60,000 Discord members, the first rebasing NFT, 6 separate NFT collections, 3 years in the making, 3 separate tokens, real DeFi innovation, and substance behind memes, might not exist.
What is Berachain, and is it real?
Grab some honey, and perk up to this research. The result might be very sweet.
There are only a few examples of NFT projects growing to become larger ecosystems. Yuga Labs Bored Apes is one example. Even rarer is an NFT project which evolves into a completely distinct protocol. That is what Berachain is promising. It is the final stage of the first rebasing NFT project.
It began with the Bong Bears NFT launched in August of 2021. The lineage traces through Bond Bears, Boo Bears, Baby Bears, Band Bears, and Bit Bears. Six generations of NFTs. In April 2022, the team released a medium article detailing their plans for a native protocol.
Berachain is an upcoming DeFi protocol built using the CosmosSDK. You’ll be able to do all the things you can usually do on a DeFi platform, but with some interesting differences.
Instead of building from scratch, Berachain is leveraging existing middleware and third-party projects to build on top of.
For newer readers, CosmosSDK is a development tool for building application-specific blockchains.
You can fork the consensus infrastructure of Cosmos and create your own blockchain. Including your own rules and characteristics.
Tendermint is a protocol created by the Cosmos team that makes it easier to develop blockchains and replicate them on other machines.
The Tendermint Core is implemented in Go. Developers can build their modules on top of it in any language. It uses proof-of-stake for validation.
Delegated Proof of Stake means even non-validators can participate in staking.
Anyone can stake their coins and then choose to dedicate their stake to validators. The validator the user has contributed their stake to can add that stake to their total. The rewards are shared.
Since the CosmosSDK comes with this Tendermint DPoS system out of the box, that’s what Berachain uses.
It takes it further by adding something called ‘Proof-of-Liquidity.’
Proof-of-Liquidity is a term created by the Berachain team. It allows users to stake assets like ETH, BTC, and stablecoins to a validator.
Generally, staking is done in a protocol’s native token. The Cosmos system makes it easier to build a ‘communication hub’ (tokens from different chains transacting between each other) for multiple blockchains. If you’ve ever used THORChain, you’ll get the idea.
Berachain’s Proof-of-Liquidity allows users to stake from a selection of tokens and then delegate that stake to validators to participate in the DPoS.
On Berachain, it’s unnecessary to stake the protocol’s native token. All you have to do is prove you have some liquidity.
Weight and precedence go to more prominent tokens first, like BTC, ETH, and USDC.
The native tokens
Before we go any further, here are the Berachain native tokens.
BERA — used as gas
HONEY — the native stablecoin
BGT — used for governance (this is an NFT)
As you already likely know, your stake helps secure the protocol.
In Berachain, the staked assets are deposited into vaults and used to earn yield. This could be through LPing to the native DEX, supplying protocol-run lending markets, helping to stabilize the peg for the native stablecoin HONEY, etc.
You can also use your stake for many things you would expect in a DeFi protocol. For example, you can use your staked assets as collateral to mint HONEY. That HONEY can be used in other ways:
– to pair with other coins for the native DEX. Similar to RUN. Ie. HONEY-OTHER_COIN
– AMO (Algorithmic Market Operations Controller). Similar to Frax, this would help keep the peg in ways other than simply buying and selling
BGT will be the governance token. It’s an NFT, and you won’t be able to transfer it. You earn BGT by staking BERA, the gas token.
When you stake BGT, you earn HONEY from fees from the DeFi-related activity.
The cycle here becomes stake assets, earn HONEY. Stake BERA, earn BGT and HONEY. Use BGT for governance. Use HONEY for various DeFi activities including using it as collateral to take out loans. Purchase more BRA, stake, etc. It will be interesting to see the optimal pathways users take.
Another note about BGT. There is discussion around the ability to use it for gauge reward weights, similar to veCRV. I’m not sure if that’s a certainty.
I am not 100% certain but I am pretty sure Berachain is being built using EVMOS.
My knowledge of EVMOS is limited. EVMOS is a middleware between Cosmos and Ethereum’s EVM.
EVMOS is a fork of the EVM built on top of Cosmos, which bridges with Ethereum.
Not familiar with its security and exact practical function.
The indications are that Berachain will have a native DEX at launch.
The AMM will be Crocswap, which is launching on a few protocols and isn’t specific to Berachain.
Crocswap has some important and unique implementation details. Here are some of them:
- There are attempted mitigations against bots and other abuses on Uniswap v2 and v3. For example, to protect against JIT liquidity contracts, instill a time-lock on liquidity so it can’t be added and pulled quickly. (JIT liquidity is a sandwich attack that exploits concentrated liquidity regimes to the detriment of the LP).
- Liquidity can be provided in concentrated liquidity ranges like Uni v3 or fluidly like in standard v2.
- Dynamic fees. Fees will be higher when there is more swap activity. This helps buffer against IL as LPs earn more in periods of potentially higher volatility.
- Earnings auto-compounded without a service fee.
- Possibility for authorized pools and whitelisted addresses like on Bancor
Since the DeFi activity will be native to the protocol, liquidity should be more concentrated.
Fractionalized liquidity is a problem in DeFi. When liquidity is fragmented across many distinct assets, pools dry up and become ‘liquidity debt.’ Like abandoned buildings along roads with otherwise livable properties.
Since the fundamental DeFi building blocks will be a part of Berachain natively, and HONEY will be used as the liquidity pair, the liquidity should more likely have the adequate depth for an efficient protocol.
Slippage, for example, is reduced. Users attempting to utilize the best external yields by using HONEY in third-party earnings vaults, which can dump the token and jeopardize the peg, will be unable to do so.
That said, native protocol DeFi does not prohibit third-party projects from building on Berachain.
There are apparently many teams already building for it, and they are vying to launch when Berachain is ready.
Since the fundamental building blocks of a liquidity protocol and the baseline activity are all natively owned and managed with the native tokens, developers will hopefully focus on building original and innovative products.
Berachain is aiming to launch in a few months from the date of this article. Perp trading is expected to be ready at launch.
The standard smart contract, liquidity, and speculation risks.
In the case of Berachain, the native DeFi that can help make the protocol more efficient and robust can also add risk. The system’s health is more centralized to the core Berachain offering.
If there is a break or fragility in a core piece, HONEY, for example, threatens to bring down all the other pieces.
We’ll see what happens. I look forward to seeing how Berachain progresses.
Very likely will need to write a Part 2 to this deep-dive.
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