DeFi
Berachain PoL and Honeypot FTO for enhanced liquidity
Liquidity has been the backbone of DeFi (decentralized finance) since its inception. However, securing liquidity through locked capital is detrimental to DeFi in the long run. This realization served as the catalyst for the creation of Berachain’s Proof of Liquidity (PoL).
The traditional Proof-of-Stake (PoS) mechanism has some irreversible drawbacks. It gives an unfair advantage to network participants at the time of the TGE (Token Generation Event), paving the way for massive sell-offs. Furthermore, PoS leads to reduced liquidity for LP pools and transactions if the chain’s security were to be improved. Since PoS chains follow a single-token economic model, protocols do not have the flexibility to fund growth with their token holdings, as this can lead to a drop in the token price.
It is to address these challenges that Berachain relies on the PoL mechanism.
Enter Proof of Liquidity (PoL)
Much like PoS, PoL uses a gas token to incentivize validators to secure the network. However, PoL introduces an additional token called a governance token to incentivize liquidity providers and determine the potential reward for stakers who secure the network.
Berachain builds on PoL, introducing two tokens: $BERA – the native gas token, and $BGT – the governance token. Using PoL allows Berachain to attract liquidity by distributing $BGT as an incentive. Liquidity providers can contribute to the liquidity of BEX pools and earn $BGT (Bera Governance Token). $BGT holders then delegate their tokens to validators.
These validators then produce blocks proportional to the $BGT delegated to them. Delegators and validators are rewarded by Berachain for strengthening the network. Validators also have voting rights to decide on the inflation of $BGT.
What makes PoL so effective for Berachain?
Here’s how PoL solves the shortcomings of PoS:
Separate tokens: PoL separates the functionalities of the delegation token and the gas token ($BGT and $BERA in the case of Berachain), ensuring enhanced network security and sufficient liquidity.
Incentive Cash Collection: The only way to earn $BGT is by providing liquidity to BEX pools. This ensures sufficient liquidity for the pool, making trade settlements and on-chain transactions more efficient.
Inter-exchange market making: Fragmented liquidity is a major challenge in DeFi, leading to underutilization of available assets. PoL also allows larger exchanges to serve as primary market makers for emerging exchanges, facilitating the creation of an interconnected trading ecosystem within Berachain.
But there are some challenges to overcome…
Users participating in the PoL are required to lock up their assets. While this ensures liquidity at the beginning, it also means that these users will be eager to unlock their assets and sell them on the market shortly after the TGE to book profits.
Here, the liquidity strength depends on the willingness of these users to lock up their assets for a longer period. Since $BGT is a non-transferable token, these users have limited opportunities to generate more profits. Hence the reluctance to lock up their assets for a longer period.
With an insufficient number of tokens locked, a liquidity crisis is never too far away, creating a detrimental scenario for the entire Berachain ecosystem. And the solution to this problem had to come from within the ecosystem.
Enter FTO: The Driving Force Behind Honeypot’s Flywheel Model
Honeypot Finance’s FTO (Fair Token Offering) model designs actions following the same mechanism as Berachain’s PoL. While the end goal of both FTO and PoL is the same: to reduce selling pressure at or after TGEs, FTO is hyper-focused on creating liquidity through supplier volume rather than locked-in volume.
The Fair Token model offers:
100% Deep Liquidity: The FTO model ensures that all tokens are in the pool at launch, preventing market manipulation.
LP Token Creation: Instead of purchasing the actual token, investors purchase LP (liquidity provider) tokens at launch, creating liquid markets from day one.
Fair prices: The protocol and participants are treated equally and the allocation of LP tokens is split 50-50 between them, eliminating the risk of an unfair advantage for either party.
LP sale without price reduction: Protocols are allowed to sell LP tokens to raise funds for operational purposes. However, this sale has no impact on the token price.
Built on Berachain, Honeypot’s FTO is designed to accelerate activity and boost liquidity within the ecosystem.
Most importantly, FTO unlocks additional usage for $BGT by integrating it into Honeypot’s Flywheel model. Here’s how:
- $BGT holders delegating to the BeeHive node (Honeypot Finance’s node) receive $HPOT (Honeypot’s governance token) as bribes.
- The corruption mechanism is directly tied to voting rights, which strengthens incentives for the $HPOT and $Honey token pools.
- In return, $HPOT holders can collect $BGT profits by participating in PoL mining.
PoL vs FTO: FTO acting as an accelerator for PoL
Users holding $HPOT, $Bera, or $Honey can invest in the $HPOT-$Honey-$Bera liquidity pool to earn $BGT. More importantly, they only need to hold one of these three tokens to be able to earn $BGT.
Together, $BGT and $HPOT power a lucrative revenue flywheel model, which leads to:
- Significant increase in platform revenue and community node size
- HPOT share buybacks surge, boosting its market value
- Increased bribes and incentives for people with disabilities, further increasing demand for $HPOT
Every time a user unlocks their tokens to withdraw liquidity, they lose their ability to generate income from $BGT issuance. Eventually, they can burn their $BGT holdings to acquire $BERA. The FTO model encourages more users to provide liquidity because it minimizes the probability of loss, with users getting back 50% of their invested tokens as LPs.
Final verdict
Once Honeypot gains prominence and helps emerging protocols attract liquidity through its Dreampad, the need for $BGT staking could increase significantly to fuel the network as well as the liquidity pool. Technically, FTO is meant to promote PoL, while addressing the problem of fragmented liquidity with efficient use of capital.
Proof of Liquidity (PoL) drives on-chain activity, speeding up the circulation of tokens. This allows PoL networks to achieve similar or even better economies of scale with fewer tokens compared to Proof of Stake (PoS) systems, where many tokens are locked up by validators, reducing the circulation speed.
Fair Token Offering (FTO) also improves token circulation by providing immediate liquidity after launch. This readily available liquidity facilitates the token’s exchange, further enhancing the PoL system’s ability to achieve substantial economies of scale. Together, these mechanisms complement each other, improving the overall functionality and sustainability of the DeFi ecosystem on Berachain.