Berachain: Memetic Playground or DeFi Utopia?

BeginnerMay 22, 2024
Built on the Cosmos SDK, Berachain is an L1 blockchain compatible with the Ethereum Virtual Machine (EVM). It originates from the Bong Bears NFT series. Renowned for its unique community culture and strong brand power, the project has raised $420.69 million in seed funding. At the core of Berachain lies the Proof of Liquidity (PoL) mechanism, aimed at addressing some issues in Proof of Stake (PoS) networks, such as the balance between economic security and ecosystem liquidity, stake concentration, and coordination between dApps and underlying protocols. Berachain boasts a robust ecosystem with over 60 projects and has attracted significant attention from users and capital.
Berachain: Memetic Playground or DeFi Utopia?

Brief

The Beracult

A team that wears comically large bear masks to crypto conferences, raised seed capital at a $420.69M valuation; All to build yet another L1, but this time around weed smoking bears. Yeah… I completely understand the FUD and, as a matter of fact, I thought the idea was stupid as f*ck when I first heard about it too.

It’s only after I took the time to understand proof of liquidity and the power of the Beracult, did my opinion change- And not only of Berachain, but in how communities are fundamentally cultivated, sustained and independently thrive.

Brief

Berachain is an EVM-compatible L1 built on the Cosmos SDK that originated from the 2021 Bong Bears NFT collection. From the memes was born Proof of Liquidity, the crux of Berachain’s mission.

Before you FUD Berachain, ask yourself why you’ve invested in other tokens? Or why some tokens retain insanely high FDVs despite having single digit users? The answer is simple, I’d argue all tokens fall somewhere on this scale:

Cult = The Time + Effort + Money a community dedicates to an asset

PMF = The sustainable demand for a given protocol (or speculation of PMF)

Quadrant A = Send it to Valhalla

Quadrant B = Currently most high FDV tokens in crypto

Quadrant C = You should probs pivot to AI

Quadrant D = Many soon to be middleware/infra tokens

There are many cryptocurrencies that hold multi billion $ FDVs just by virtue of having a strong community. Take Cardano for example. It stands at a staggering ~$18B FDV with no users and TVL, but the Cardano community is ever growing (somehow?), earning them merit amongst retail mindshare. Other examples of predominately attention assets (outside memecoins) include Litecoin, Cronos, etc.

Is this a bad thing? Like the protocols of the internet (HTTPS, TCP/IP..) blockchains themselves will eventually become synonymous, meaning the primary differentiator of launching a successful chain is brand. People trust brands, ergo, blockchains will either become brands or die.

The Beracult

I think it goes without saying, Berachain has one of the strongest brands in crypto. But just how strong?

The genesis Bong Bear collection and its rebases sit at a ~$150M+ market cap with consistent growth in price, volume and holders over the past 2 years.

One interesting thing to note is there exists a phenomena of enriching your early holders (e.g Chainlink, Axie..) and your community autonomously thriving, almost taking a life of its own. Take “The Honey Jar” for example, a Berachain community-run project led by Janitoor. Jani started out as a Bong Bear whale, and now runs a 20+ FTE operation that has onboarded over 100k+ users to the Berachain ecosystem.

The Honey Jar

The Honey Jar or THJ, is the heart of the Berachain community, founded in January 2023 by Jani. Through the depths of the bear, THJ grinded like no other, creating countless lore articles, competitions, podcasts, spaces, NFT mints etc. gradually building one of the most prolific communities in crypto. At the heart of the cult is an NFT collection call the “Honeycomb,” a set of 16,420 NFTs that act as a “perks aggregator” to the THJ ecosystem.

An interesting stat about the NFT collection: 4229 people free claimed the NFT, of which, 1569 have diamond pawed and not sold for over a year despite reaching ATH of 0.6 ETH+.

Aside from the NFT collection, the community has also run a myriad of social experiments on Mirror and Zora, where community members could mint THJ lore articles/assets.

THJ quickly became the top grossing author on Mirror, with >25% of all funds raised on Mirror being THJ assets

The THJ cult also dominated the volume on Zora on Base and on Optimism

Basically the THJ cult (and by extension Berachain) has proven more than any other, they rank extremely high on the cult index in that: They are willing to spend material time, effort and money

But why even go through this trouble pre-mainnet?

“THJ’s strategy has been to create outposts in large communities and protocols and L1s to create wormholes back to berachain (“berachain is the destination chain”) by giving beeple elsewear a taste of beraculture/berapill them and an opoortunity to put some skin (fur) in the game”

  • Janitoor (@deepname99)

    Jani created the thesis > year ago as it was critical to prep for the influx of new users and capital by giving them a wealth of rich stuff to engage with. A year later, and the thesis has played out to a tee.

The takeaway? Few projects, if any, will ever have a super weapon like THJ.

Ecosystem

List of projects building on Berachain. 🐻 = Bera Exclusive (Source: THJ)

There exists a rich community of 60+ Berachain exclusive projects: Ranging from restaking protocols, indie games, money markets, NFT AMMs, liquidity aggregators, launchpads and so much more. Moreover, there are plenty of VC backed Berachain native projects including Infrared Finance, Kodiak, Beraborrow, Gummi, Beratone and so forth.

Other examples of Berachain community efforts include The HoneyCast- a Berachain native podcast that has been recording episodes for the past ~2 years, Beraland- the community run Berachain discord hub/project aggregator etc.

Aside from the flourishing Bera native ecosystem, it’s trivial for any existing EVM dApp to port over to the Berachain. A few multichain deployments include Ambient, Thetanuts, Concrete… with many more yet to be announced.

And of course, it’s hard to talk about the Bera ecosystem and not mention Berapalooza, the most hype event of ETHDenver- Now famously core to Framework’s thesis to co-lead the latest round.

Okay so Berachain has memes. So what?

I won’t sit here and shill you on an EVM-compatible CometBFT chain being ground breaking. I think establishing EVM compatibility and integrating existing tech stacks are table stakes. I can say, however, Proof of Liquidity (PoL) is a generational experiment in DeFi.

ELI5 Proof of Liquidity

PoL is a novel reward mechanism to align users, dApps and validators. In short, users stake/mint LP tokens and earn BGT that can be delegated to validators, who receive block rewards commensurate to their BGT stake. Therefore, security is directly tied to liquidity. More concretely, refer to the flywheel:

Proof of Stake (PoS) networks maintain a few limitations:

  1. Improving chain’s economic security reduces ecosystem liquidity
  2. Stake becomes centralized amongst a few actors (LSTs/NoOps)
  3. Lack of coordination between dApps and the underlying protocol

PoL aims to solve the problems associated with PoS by introducing a dual token model that separates the network token (BERA) and governance token (BGT). By virtue of this separation we can:

  1. Systemically build liquidity while still improving security, which contributes to efficient trading and sustainable network growth
  2. Align protocols and validators which enables superior coordination of incentives through LP pools, bribes, governance tokens, etc.

The most exciting part about PoL is it enables any dApp to natively “turbocharge” their growth in a meritocratic manner, with that decision being made by people who provide “value” or liquidity to the ecosystem in the first place, the BGT holders (aka users).

To clarify, the goal of ETH and Berachain are inherently different. ETH aims to become a WW3 censorship resistant layer for all value to settle whereas Berachain aims to be a canvas for infinite economics games. To add, Berachain has stated they are an ETH adjacent chain.

That’s nice, but won’t the chain get rekt due to impermanent loss?

I’ve heard many people who understand PoL say, won’t Berachain just get rekt by impermanent loss given the network security is predicated on staking/minting LP tokens?

I’ll start by saying there is no silver bullet solution to the LP profitability problem. DEX designs are rapidly improving and we are seeing the rise of MEV aware designs that bid back value to the app layer, but the LP profitability problem remains fundamentally unsolved.

So won’t Berachain just collapse over time then? I’d argue no, here’s why:

  1. There are other ways to earn BGT aside from providing liquidity to DEXes. A variety of venues will be whitelisted for BGT emissions, whether that be money markets, options protocols, etc. *Note any dApp (native or not) can be WL for BGT emissions.
  2. Contrary to the MEV-Boost paradigm on ETH, where there exists a proposer monopoly, PoL incentivizes validators (and even protocols) to bid majority of profits back to the users. So while LPing itself may not be profitable, LPs may receive enough rebates via validator bribes and/or boosted block rewards. As such, I believe Berachain is a canvas for infinite economic games bc user $$$ ends up back to users
  3. Lastly, there are options to hedge impermanent loss on BGT yielding LPs. Smilee Finance and GammaSwapLabs have already committed to offering such products on Berachain.

*Note, there will also be stable pools which offer a secure source of yield.

But what if majority of the liquidity were to leave the ecosystem?

Well, BGT would not stop being produced. As such, it would just be going to a smaller, more concentrated group of LPs at crazy APYs. Hence, it’s likely speculators will keep Berachain in an equilibrium of sorts.

Contrary to PoS networks where network rewards are predominately accrued by sophisticated actors, PoL accrues value to its users, thereby promoting the long-term health of the DeFi ecosystem as liquidity attracts liquidity.

So will Berachain work? 0.1T FDV FUD??

Truthfully I don’t know if Berachain will work. A few of my concerns:

  • I’d argue PoL may only work as intended in an efficient market
  • Akin to the LRT landscape, I wonder how many backroom deals will take place in an effort to secure more BGT delegation/emissions
  • Possible stake centralization around a single LST provider

But here’s what I will say. As someone who’s been in DeFi for 6+ years, Berachain is one of the largest, first-principles DeFi experiment I’ve ever seen. While we have yet to see what games will be played, I’m incredibly excited to watch these Beras push the boundaries of crypto.

Very grateful to Smokey and Jani for the review!

Resources:

All data courteous of THJ’s incredible dashboards: https://dune.com/thj

Disclaimer:

The views and opinions expressed are solely my own. I personally do not own any Berachain or Berachain related assets at this time.

Statement:

  1. This article originally titled “Berachain: Memetic Playground or DeFi Utopia?” is reproduced from [Arnav’s Musings]. All copyrights belong to the original author [Arnav]. If you have any objection to the reprint, please contact the Gate Learn team, the team will handle it as soon as possible.

  2. Disclaimer: The views and opinions expressed in this article represent only the author’s personal views and do not constitute any investment advice.

  3. Translations of the article into other languages are done by the Gate Learn team. Unless mentioned, copying, distributing, or plagiarizing the translated articles is prohibited.

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