore, we see that under the PoL model:

First, in order to achieve better circulation between protocols, a long-term game is usually formed to continuously attract liquidity through rewards. This "reward arms race" will bring a better liquidity foundation to Berachain.

Secondly, validators are also engaged in a game, as they hope to attract more BGT holders to support them in order to obtain better "Boost" values and potential rewards. Therefore, validators are actually continuously helping to optimize the network's liquidity.

So third, whoever can provide more liquidity will have more say and economic benefits, continuously forming a growth flywheel that integrates liquidity, security, and incentive distribution.

2. What does POL v2 bring?

In fact, in Berachain v1, the BGT token, which serves both governance and incentive functions, has been deeply integrated into Berachain's economic cycle system. As an incentive asset with inflation attributes, BGT has clear native use cases at the blockchain layer and possesses sustainable earning capabilities.

In contrast, the economic role of another core token BERA in the v1 phase is relatively weak. Apart from bearing Gas fees and serving as staked assets for validators, users can hardly obtain on-chain rewards from BERA in a native way. Therefore, most BERA holders can only rely on third-party DeFi protocols, such as participating in LP farming that supports BERA or its wrapped assets in PoL pools to indirectly gain rewards, but such paths often have high thresholds, cumbersome operations, and poor experiences.

Similarly, in the current global increasingly stringent compliance environment, BERA and other native PoS assets on-chain face similar issues, namely a lack of compliance-friendly yield models, making it difficult for institutional users to adopt or incorporate them into the traditional financial system, thus limiting market expansion opportunities.

Therefore, the most intuitive change of v2 for Berachain is the introduction of the BERA incentive module, which allows BERA to better integrate into the Berachain economic ecosystem without significantly altering the existing economic ecosystem, and to better empower the ecosystem.

BERA incentive module

In v2, Berachain further introduced the BERA incentives module, allowing users to stake BERA tokens directly through single-coin staking on Berahub, thereby earning native rewards from the on-chain ecosystem.

In fact, the BERA incentive module itself is similar to a staking method. If users natively stake BERA tokens, the system will first convert them into wrapped tokens WBERA, and then after staking them on the network, a certificate token sWBERA will be issued. In addition, users can also directly stake WBERA tokens, and the system will similarly issue a certificate token sWBERA.

Similar to Lido's stETH, the sWBERA token is akin to a LST, which can serve as a collateral asset, and is also expected to capture yields in the Berachain ecosystem's DeFi protocols, enhancing capital utilization for multiple benefits.

In v1, holders of BGT will delegate BGT to validator roles to help validators increase their "Boost" value.

When users stake BERA tokens, they are directly staking into the contract of Berachain, with a user experience similar to single-coin staking in PoS, instead of delegating to validators. However, it is important to note that there is a 7-day unlocking period when redeeming sWBERA for BERA.

From the perspective of revenue sources, in v1, the earnings for BGT staking users come from the bribe income that validators receive after providing incentives for a specific PoL pool (additional incentives obtained from the treasury or related protocols). After deducting delegation fees, most of this is allocated to BGT stakers. In v2, 33% of this bribe income will be used to repurchase WBERA, which will then be distributed to BERA stakers (reinvestment). The amount of staking income that users receive depends on the proportion of their staked BERA tokens relative to the overall share.

We see that in v2, the threshold for users to earn income from BERA has been significantly lowered. They can directly stake at the blockchain layer, which is safer and more reliable. Users no longer need to go through third-party protocols to become LPs or delegated stakers.

In terms of returns, the current yield of single-sided staking for BERA can reach 103% (the highest yield for single-coin staking among Layer 1s), which is basically a very impressive return state. Although CEX also has the earning function for BERA, the overall yield is about 60% to 90%. Overall, staking directly on-chain, specifically on Berahub, is more cost-effective.

BERA staking rewards have a real source of income

In fact, the native staking of BERA does not rely on inflation to "distribute coins"; its mechanism itself is supported by real yield.

This point is actually easy to understand. In the PoL model of Berachain, the protocol initiates "bribes" to validators in order to compete for BGT rewards. Most of these bribe funds come from the protocol's own treasury and are paid in the form of stablecoins, mainstream assets, or protocol tokens. These funds are not directly given to validators; instead, a 33% fee is charged by the system, which is uniformly auctioned for WBERA by the network, and finally distributed proportionally to users who stake BERA.

In other words, while there are indeed BERA rewards being issued on-chain, this is not an inflationary process created out of nothing like other PoS networks; I have real funds backing it. This process is similar to the network selling the "coin issuance rights" and then distributing the proceeds to the stakers.

In this regard, Berachain's article also provided a good example that I think is great.

If ETH and BERA both issue $100M of tokens annually:

ETH directly gives stakers $100M;

Berachain sells inflation through a bribery mechanism, and if the efficiency is 80%, it will achieve an additional ~$80M in real gains.

The result is: with the same inflation, Berachain can achieve $180M in on-chain value return, while ETH only has $100M.

Therefore, the staking rewards of BERA belong to "protocol layer real yield", which is not only more sustainable but also gives long-term value support to its native staking scenario.

Institutional Friendliness

Another aspect is the institutional friendliness mentioned by Berachain.

Previously, we actually mentioned that the Berachain PoL v2 model turns inflation into real income for the protocol, constructing a clear and well-defined on-chain real revenue model for BERA, which does not rely on third-party protocols or secondary market speculation, but completely comes from the real bribery expenditures of the on-chain protocol, and is converted into traceable incentive funds through auctions.

The returns generated by this model can be uniformly packaged, split, and distributed in a CEX custodial environment, allowing the staking of BERA to have the potential to be packaged by institutions as wealth management products, custodial protocols, and structured income tools. This actually addresses a pain point of being difficult to directly reach institutional users.

On the other hand, I am reminded of the recently much-discussed "Clarity Act," which establishes a clearer compliance framework for crypto assets. Therefore, the launch of PoL v2 is quite timely, binding returns to real economic activities through the mechanism layer. On-chain financial instruments should have clear sources of income, an underlying structure that is subject to auditable scrutiny, and asset attributes that are custodial and interpretable for holders. This is one of the directions advocated by the Clarity Act.

If BERA launches a Digital Asset Treasury in the future, it will also provide institutions and even listed companies with a compliant, custodial, and on-chain revenue path that has continuous cash flow characteristics.

So overall, the launch of v2 itself is not only about accelerating the flywheel within the ecosystem but also has a deeper and long-term strategic significance for ecological development.