Berachain: Meme New Paradise or Decentralized Finance Utopia?

Original by Arnav’s Musings

Original compilation: Deep Tide TechFlow

A team that wore huge and comical bear masks to a encryption conference and managed to raise seed money at a valuation of $420.69 million, all to build another L1, but this time the theme revolves around marijuana-smoking bears. Yes, I totally understand the skepticism about this idea, in fact, when I first heard about the idea, I also thought it was very stupid.

It wasn’t until I took the time to learn about Proof of Liquidity and the power of the Bera community that my perspective changed – not just about Berachain, but about how the community can fundamentally nurture, sustain, and independently thrive.

Introduction

Berachain is an EVM Virtual Machine (EVM)-compatible L1 built on top of the Cosmos SDK and derived from the Bong Bears NFT collection in 2021. Proof of Liquidity was born from these memes, which is at the heart of Berachain’s mission.

Before you express doubts about Berachain, ask yourself why would you invest in other Tokens? Why do some Tokens maintain ridiculously high fully diluted valuations (FDVs) despite having only a few users? The answer is simple, I think all Tokens are in this range:

• Cult = the amount of time + effort + money invested by the community in an asset
• PMF = Ongoing demand for a given protocol (or speculation on PMF)
• A Quadrant = Send to Valhalla
• Quadrant B = Tokens with a large longest number of high FDV in Crypto Assets today
• Quadrant C = You should probably move to AI
• D Quadrant = Xu long is about to become a middleware/infrastructure Token

Xu long Crypto Assets has billions of dollars in FDV alone with strong community support. In the case of Cardano, the Cardano community somehow continues to rise and gain recognition in the retail market, despite having an FDV of around $18 billion without users and total TVL value. Other examples that focus primarily on assets (in addition to memes) include Litecoin, Cronos, and others.

Is this a bad thing? Just like the protocol of the internet (HTTPS, TCP/IP, etc.), the 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 either becomes a brand or dies.

Bera Community

It goes without saying that Berachain has one of the strongest brands in the Crypto Assets space. But long stronger?

The market capitalization of the Bong Bear genesis series and its new version is approximately $150 million or more, and the price, volume, and holdings have continued to rise 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 on its own, almost forming a life of its own. Take, for example, “The Honey Jar”, a Berachain community-run project led by Janitoor. Jani started out as a Large Investors at Bong Bear and now runs a team of over 20 people and has attracted more than 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. In Bear Market, THJ has worked as hard as any other project, creating countless lore articles, contests, podcasts, short rooms, NFT minting, and more, gradually building one of the most long prolific communities in the encryption field. At the heart of this community is an NFT collection called “Honeycomb” with a total of 16, 420 NFTs that serve as a “welfare aggregator” for the THJ ecosystem.

An interesting statistic about NFT collections: 4,229 people claimed their NFTs for free, with 1,569 holding them for more than a year despite the price reaching more than 0.6 ETH. In addition to NFT collections, the community has also run long social experiments on Mirror and Zora, where community members can minting THJ lore articles/assets. THJ quickly became the highest-paid author on Mirror, with more than 25% of all Mirror fundraising being THJ assets.

The THJ community also dominates Base and Optimism on Zora

Basically, the THJ’s community (and Berachain by extension) has proven a higher “cult” index than any other project: they are willing to spend a lot of time, effort, and money.

But why go through all this trouble before the Mainnet?

According to Janitoor (@deepname 99), “THJ’s strategy has always been to create outposts in large communities and protocol and L1s, creating wormholes to Berachain by giving others a chance to experience Beraculture and Berapil and give them a chance to earn some fur in the game (‘Berachain is the target chain’)”

Jani made this argument a year long ago, and it’s crucial to be prepared for the influx of new users and capital, and to provide them with rich content. A year later, this assertion was validated.

What are the implications? All I can say is that there are few, if any, projects that have a superweapon like THJ.

Ecosystem

There’s a rich community of over 60 Berachain exclusive projects: from re-stake protocol, indie games, coin marketplaces, NFT AMMs, Liquidity aggregators, launchpads, and more. In addition, there are long venture capital-backed Berachain native projects, including Infrared Finance, Kodiak, Beraborrow, Gummi, Beratone, and more.

Other examples of 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 long chain deployments include Ambient, Thetanuts, Concrete… There are longer yet to be announced.

Of course, it’s hard to talk about the Bera ecosystem without mentioning Berapalooza, the hottest event for ETH Denver, which is now a core hotspot for Framework, co-leading the latest funding round.

Well, Berachain has memes, so what?

I’m not going to sit here and sell you a breakthrough EVM-compatible CometBFT chain. I think building EVM compatibility and integrating existing technology stacks is key. However, I can say that Proof of Liquidity (PoL) is an intergenerational experiment in Decentralized Finance.

ELI 5 Proof of Liquidity

PoL is a novel reward mechanism for aligning users, dApps, and validators. In short, users hold/mint coin LP Token and earn BGT, and these BGT can be delegated to validators validators receive Block Reward commensurate with their BGT shares. Therefore, security is directly linked to liquidity. More specifically, please refer to:

There are still some limitations to attestation of stake (PoS) networks:

• Improving the economic security of the chain reduces ecosystem liquidity
• Concentration of interests in a small number of participants (LSTs/NoOps)
• Lack of coordination between dApps and the underlying protocol

PoL aims to solve PoS-related problems by introducing a dual Token model that separates network Token (BERA) and Governance Token (BGT). With this separation, we can:

• Systematically build liquidity while improving security, which contributes to efficient trading and sustainable network rise
• Align protocol and validators to enable superior coordination of incentives through LP pools, bribery, governance token, etc.

The most exciting part of the PoL is that it enables any dApp to “accelerate” its rise in a utilitarian way, a decision made by the people who initially provided “value” or Liquidity to the ecosystem, i.e., BGT holders (i.e., users).

To clarify, the goals of ETH and Berachain are fundamentally different. ETH aims to be a WW 3 censorship-resistant layer for all value precipitation, while Berachain aims to be a canvas for infinite economic games. In addition, Berachain has declared that it is an ETH neighboring chain.

That’s great, but won’t the chain be hit hard by Impermanent Loss?

I’ve heard longest people who know PoL say that Berachain won’t be hit hard by Impermanent Loss because its network security relies on staking/minting LP Tokens?

First of all, I would like to say that there is no silver bullet for LP profitability. DEX designs are rapidly improving, and we’re seeing the rise of MEV-conscious designs that return value to the application layer, but the question of LP monetization remains fundamentally unresolved.

So will Berachain collapse over time? I don’t think so, for the following reasons:

• In addition to providing liquidity to the DEX, there are other ways to earn BGT. Various establishments will be listed in Allowlist (WL) for BGT emissions, whether it is a coin market, Options protocol, etc. Note that any dApp (native or not) can be BGT drained by WL.
• Contrary to the MEV-Boost paradigm, where there is a proposer monopoly on ETH, PoL incentivizes validators (and even protocols) to return most of the profits to users. So, although LPing itself may not be profitable, LPs may receive sufficient rebates through validator bribes or increased block rewards. Therefore, I believe that Berachain is the canvas for the infinite economy game, as the user’s money will eventually be returned to the user.
• Finally, there are options to temporarily hedge losses against LPs generated by BGT. Smilee Finance and GammaSwapLabs have already committed to offering such a product on Berachain.

Note that there will also be stable pools that provide a secure source of earnings.

What if most of the liquidity leaves the ecosystem?

BGT does not stop production. Instead, it flows to a smaller, more concentrated group of LPs at extremely high annual intrerest rates. As a result, speculators are likely to keep Berachain in some sort of equilibrium.

In contrast to PoS networks, where network rewards are primarily accumulated by experienced actors, PoL brings value to its users, thereby promoting the long-term health of the Decentralized Finance ecosystem as liquidity draws attention and motivity.

So will Berachain work? Doubts about 0.1 trillion FDV

To be honest, I don’t know if Berachain will work. I have a few concerns:

• I think PoL can only work as expected in an efficient market.
• Similar to LRT, I would like to know that in order to get a more long BGT authorization/emissions there will be long less behind-the-scenes dealings.
• There may be a concentration of benefits around a single LST provider.

But here’s what I’m going to say. As someone who has been working in the Decentralized Finance space for more than 6 years, Berachain is one of the largest and first Decentralized Finance experiments I’ve ever seen. While we don’t yet know what games will be played, I’m very much looking forward to seeing these Beras push the boundaries of Crypto Assets.