Challenges of PoS Chains

In today’s Web3 industry, nearly every public blockchain adopts the Proof of Stake (PoS) consensus mechanism apart from Bitcoin. Under PoS, validator nodes stake a certain amount of native tokens to earn opportunities for block production, thus maintaining network operations. However, this approach has gradually given rise to two major issues:

1. Liquidity

Native tokens, aside from staking, are typically used to pay gas fees for network usage and provide essential liquidity for most trading pairs on decentralized exchanges (DEXs). However, significant amounts of tokens locked in staking are unavailable for use in DeFi protocols, leading to poor capital efficiency, decreased token liquidity, reduced network activity, and ultimately slowing ecosystem growth. To address liquidity challenges of staked assets, the prevailing solution involves issuing Liquid Staking Tokens (LST). Yet, the market is now saturated with various types of LSTs, ironically resulting in fragmented liquidity. \

2. Economic Incentives

Excessive token staking can significantly reduce overall network activity. This issue is particularly pronounced for newly-launched blockchains, whose initial token circulation tends to be quite limited, with a substantial proportion of tokens locked in staking. Such conditions create significant barriers for ecosystem projects attempting to gain traction. Consequently, blockchain foundations must invest heavily in these projects, attracting users via token incentives. However, this economic incentive model only treats the symptoms rather than the root cause. Most projects struggle to retain users once foundation support ends, indicating that external funding alone is not a sustainable long-term solution without a viable mechanism to incentivize user engagement continuously.

To solve these two major challenges facing traditional PoS chains, Berachain has introduced the innovative Proof of Liquidity (PoL) mechanism.

Berachain Introduction

Berachain is an EVM-compatible Layer 1 blockchain. Its unique PoL consensus mechanism essentially redistributes a portion of block rewards earned by validator nodes back to liquidity providers in DeFi protocols, incentivizing more users to supply liquidity. At the same time, liquidity providers can vote for their preferred validators, enabling these validators to secure additional block rewards, thereby further enhancing the profitability distributed to liquidity pools.

Berachain’s ecological flywheel (Source: DeSpread)

In this system, DeFi projects actively “bribe” validators to allocate block rewards toward their liquidity pools to attract more users and liquidity. Validators, aiming to maximize profits, select liquidity pools based on these incentives (bribes) and user support. Meanwhile, users continually vote for validators offering the most beneficial returns. Through this mechanism, Berachain successfully builds an enormous ecological flywheel by aligning the economic interests of users, DeFi protocols, and validators. This encourages an influx of liquidity, thereby accelerating ecosystem growth.

Considering that once Berachain’s ecological flywheel begins spinning, it could generate significant wealth effects, Berachain attracted many projects and users during its testnet phase. Following the launch of its mainnet, the total value locked (TVL) rapidly surged beyond $3 billion, with over 180 ecosystem projects currently deployed, most of which are native to Berachain.

Team Members and Financing Background

Berachain traces its origins to an NFT project called Bong Bears, initiated in 2021. At the peak of NFT Summer, Bong Bears gained strong support from the DAO community of Olympus, a prominent algorithmic stablecoin project. Berachain was then founded by experienced community members using pseudonyms, such as co-founder Smokey The Bera, co-founder and CTO Dev Bera, and another CTO, Grizzly Bera. Compared to most public blockchain projects that start cultivating a community only after launch, Berachain emerged directly from an existing community, having a robust community foundation from the outset.

Berachain completed two financing rounds in April of 2023 and 2024, respectively. The Series A round was led by Polychain Capital, raising $42 million, while the Series B round, led by Framework Ventures and Brevan Howard Digital, raised $100 million. In total, Berachain raised $142 million, reaching a valuation of $1.5 billion. Other prominent investors included OKX Ventures, Hack VC, Mustafa Al-Bassam (founder of Celestia), Sandeep Nailwal (co-founder of Polygon), numerous renowned institutions, and angel investors. Both the lineup of investors and the scale of funding were impressive, providing Berachain with substantial resource support.

Berachain’s Technical Features

Next, we will provide a detailed introduction to Berachain’s Proof of Liquidity (PoL) mechanism and its underlying infrastructure, BeaconKit, which supports its operation.

Proof of Liquidity

The concept of PoL was briefly explained earlier. This section will delve deeper into its actual operational details, illustrated by the figure below:

The Operational Process of PoL

Firstly, PoL involves two native tokens on Berachain: $BERA and $BGT. Their functions and characteristics are as follows:

• $BERA: A circulating token on Berachain. To become a validator node, one must stake a certain amount of $BERA. It is also used to pay gas fees and provide liquidity on decentralized exchanges (DEXs), functioning similarly to native tokens on other blockchain networks.
• $BGT: Berachain’s governance token, a soulbound token linked exclusively to user accounts, which cannot be traded or transferred to other accounts. It can only be obtained by staking liquidity provider (LP) tokens. Holders can delegate their $BGT to validators, allowing these validators to receive increased block rewards, or exchange $BGT for $BERA—but not vice versa.

The detailed operational flow of PoL is as follows:

1. Nodes stake $BERA to become validators.
2. Validators receive block rewards in the form of $BGT, with a portion of these rewards allocated to selected liquidity pools.
3. Liquidity providers earn $BGT.
4. Users can then convert their $BGT into $BERA or delegate their $BGT to validators they support.
5. Validators receiving more $BGT delegations subsequently gain increased block rewards.
6. Users thus obtain even more $BGT as returns.

Within this cycle, validators aim to attract more $BGT delegations by allocating rewards to the protocols with the most liquidity. DeFi projects strive to attract users and capital to become preferred liquidity pools chosen by validators. Users, naturally, select liquidity pools offering the highest returns and delegate their $BGT to validators, allocating rewards to these pools. Ultimately, this creates a powerful ecosystem flywheel aligning validators, liquidity providers, and DeFi protocols in a mutually beneficial incentive structure, attracting continuous liquidity without relying on extensive external incentive policies typically required by other blockchains during their initial growth stages.

Furthermore, the success of PoL hinges on block rewards incentivizing core users who contribute liquidity to the ecosystem, simultaneously enhancing Berachain’s network security and liquidity. Unlike traditional PoS networks—where users must choose between staking tokens or providing liquidity, resulting in suboptimal capital allocation—Berachain enables simultaneous growth of both liquidity and security. Additionally, since the governance token $BGT can only be earned through liquidity provision, governance rights are effectively placed in the hands of users who actively contribute to the ecosystem’s liquidity, enhancing the fairness and effectiveness of governance.

In conclusion, Berachain’s PoL mechanism significantly enhances capital efficiency and brings substantial financial support to the ecosystem’s DeFi projects. It addresses the liquidity shortages common across many blockchains, offering a novel and powerful solution to the challenges of on-chain liquidity.

BeaconKit

To support the operation of the PoL consensus mechanism, Berachain adopts a modular infrastructure known as BeaconKit, built upon CometBFT. BeaconKit separates the consensus and execution layers, which communicate through the Engine API. The execution layer runs the same client software as Ethereum, thereby providing a fully EVM-compatible environment. Moreover, whenever Ethereum undergoes upgrades, BeaconKit does not require manual network updates—developers only need to reinstall the latest Ethereum client. This significantly reduces development overhead and supports the seamless migration of Solidity-based smart contracts.

BeaconKit’s Dual-layer Structure (Source: Berachain Blog)

BeaconKit’s two-layer architecture allows the consensus and execution layers to operate independently, ensuring they do not interfere. Consequently, BeaconKit can deliver Single-Slot Finality, meaning that each block becomes finalized immediately upon creation. This eliminates the waiting period typically required for confirmation and prevents block reorganization issues common in traditional PoS chains, resulting in higher security and near-instantaneous transaction settlement.

Additionally, BeaconKit’s modular design enables Berachain to flexibly integrate technologies like cross-chain bridges, oracles, and data availability (DA) solutions. Potential collaborations with providers such as Celestia or EigenDA can further enhance Berachain’s on-chain data throughput and scalability. This modularity allows Berachain to maintain the flexibility of the PoL mechanism, while simultaneously ensuring transaction speed and security. It provides a high level of adaptability, enabling the network to quickly respond to future challenges and potential bottlenecks.

Berachain’s Tokenomics

Berachain has three native tokens in total: besides $BERA and $BGT (previously introduced under PoL), it also issues the stablecoin $HONEY. The token economics of these three tokens are as follows:

• $BERA

Distribution of $BERA (Source: Berachain Core Docs)

$BERA can be staked and is also used as gas fees within Berachain. Its total supply is 500 million, allocated as follows:

1.Community (48.9%, 244,500,000)

• Airdrops (15.8%, 79,000,000): Distributed to testnet users, official and ecosystem NFT holders, community supporters, ecosystem projects, community builders, etc.
• Ecosystem Development (20%, 100,000,000): Supports ecosystem growth, research and development, growth programs, and Berachain Foundation operations, primarily focusing on developer and builder initiatives, validator node delegation, and optimization of PoL and BeaconKit. \
  • Future Community Incentives (13.1%, 65,500,000): Reserved for future incentive programs or grants to support the growth of ecosystem projects, developers, and users.

2.Investors (34.3%, 171,500,000)
3.Core Contributors (16.8%, 84,000,000)

The unlocking schedule for $BERA tokens follows a uniform structure: after a one-year lockup period, 1/6 of tokens will unlock, with the remaining 5/6 released linearly over the subsequent 24 months. Additionally, the network implements approximately a 10% annual inflation through $BGT emissions, subject to governance.

Unlocking Schedule for $BERA (Source: Berachain Core Docs)

• $BGT
  $BGT is Berachain’s governance token. It has no fixed supply and is distributed as block rewards to network validators, with a portion allocated specifically to liquidity pools. Users providing liquidity receive $BGT tokens. $BGT cannot be transferred or traded between addresses, but it can be converted unidirectionally into $BERA at a 1:1 ratio. Additionally, $BGT has two other primary functionalities:

4.Delegation: Users delegate $BGT tokens to validators, increasing validator rewards and earning more $BGT from liquidity pools.
5.overnance: Holders of more than 10,000 $BGT can create governance proposals. All holders can vote on proposals proportionally based on their $BGT holdings.

• $HONEY
  $HONEY is Berachain’s native stablecoin, fully collateralized and softly pegged to the U.S. dollar. It serves as the primary payment medium within the ecosystem and a hedge against market volatility. Users can mint $HONEY only using whitelisted collateral assets. Currently, supported collateral assets include $USDC and $BYUSD. Each collateral type has an independent minting rate managed via dedicated vaults. Governance proposals can expand the range of collateral assets in the future.

To prevent de-pegging, $HONEY employs a “Basket-Mode” stabilization mechanism that automatically activates if any collateral asset loses its peg. When Basket-Mode is active, users cannot selectively redeem assets; instead, they redeem $HONEY proportionally from all collateral assets. For example, if $USDC constitutes 60% of collateral and $PYUSD 40%, redeeming 1 $HONEY under Basket-Mode would return 0.6 $USDC and 0.4 $PYUSD. Similarly, minting new $HONEY under Basket-Mode requires providing collateral proportionally from all accepted assets rather than from a single asset.

Minting and redeeming $HONEY incur fees based on a predefined minting rate, which are distributed among $BGT holders. For instance, if the current minting rate is 0.999, a user who provides 1,000 $USDC would receive 999 $HONEY, while the remaining 1 $USDC would be distributed to $BGT holders, thereby incentivizing the adoption of $HONEY.

In summary, using full collateralization, flexible vault infrastructure, and the Basket-Mode mechanism, $HONEY establishes a reliable stablecoin system within Berachain’s ecosystem. Its thoughtful design ensures daily usability and stability and aligns economic incentives across the ecosystem through fee-sharing mechanisms with $BGT holders.

Berachain Ecosystem Overview

Following the launch of its mainnet, Berachain’s TVL quickly surpassed $3 billion, with approximately $1.5 billion worth of $BERA staked on the network and around $40 million worth of $BGT already minted. The ecosystem currently hosts more than 180 projects. Below is a brief overview of several popular ecosystem projects, offering deeper insights into Berachain’s current state of development.

Infrared

Infrared is a liquidity staking protocol built around the PoL mechanism. Users can mint their $BERA into $iBERA, retaining liquidity while earning staking rewards. Additionally, users can deposit specific LP tokens into Infrared’s treasury, generating $BGT tokens and distributing liquidity staking tokens ($iBGT) back to the users.

Use Cases of iBGT (Source: Infrared)

$iBGT unlocks the potential liquidity of $BGT. Holders can stake $iBGT on Infrared to further accumulate $BGT, exchange it for other tokens, or utilize it within DeFi protocols to gain additional yields.

Infrared simplifies user participation in PoL, promotes optimized liquidity across Berachain through cooperation with other ecosystem protocols like Kodiak, and offers multiple yield-generating strategies. Due to its flexibility and increased yields, Infrared has accumulated a TVL of approximately $1.5 billion, making it Berachain’s largest DeFi protocol. Infrared plans to further expand its ecosystem influence through derivative products in collaboration with other projects.

Infrared Ecosystem Map (Source: @infraredfinance/ibgt-is-everywhere-fd353f8196a6">Infrared Blog)

Kodiak

Kodiak is a decentralized exchange (DEX) on Berachain. In addition to supporting the standard AMM model of Berachain’s official DEX, Kodiak introduces the Concentrated Liquidity AMM (CLAMM) model. This model allows users to provide liquidity within specified price ranges, significantly enhancing capital efficiency and LP returns while simultaneously earning $BGT.

However, since CLAMM allows users to supply liquidity across different price ranges, LP tokens vary from user to user, limiting interoperability with other protocols. To resolve this issue, Kodiak has developed a unique mechanism called “Island,” which automates fund management and standardizes each user’s LP tokens, enabling their use across other protocols and fostering diverse yield strategies.

The Island mechanism in Kodiak (Source: Kodiak)

Kodiak established partnerships with multiple ecosystem projects even before mainnet launch, and its current TVL stands around $1.1 billion—nearly equivalent to Berachain’s official DEX. Kodiak’s importance to Berachain’s ecosystem mirrors Uniswap’s critical role within Ethereum.

Besides Infrared and Kodiak, other key ecosystem projects include DEX and token launchpad Honeypot Finance, lending protocol BeraBorrow, ecosystem entry point The Honey Jar, and derivatives platform SMILEE, among others not fully detailed. These examples demonstrate Berachain’s rapid ecosystem expansion, with numerous projects that have quietly cultivated their communities since the testnet phase. As Berachain’s PoL flywheel fully accelerates, more projects are expected to join, creating even richer DeFi experiences.

Comparison of Berachain with Solana, Hyperliquid, and Monad

Numerous emerging blockchain platforms have rapidly gained prominence in this market cycle, including Hyperliquid, Monad, and Solana—revived after the FTX bankruptcy. All have shown impressive performance. Therefore, the following comparison will primarily focus on differences and similarities between Berachain and these blockchains regarding performance and ecosystem development. Ultimately, the unique competitive advantages possessed by Berachain will be summarized.

Performance

Solana

As is widely known, Solana delivered impressive results in the previous market cycle. Yet, after the collapse of FTX, it entered a quiet period during the bear market, to the extent that many doubted its ability to recover. Despite this, Solana successfully regained public attention at the end of 2023, largely due to wealth effects brought by the meme coin $BOME and the token airdrop from Jito’s liquid staking protocol, ultimately becoming one of the most popular chains in this current cycle.

Solana’s consensus mechanism employs a unique model called Proof of History (PoH), a modification of PoS. Each time a transaction or block is created, PoH assigns it a timestamp and uses it to determine the order of transactions and blocks. Thus, nodes across the network can rapidly reach consensus on transaction sequences and concurrently process transactions with different timestamps, significantly improving block creation speed. According to Solscan data, the network’s TPS has consistently maintained above 4,000 over the past year, with transaction success rates significantly improving to around 90% on average.

Solana Network TPS (Source: Solscan)

From this perspective, Solana’s network performance is not mere theory—it has effectively endured the challenges posed by market demands. Notably, over the past year, transactions on Solana have largely been driven by meme coins, known for creating short-term transaction surges, potentially leading to network congestion. Nevertheless, aside from occasional congestion needing further optimization, Solana has experienced no downtime events over the past year, clearly demonstrating its improved stability. However, considering its frequent early-stage network outages, whether Solana can sustain this stability remains to be observed.

Hyperliquid

Hyperliquid is an application-specific blockchain built around a decentralized derivatives trading platform. It employs its proprietary consensus mechanism, HypeBFT, which greatly optimizes transaction latency compared to traditional consensus algorithms. According to official documentation, clients in geographically close regions experience median latency as low as 0.2 seconds from order submission to confirmation, with a 99th percentile latency of just 0.9 seconds. This ultra-low latency allows Hyperliquid to support high-frequency trading and sophisticated financial operations effectively.

Although Hyperliquid hasn’t open-sourced the code for HypeBFT—thus limiting detailed technical insights—data from the past three months indicates that Hyperliquid processes an average of 4,106 orders per second. Notably, this number represents only the orders, whereas in practice, every trading-related activity, such as order placements, executions, and liquidations, is recorded on-chain. Therefore, its actual TPS is likely higher than the displayed figure of 4,106.

Hyperliquid’s Cumulative Transactions (Source: Hyperliquid Stats)

Despite handling such massive transaction volumes, Hyperliquid has never experienced downtime, offering a seamless user experience comparable to centralized exchanges. However, unlike general-purpose blockchains such as Solana, Hyperliquid is an application-specific chain solely optimized for derivatives trading. Thus, it’s plausible that HypeBFT achieves its impressive performance precisely due to specialization in the trading scenario. While Hyperliquid has recently introduced HypeEVM to enable migration of Ethereum-based projects onto its platform, it’s uncertain whether it can sustain this performance level if applied beyond derivatives trading.

Hyperliquid Node Status (Source: Hyperliquid)

A critical point of concern is Hyperliquid’s degree of centralization. Currently, Hyperliquid has only 25 validator nodes, with the top five nodes—all operated officially—controlling approximately 78% of the total stake, raising significant centralization risks. Moreover, ordinary users who wish to trade on Hyperliquid must currently bridge USDC exclusively from Arbitrum, meaning all user funds are effectively locked in a bridge contract between Hyperliquid and Arbitrum. If this contract were to be compromised by hackers, user assets could suffer enormous losses.

Monad

Monad is an EVM-compatible, high-performance Layer 1 blockchain characterized by four key technological innovations:

• MonadBFT
  Like Hyperliquid’s HypeBFT, MonadBFT is also an improvement based on the HotStuff consensus algorithm. However, MonadBFT reduces the communication stages from three rounds to two, and employs a pipeline working model, allowing multiple blocks to undergo different stages of processing simultaneously. This significantly optimizes network communication efficiency, reduces block confirmation time to around 0.5 to 1 second, and markedly increases transaction throughput.

• Optimistic Parallel Execution
  When processing transactions, Monad initially assumes that there are no conflicts between transactions, allowing all transactions to execute concurrently. The network subsequently verifies all results and resolves any detected conflicts according to predefined rules, ultimately updating the finalized results onto the blockchain. This approach enables Monad to maintain data consistency while significantly boosting transaction-processing speed.

• Asynchronous Execution
  By separating the consensus and execution layers, Monad allows network nodes to process new transactions even while waiting for a block to be finalized. Nodes do not need to remain idle until block completion, thereby reducing wasted resources and maximizing the utilization efficiency of block intervals.

• MonadDB Database
  Monad utilizes a customized database known as MonadDB, which stores block data using a Patricia Merkle Tree structure. Compared to traditional databases, MonadDB reduces network overhead and enhances efficiency in state access operations.

Monad officially claims a maximum TPS of 10,000 through optimizations across multiple core network components. Currently, Monad remains in the testnet phase; however, according to unofficial data from Flipside, its recorded historical peak TPS reached as high as 9,998, indicating that official performance claims for Monad are not mere exaggerations.

Monad Network Status (Source: Flipside)

Summary

According to Dune’s data dashboard, Berachain reached a peak TPS of 1,299 since its mainnet launch. Compared with Solana, Hyperliquid, and Monad, Berachain’s performance appears somewhat lacking. However, from the previous technical introductions of these blockchains, it’s evident that their initial design focus heavily emphasized optimizing network performance, which is not Berachain’s main strength. Berachain’s distinct advantage lies instead in the robust liquidity provided through its PoL mechanism. Moreover, Monad is still in the testnet stage, and its real performance will face genuine tests only after its mainnet launch. Hyperliquid, on the other hand, is a high-performance chain specialized for derivatives trading, differing greatly from general-purpose chains like Berachain. Solana, while a general-purpose blockchain renowned for its exceptional early performance, experienced multiple significant downtime events. It only achieved its current stability after several years of development and improvements. Thus, it remains entirely possible that Berachain could similarly overcome future performance bottlenecks through network upgrades.

Berachain TPS (Source: Dune)

Beyond uncertainties regarding performance, Berachain’s PoL mechanism creates a situation where its governance token ($BGT) can only be obtained through liquidity provision. Consequently, network governance may become centralized among a few validator nodes. According to official data, Berachain currently has 61 nodes, with users delegating roughly 5 billion $BGT to these validators. However, the top 10 nodes alone received delegations totaling approximately 4.15 billion $BGT, accounting for about 83% of the total. Particularly noteworthy is that the top four validators are operated by Infrared, collectively holding around 2.16 billion $BGT, representing 43% of total delegation. This demonstrates the current state of extreme network centralization. Additionally, newly minted $BGT primarily flows toward these dominant validators and their corresponding liquidity pools, potentially creating a scenario where “the rich get richer,” making it difficult for newer nodes to compete without increasing incentives significantly.

Distribution of $BGT among Validator Nodes (Source: Bera Hub)

While Berachain’s PoL ecosystem flywheel could generate substantial liquidity once it starts spinning, a potential downturn could trigger large-scale capital outflows. A primary risk contributing to such a scenario occurs when the intrinsic value of $BERA significantly exceeds that of $BGT, prompting mass conversions of $BGT into $BERA and subsequent sell-offs. This dynamic risk requires users to closely monitor and evaluate whether holding $BGT yields greater returns compared to directly selling $BERA, a calculation entirely dependent on the ongoing prosperity and growth of Berachain’s ecosystem.

Ecosystem Overview

Ecosystem Data of Solana, Hyperliquid, Monad, and Berachain (Sources: DefiLlama, Solscan, Hyperliquid Stats, MonadExplorer, Monad, Berascan)

From the data presented, Solana has the longest development history among these chains, currently hosting 207 DeFi protocols with a TVL exceeding $7 billion and averaging over 3 million daily active addresses in the past month. Hyperliquid, on the other hand, is an application-specific Layer 1 focused exclusively on derivatives trading, thus limiting its range of applications. Although it recently launched HypeEVM to broaden its ecosystem, it still has only around 10 DeFi protocols, with a total of just 404k addresses. Despite its limited ecosystem scale and user base, Hyperliquid has reached nearly $200 billion in trading volume over the past three months, roughly 40% of Solana’s volume. Given that Hyperliquid’s address count is over 7 times smaller than Solana’s, this demonstrates strong product-market fit and exceptional user retention. Monad, meanwhile, has attracted significant market anticipation due to its technological innovation and strong funding background, already drawing 79 DeFi protocols and nearly 50 million addresses during its testnet phase.

Compared to these Layer 1 blockchains, Berachain’s ecosystem statistics do not stand out significantly. However, within just over a month after launching its mainnet, Berachain accumulated over $3 billion in TVL, surpassing many blockchains with longer development histories. This rapid liquidity accumulation is primarily due to preparations for its upcoming PoL-driven ecosystem flywheel. As mentioned previously, Berachain validators can distribute part of their earned $BGT rewards to designated liquidity pools, and users who receive these $BGT tokens can then delegate them back to validators to boost block rewards further. However, Berachain’s $BGT allocations are limited solely to pools on its official DEX and have yet to open up competition for other DeFi protocols. Consequently, most funds currently on Berachain merely accumulate $BGT in anticipation. Once the network opens $BGT allocations to other pools, the PoL flywheel will truly activate. Thus, while Berachain’s ecosystem growth currently lags behind other chains, an explosive growth phase could occur once the PoL mechanism fully takes effect.

Conclusion

Berachain uses the PoL mechanism to address the liquidity challenges most public blockchains face, enabling it to quickly overcome the cold-start phase and stimulate rapid ecosystem growth. However, compared to other emerging popular blockchains, its performance remains insufficient. Whether its underlying infrastructure can sustain substantial transaction volumes once on-chain activity reaches a certain scale remains to be observed. Additionally, while the PoL flywheel design can drive ecosystem prosperity, it could also lead to rapid decline if block rewards distributed from validators fail to satisfy user demand. Balancing the interests of all participants within this flywheel to maintain stable growth represents a crucial issue Berachain must tackle in the future. Despite the numerous challenges ahead, Berachain’s innovative PoL mechanism provides a groundbreaking solution to blockchain liquidity problems, making its future performance worth anticipating.