Berachain: what it is and how it revolutionises Liquidity in Web3

Berachain is a unique Layer 1 blockchain that combines the interoperability of the Cosmos Software Development Kit (SDK) with full compatibility with the Ethereum ecosystem (EVM). If we had to define it in one word, that word would be “liquidity.” This concept, along with its efficient management, is central to its functionality and distinguishes it from other protocols in the Web3 space. This is made possible by an innovative mechanism developed by the network itself: Proof-of-Liquidity.

More than just a carbon copy of Ethereum

To fully understand how Berachain operates, we need to examine its two foundational elements: its technical architecture and its innovative consensus mechanism. Berachain can be seen as a hybrid between Cosmos and Ethereum. 

Think of Ethereum as a universal computer, with the Ethereum Virtual Machine (EVM) serving as its operating system, responsible for executing smart contracts. Berachain has developed an execution environment that closely resembles Ethereum’s engine, which it refers to as “EVM Identical.”

Whenever the Ethereum system is updated, Berachain can instantly adopt the new version, ensuring maximum compatibility. This is a significant advantage for developers: launching an application on Berachain is just like doing it on Ethereum. This compatibility not only attracts talent and projects from the Ethereum ecosystem but also promotes the development of a rich and diverse environment.

In the introduction, we discussed the Cosmos Software Development Kit (SDK). How does Berachain reconcile the two virtual environments? The answer lies in its technical architecture, which is based on BeaconKit. This framework decouples the consensus engine from the execution environment. 

In simpler terms, Berachain utilises CometBFT, a highly secure and battle-tested consensus engine from the Cosmos ecosystem, to enable validators to agree on the network’s state. BeaconKit acts as a modular bridge, allowing this consensus engine to communicate seamlessly with an execution environment similar to Ethereum’s.

This architecture offers a benefit known as single-slot finality, resulting in high efficiency. It allows a transaction to be considered final and irreversible in just two seconds, whereas on Ethereum, this state is typically reached in about thirteen minutes.

Proof-of-Liquidity: a new security model

We now reach the core of Berachain’s innovation. To fully grasp this, it’s beneficial to take a step back. Since Bitcoin’s inception of Bitcoin, blockchains have sought to resolve the trilemma of security, speed, and scalability. The initial consensus model was Proof-of-Work (PoW), introduced by Bitcoin, which requires miners to invest significant computational resources (in terms of hardware and electricity) to validate blocks. Due to the associated costs and environmental impact, the industry has gradually shifted towards Proof-of-Stake (PoS).

In the Proof-of-Stake (PoS) model used by Ethereum, validators have a vested interest in the network’s security by staking the native tokens. If they act maliciously, a portion of their staked capital can be burned, a process known as slashing. This mechanism aligns their interests with the overall security of the network.

However, PoS has a significant limitation: it does not create a direct connection between validators and the decentralised applications (dApps) existing on the blockchain. At the consensus level, there are no incentives for validators to support dApps that provide economic value actively, and similarly, dApps may not have a reason to align with the interests of validators. 

This is where Berachain’s Proof-of-Liquidity (PoL) model comes into play. Building on the principles of PoS, PoL incorporates an incentive system directly into the core of the protocol, strategically designed to align the interests of all participants: validators, applications, and users.

In summary, Proof-of-Liquidity (PoL) is a model that balances network security with the availability of liquidity. Rather than depending solely on staked capital, as in Proof-of-Stake, Berachain actively incentivises users to provide liquidity to the ecosystem’s applications.

This creates a merit-based system: the more liquidity that flows into applications, the more secure and appealing the network becomes for new projects. PoL transforms validators from mere network guardians into proactive capital managers, rewarding them for their ability to allocate resources and align everyone’s interests intelligently. With its evolution to PoL v2, the consensus mechanism has been further enhanced to make it more sustainable and balanced. The main innovations are:

To make Proof-of-Liquidity work, Berachain uses a two-token architecture, designed to separate the functions of governance and gas fees. There is also HONEY, the native stablecoin pegged to the dollar, which is positioned outside of the PoL system. Below is a brief description, but we will cover it in detail in a dedicated section:

Reward vaults: the Liquidity Engine

It’s impossible to understand what Berachain is and how it works without discussing Reward Vaults, the practical tool through which Proof-of-Liquidity comes to life. These are smart contracts where users can stake specific tokens to receive a stream of rewards in BGT.

The process is simple:

Additionally, projects can add extra incentives to make their vaults more attractive, creating a competitive market that rewards the most valuable applications.

So how is the loop closed? The process is a continuous flow of incentives:

BeraChef: the contract that “Cooks Up” rewards

To manage this complex flow of incentives, Berachain relies on BeraChef, a smart contract that acts like a Michelin-starred chef directing their kitchen brigade. Its three main tasks are:

Each validator can set its own allocation strategy, specifying how to distribute rewards among various projects. If they don’t, a default configuration is used.

To conclude, the exact amount of BGT issued per block is determined by a mathematical formula that considers several variables, such as the validator’s “boost” and other network parameters. This ensures the system remains balanced and that incentives are distributed to promote long-term growth and security.

As you navigate the Berachain ecosystem, you will often encounter the “Boost APR” metric. What does it mean? In simple terms, it is the Annual Percentage Rate (APR) you can expect to earn by delegating your BGT tokens to a specific validator.

This value is not fixed but is calculated dynamically. The system analyses a specific period and sums the value of all the “incentives” a validator has received from the various projects they support. This total earning is then compared to the total amount of BGT delegated to that validator and projected on an annual basis.

A key detail is that the displayed APR percentage already accounts for the validator’s commission. This means the yield you see is what is actually due to delegators like you, making the comparison between validators transparent and straightforward. Ultimately, the Boost APR is the tool that allows you to choose which validators to entrust your tokens to strategically.

The two-token architecture: BERA and BGT

After exploring the infrastructure of this Layer 1 blockchain, it’s time to focus on the tokens that coexist within this innovative ecosystem, which is the only way to understand how Berachain works fully. This architecture is designed to separate governance functions from economic ones, creating a more stable and balanced system.

BERA is the native token of Berachain, its “fuel.” Like other Layer 1 blockchains, it is essential for paying transaction fees (gas). One of its most interesting features is that a portion of the fees paid in BERA is burned, meaning it is permanently destroyed, reducing the circulating supply over time.

The second major utility of BERA is related to security: it is the asset that validators must stake to participate in consensus. The more BERA a validator stakes, the higher their probability of being chosen to produce new blocks. In short, the economic value of all staked BERA tokens constitutes the financial security of the chain.

To understand BERA’s value and role, it’s helpful to analyse its tokenomics. The total supply at genesis is 500 million BERA. To this, an annual inflation of about 9% is added, managed through BGT emissions and subject to governance veto.

We’ve already established that BGT is the asset that makes Berachain truly different from other networks. While BERA is at the centre of its economic model, BGT manages decision-making power and incentives. As we’ve seen, it is a non-transferable token earned by actively participating in the ecosystem, primarily by providing liquidity.

So, once earned, what can you do with BGT?

HONEY, the ecosystem’s stablecoin

A native stablecoin is a must-have in this innovative financial ecosystem. HONEY is designed to provide a stable option for users, being a fully collateralised stablecoin with a value soft-pegged to the US dollar.

High-quality reserves guarantee its stability. Currently, it is backed by a basket of the market’s most reliable stablecoins:

You can obtain HONEY in two main ways:

One of HONEY’s most innovative features is its security mechanism, called “Basket Mode.” This system automatically activates if one of the collateral assets loses its stability (depegs). In this mode, when a user decides to redeem their HONEY, they do not receive a single asset of their choice but rather a proportional share of all collateral in the system.

This intelligent mechanism prevents bank runs on the healthier assets, distributing risk and protecting the stablecoin’s overall stability. Finally, the small fees generated from minting and redeeming HONEY are also distributed to BGT holders, adding another source of revenue for those who actively participate in governance.

The dApp ecosystem and the “Flywheel Effect”

The success of Berachain is entirely linked to that of its application ecosystem, which revolves around the dynamics of Proof-of-Liquidity. The central hub for this interaction is BeraHub, the portal where users can manage their BGT, stake their BERA tokens, and access BEX, the network’s native decentralised exchange.

However, analysing data from DeFiLlama reveals that the ecosystem is already highly competitive: the exchange with the most value locked is Kodiak, while the leading protocol by TVL is Infrared Finance, dedicated to liquid staking, alongside other notable projects like Dolomite, an advanced protocol for lending and margin trading. This demonstrates the network’s vibrancy, where success is not a given but must be earned.

This is where the true strength of PoL manifests: the success of the applications is vital for the success of the network itself, creating a “flywheel effect” at the ecosystem level.

This model transforms competition from a zero-sum game into a collaborative environment based on close coordination among three leading actors:

This creates a virtuous cycle: the most solid dApps offer the best incentives, attract more emissions from validators, which in turn attract more liquidity from users, making the entire ecosystem stronger and more liquid.

Despite the mainnet launching only recently (February 6, 2025), the network has seen explosive adoption. Shortly after its launch, Berachain reached the incredible milestone of $3 billion in Total Value Locked (TVL) in less than a month, peaking at $3.3 billion at the end of March. During that peak, the volume on the network’s decentralised exchanges hit highs of $160 million per day, with monthly DEX volume in March nearing $2.4 billion.

Conclusion

Technology alone is not enough to guarantee a blockchain’s success. Berachain’s approach stands out because it focuses not only on technical innovation but on creating a virtuous cycle that ensures sustained growth and collaboration within its ecosystem.

In a crypto sector where users are the scarcest resource, Berachain is rewriting the rules. Instead of adopting tactics that sometimes lock up user liquidity without guarantees, its model transforms them from mere “exit liquidity” into active and fundamental participants, with a decision-making role in where value and liquidity should flow.

Proof-of-Liquidity can be seen as the first “extendable incentive system at the protocol level,” designed for long-term success. This concept aligns with the “Fat Bera Thesis”: the idea that applications capturing the most value in the ecosystem will be those that best leverage the PoL mechanism to attract users and capital.

However, the model also raises important questions that only time can answer. Will the strong interdependence between validators and BGT delegators last once the network is fully operational? Will validators, given their importance, become too powerful, centralising power? And what would happen if the demand for transactions on the network were to fall?

Many of these fascinating theoretical assumptions will have to be confirmed by the test of the market. The success of Berachain will depend on its real-world implementation and the continuous efforts of its community to ensure that its principles of decentralisation and sustainability are upheld over time.