This article will explain:

1. Berachain’s Proof of Liquidity

2. Protocol Owned Liquidity

3. Why Protocol Owned Liquidity powered by Berachain’s Proof of Liquidity goes sicko mode

POL: Proof-of-Liquidity primer

One of Berachain’s main innovations is its novel Proof-of-Liquidity consensus and security mechanism. It is a system in which validators of the chain itself direct new emissions of the native governance token $BGT.

These new emissions are directed to LPs of whitelisted pools, akin to the way $veCRV holders direct the new issuance of $CRV to various liquidity providers.

Much like the Curve Wars, this has two main byproducts:

1. Bribe markets: Protocols can incentivize validators (via bribes) to direct liquidity incentives to a desired pool

2. Hoarding: Protocols have an incentive to hoard the governance token and run their own validators such that they may direct liquidity incentives to their pool(s), without having to continually pay other validators to do so

Unlike the Curve Wars however, the governance token which directs the emissions cannot be acquired as easily. Therefore if protocols want to pursue the strategy of acquiring $BGT, it can only be done via LPing and acquiring $BGT emissions.

This is because $BGT is non-transferable, and can only be made liquid by burning it to receive $BERA, in an irreversible transaction.

This may be bypassed by acquiring $iBGT, a liquid equivalent product created by Infrared Finance. Holding liquid versions of $BGT may carry other benefits and risks, and can be part of a well developed liquidity strategy.

POL: Protocol Owned Liquidity primer

This brings us to another POL acronym, however with a different meaning. Protocol Owned Liquidity refers to the liquidity owned by - you guessed it - the Protocol.

Before Protocol Owned Liquidity, there existed Liquidity Mining. This was first introduced during DeFi summer in 2020, where protocols would reward LPs with their governance token. This is akin to “paying rent” to the market for liquidity. Because when the payments stop, so does the music liquidity.

More capital efficient methods such as bribing emerged, but the drawbacks here are also similar to that of Liquidity Mining wherein a recurring cost must be paid to maintain the desired amount of liquidity. If this is mismanaged and the token supply over-inflated, a death spiral can begin where the token is devalued and thus the liquidity incentives themselves become less valuable.

A protocol buying and owning its liquidity may be costlier in the short term, but is much healthier in the long run as it removes this recurring overhead which dilutes persons or entities that hold the token. This includes the protocol treasury, holders, stakers, team, among others.

A protocol owning its own liquidity means that:

• It does not have to continually pay out bribes to validators, or give incentives to liquidity providers

• It has another source of revenue (swap fees from LPing), which are often overlooked as a source of revenue, especially in concentrated liquidity pools

When protocols do not have to ‘rent’ liquidity from the market, they can also reduce or stop emissions of their native token, and reduce inflation of the circulating supply. This has innumerable advantages for the treasury, users, holders, and Yeetards everywhere.

POL²

Due to the unique nature and mechanisms of Berachain, Protocol Owned Liquidity is more important than ever. Protocols can reduce inflation, earn revenue from swap fees, benefit stakeholders, and they can also stack that sweet $BGT.

The benefits of doing the latter come from the high intrinsic value of owning $BGT.

• New $BGT emissions can be directed to LPs of the owner’s desired pool at no extra cost to them (besides opportunity cost)

• Yet another revenue source can be attained by accepting bribes to direct $BGT emissions to different pools

Either strategy can be used and alternated between depending on the goals and needs of a protocol.

Protocol Owned Liquidity is important. On Berachain, it becomes important-er.

This is how a bera protocol may use POL²:

1. Whitelist liquidity pool for $BGT emissions via Berachain governance (this is a prerequisite)

2. Deploy treasury assets into the $TOKEN/$BERA pool

3. Spend some assets on an initial bribe to validators to direct $BGT to the $TOKEN/$BERA pool, and farm the received $BGT

4. Delegate the $BGT to a validator, or spin up a validator (if $BGT received allows)

5. Direct new issuance of $BGT to the $TOKEN/$BERA pool with the newfound governance power

6. Continue farming the received $BGT

7. Go back to step 4 and repeat

Despite our severe Yeetardation, Yeet understands the importance of POL on the POL chain. We will bring something to the ecosystem that allows Berachain ecosystem protocols to build up their POL² and harness these benefits.

Now go back to eating crayons you Yeetards.