How DeFi protocols are playing Berachain’s 79m token airdrop

Three years after its inception, Berachain is finally launching.

The bear-themed blockchain, which has raised a whopping $142 million from VCs, announced on Tuesday that it will airdrop 79 million BERA tokens — almost 16% of the supply — to its community and early users upon launch.

“Thousands of people who have been part of this ecosystem for the last three years are finally being rewarded,” Wajahat Mughal, CEO at IVX, a DeFi options protocol built on Berachain, told DL News.

“Those who stuck around and got involved are getting nice airdrops.”

Berachain aims to solve coordination problems between the validators that process blockchain transactions and those building its user-facing apps — like IVX.

It does this through a novel Proof of Liquidity validation mechanism, an alternative to Ethereum’s Proof of Stake or Bitcoin’s Proof of Work.

Excitement for Berachain is high. DeFi users have locked up over $3.2 billion in pre-deposit vaults which will automatically transfer onto the blockchain when it launches.

The pre-deposits will make Berachain the eighth-largest blockchain by deposits when it launches, overtaking other well-funded blockchains including Avalanche, Sui, and Aptos.

The launch will also kick start a race among DeFi protocols to secure as much of the blockchain’s native governance token as they can.

What is Berachain?

Berachain is a blockchain based on Ethereum. Instead of Ethereum’s Proof of Stake validation mechanism, Berachain uses one of its own inventions, called Proof of Liquidity, or PoL.

Under PoL, DeFi users earn Berachain governance tokens, or BGT, by providing liquidity on the blockchain’s native apps or by running a validator.

Users can convert BGT, which is untradable, to BERA, the blockchain’s tradable gas token, at a one-to-one ratio. But the conversion only works one way.

The validators that process transactions can’t max out the rewards they get for doing so without users delegating BGT to them. In return, Validators are forced to give away some of the BGT they earn to users of DeFi apps.

It’s a new system, and it hasn’t been tried by any other blockchain. The hope is it will align validators and DeFi protocols while creating a sustainable way to secure the blockchain.

Fierce competition

PoL aligns the incentives of validators and DeFi apps. But it will also drive fierce competition.

Berachain only gives out a limited amount of BGT at any given time. Determining which validators can convince users to lock up their BGT with them, and in turn, which apps can convince validators to direct rewards to their users, will impact which apps are ultimately successful.

The more BGT an app controls, the more BGT it can earn and direct to its users, creating a flywheel effect.

One of the top priorities among apps will be to capture as much BGT token emissions as possible, Mughal said.

For IVX, that means getting in good with validators.

“We focused on creating extremely strong connections with the top validators over the last 12 months,” Mughal said.

Some apps, like liquid staking protocol Infrared, are choosing a different path.

“We run our own validator infrastructure,” a spokesperson for Infrared told DL News.

Doing so lets Infrared easily direct the rewards its validators must give away to those using its app.

Infrared says its goal is to get DeFi users to lock up liquidity, bootstrapping the protocol’s initial BGT holdings.

Liquid staking apps like Infrared are highly competitive. On Ethereum, Lido, the biggest liquid staking protocol, accounts for a whopping 68% of the market, despite numerous attempts from upstarts to chip away at its dominance.

Bera bribes

The PoL system shares some similarities with the decentralised exchange Curve.

DeFi apps, eager to get validators to give BGT to their users, may choose to offer them additional tokens to do so. This kind of deal, known in DeFi as a bribe, is a well-established practice on Curve.

On Curve, apps bribe CRV token holders to get them to boost the yields on certain liquidity pools. Simply put, it lets apps buy liquidity for their tokens, making them more attractive for users.

Similarly, Berachain apps can bribe validators to make their offerings more attractive to users by increasing the yields they can earn by using them.

It’s likely that multiple Berachain apps will compete to bribe validators.

Mughal said IVX plans to use its early revenue to bribe validators to give it an edge against other protocols.

However, such systems don’t always work as intended.

Solidly, a decentralised exchange that used a similar bribe system, received harsh criticism upon launch after bugs in its code and problems with its token rewards system drove users and liquidity providers away.

Tim Craig is DL News’ Edinburgh-based DeFi Correspondent. Reach out with tips at tim@dlnews.com.

Disclosure: The two co-founders of DL News were previously core contributors to the Curve protocol.