PoL V1.3: The end of the great extraction

[ozzy]

Proposal to introduce Proof-of-Liquidity V1.3 (Skipping V1.2 since it’s in the works, but I raised my concerns beforehand to the foundation)

May 31st, 2025.

Context:

Author: Ozzy (Core Contributor: RootsFi)

Since the first big proposal by: Smokey, Jack, Carnation went live, it was clear after a few days, that the desired effect would eventually backfire. I’m sure, that’s essentially the reason why PoL V1.2 is being crafted as we speak. However, I felt like the foundation could use some help here in order to tackle a few of the key issues we are facing at the moment.

The introduction of PoL V1.1 was generally very well received, especially after I called out key issues early on May 3rd with the release of my article: Think Point. A Serious Article for once.

After the rollout of the proposal, the chain lost yet another billion dollars in TVL. The sentiment is down, builders, but thankfully also grifters are slowly leaving. It’s definitely time for some damage control to manage expectation, and also ensure that the core focus of the chain is to restore balance and stability.

The painful part: Please skip if you don’t want to cry.

We do not need to sugarcoat it. The current state of Proof-of-Liquidity was supposed to become the next big thing. Compared to Proof-of-Stake and other mechanisms, at the current rates, it rather looks like a failure in an attempt to revolutionize the space. That doesn’t mean that the broken system can’t be fixed.

Issues at the moment:

• No reason to hold BERA
• Vampire attack on chain level
• Major Pairs liquidity drought
• DEX Volume sub $50M for a $1B TVL chain
• Lack of Major Protocols on Berachain

Let’s talk about each point one by one before we move onto the general proposal + solution.

“No reason to hold BERA”

Now, please listen to this: Majority of the teams building on Berachain
received a so-called “RFA” or if you were building a community, you received “RFC”.

So when protocols are incentivizing their pools on Berahub, what happens is that they usually use the liquid assets they have in their multi-sig. No, they won’t use their “own” tokens, they will use WBERA. Why? I mean just look at the berachain ecosystem tokens. You think they can allow it to drain further?

So the way how this circle jerk is now working: Teams use the RFA to incentivize liquidity provision, investors and retail throw in their money into those assets. Sometimes they are surprisingly even willing to take a big haircut in IL. They get BGT on Berahub, Berapaw or Infrared → And then they either just dump it or continue keeping it in the ecosystem by looping it a gazillion times. But the best part now is: Validators literally get WBERA, boosters also get WBERA. So now I can use the very centralized BGT distro to get even more WBERA with my BGT to dump even more. Some of the pools are so capital inefficient, it offers an easy way in and out.

Why would I even hold BERA in any form, if it’s used to incentivize, and then gets extracted by validators and boosters, but even more LRDs (Liquid Reward Derivatives (Berachain specific)). Obviously, the bearishness would hold on until all RFA has been depleted, right? Right? No.

Read below.

Vampire Attack on chain level

When I was vocal about adding pressure on major pairs on the native DEX, Smokey, Jack and Carnation went on and proposed the following: “10-20% fixed BGT emissions towards BEX major pairings, ensuring that major BERA denominated, and stable pairs will have sufficient liquidity on Berachain”. But it all won’t even matter if we are looking at what’s currently happening:

To give you the TLDR: Protocols are either working hard, or using the RFA they got to incentivize the usage of their pools by thickening liquidity. The result is we get BGT emissions on those pools. Those protocols are usually deploying around $1K-10K. Now here is the funniest part, and I’m going to say the quiet part out loud since every one is afraid to say it:

“The Premium on BGT derivatives and wrappers are killing the chain and especially the main asset: BERA”

Why? Because any protocol that meets the requirements set by the foundation can list the vault for BGT emissions → Any LRD can list it → They put a tax on that → use their own assets as additional yield source. So essentially 10% efficiency of BGT on all pairs, as long as listed by Infrared, Berapaw etc., is used to create a premium.

LRDs are the big winners of this chain, and it doesn’t even make sense to deploy anything but a LRD. Why would I work hard for my protocol (to generate fees etc.) when anything I use to incentivize is being taxed for the premium of BGT wrappers and derivatives? It even creates more indirect sell pressure on the already down bad asset: BERA.

And this is not a shot at those mentioned protocols, they are good guys. Essentially, they are just using what the chain is offering them. Do I blame them? Absolutely not. It’s clear that the chain has its issues. But let’s move onto the next one.

Major Pairs Liquidity Drought

Already addressed. The foundation should stop overcomplicating things and just incentivize major LPs OR direct emissions using the validators they already have.

DEX Volume sub $50M for a $1B TVL chain

This can be tackled easily by incentivizing volume in an environment where dead liquidity is just sitting on chain. I have a solution below for this one which will eventually require: Proof-Of-Liquidity V1.3 or even renaming it to Proof-Of-Points (Or short: PoP).

Lack of Major Protocols on Berachain

Where is Circle, Chainlink, Aave, Uniswap etc.? In DeFi, the image of a project is crucial for capital deployment. I would personally not deploy into something I don’t know anything about. Let alone all those Bera names.

The trusted names are drivers in billions of dollars in capital and TVL in general.

The funniest part of Boyco etc. is how the foundation tried to get those players on board and Ethena never deployed on Berachain for instance. Got hundreds of million in USD, delivered as mercenary.

Thanks for playing.

Okay, enough yapping about the negative side of things. Let’s talk about the solutions, because I have a few.

Solutions

1. Kill BGT entirely
2. Bump up gas fees
3. Kill BGT emissions for LRDs entirely and delist now if Point 1 is no option
4. Incentivize Volume via PoL V1.3 or “Proof of Points”
5. Lower inflation and create a new schedule.
6. TO PROJECTS: Expand to other chains using Berachain as the liquidity hub!!!

So let’s talk about a few points:

Kill BGT entirely

Why? Because this shit is cooked. Like honestly, why do we even need BGT? The distro is fucked, and I don’t see a case where we can go decentralized from here. BERA should be distributed to those who LP.

BGT at the moment is mostly controlled by 2-3 entities. Where is the decentralization in that? Deprecating BGT will lead to burn to BERA and from there we can steer inflation the same way as Solana, Ethereum etc.

BERA has a better distribution and offers Berachain a real chance to become a “decentralized liquidity layer” across other chains. BGT is just a way to keep inflation within the own ecosystem, but it also means that key players will eventually just loop and accumulate more and then just dump it - especially with Berachain being super isolated.

What is there that we can’t do with BERA? We fragmented liquidity and made it look like BERA has no inflation. It’s kind of ridiculous, because we all know the truth - regardless of conversion rate etc. BERA will be the asset to bleed.

Bump up gas fees

It’s too cheap. I’m sorry. This can be quite lucrative and adds another layer of buy pressure.

Kill BGT emissions for LRDs entirely and delist now if Point 1 is no option

This way they can’t put a tax on every asset and then use it for their own assets while taking away the efficiency of the chain. I honestly and genuinely don’t understand how nobody can actually see this.

The thing that essentially makes BGT special is, that it can’t be moved. It’s Soulbound. So why would I pay a premium on something so I can move it? Any ideas?

What’s stopping the LRDs from simply adding a 0.5-1% fee for making the assets movable without extracting value indirectly? Major think point here.

Incentivize Volume via PoL V1.3 or “Proof of Points”

One of the things I am very concerned about is how Berachain moves like SEI.

Source: DefiLlama - Left TVL, all the way on the right the volume

In a blog post by Camila Ramos (Proof of Liquidity: Points, but better | Berachain Blogs) on the official blog of Berachain she describes Proof-Of-Liquidity as a points program but better since it’s liquid. Not a bad thought in my opinion, and I share a similar opinion here.

But the foundation needs to do a better job with the underlying. There are some issues I see with PoL. Yes, Liquidity is king. But at what cost? The chain essentially becomes dead because the swap volume is not there. Turns out I can make money on this chain without doing much. I can just park my money and then dump it. Not efficient.

The solution for this is, perhaps instead of just directing all the BGT emissions to reward vaults, is to create a flywheel where volume generation leads to multiplier. Perhaps like a Tier system.

People do not see a narrative here, but Berachain has a good shot to become something that Tron is for stablecoin transfers, but for liquidity.

The lack of volume makes this chain look dead. I mean look at SEI for instance. And I believe the chain got way more pull than the competition we are seeing on the screenshot.

I will write a more detailed post on “Proof of Points” later, especially on how to tackle the edge cases such as wash trading etc. For now I’d love to hear more opinions on this one and eventually draft a new whitepaper on this matter.

Lower inflation and create an inflation schedule

Inflation is too hot and isn’t benefiting anyway. We don’t need more inflation, we need sticky liquidity and more volume. Create a proper inflation schedule that allows scaling.

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Implementation:

• Launch BGT deprecation roadmap: BGT Redemption Period, Enforce 1:1 burn of all BGT into BERA, Disable any remaining BGT functions and retire the token

• Update PoL module to mint rewards directly in BERA and integrate “Proof of Points”:
  → Redirect 50% of block emissions to existing validator-voted vaults (LP rewards in BERA)
  → Allocate 50% of emissions based on per-address volume (Points) with tiered multipliers
  → Implement tracking of trading volume and LP stake amounts to compute tiers

• Enforce PoL based BERA emissions towards major pairs

• Increase Gas Fees (minGasPrices based on dynamic curve)

• Remove all LRD-related vaults from PoL eligibility (delist any BGT-wrapped or BGT-derivative tokens)

• Activate new BERA inflation schedule in consensus code:
  → Set initial high inflation rate (matching current BGT emission equivalent)
  → Embed automatic periodic reductions tied to block height (or usage milestones)
  → Publish target long-term inflation curve (e.g., 10% → 9% → 8% → 7% → 6%)

• New round of incentives (or unlock part or remainder of RFA for infrastructure, audit use cases etc.) for smaller projects to adapt the changes and have a chance to thrive using a milestone based unlock by the foundation in order to tackle fraudulent behavior

Feedback and Suggestions Welcome

This article is written in the spirit of community contribution and critical dialogue. Constructive feedback or alternative solutions are welcome and encouraged.

Thank you,
Ozzy

[ribdyne]

Hey ser.

New to the community, but hopefully I can contribute a little bit to this discussion. One concern that I currently have with BGT is the fact that, initially, it “delays” bera inflation by offering superior yield that holders can opt to collect. But, as time goes, and having a high inflation, BGT is actually compounding future inflation to bera, that will eventually get realized. So, as time goes, bera’s inflation might be controlled, but there will be a ton of BGT supply that might get burned for bera and dumped on the market at any day. We actually saw this happening a couple days ago, when someone burned over 100k BGT for bera in a single day:

So, it seems like, in the current form, there will always be a danger of holding an asset like bera which can have major inflationary days, with big amounts of bera entering circulation supply and being sold.

I’d actually like to know your opinion about using part of bribes/incentives for actually buying back and burning bera on a constant basis, instead of using it for COL (which was the original proposal by the foundation).

ps. I strongly agree with the idea of using POL to incentivize actual activity onchain, instead of just liquidity provisioning (which basically is incentivizing users to park money in LPs and sell rewards).

[ozzy]

It’s like filling up a glass. At any given moment, once it’s full enough it will eventually overflow.

PoL is great, just not in the current state, hence my suggestion to eliminate BGT entirely or reduce exposure to LRDs on a tax level. So imagine you have a protocol, and you want more liquidity on your desired pair → you bribe. The LRD can just come in list you, people will use it to farm their token “LBGT or iBGT” for instance with 100% APR.

It’s taxation on a protocol level on top of incentives (PoL).

I see combining PoL with Volume as a solution here to beat other chains in fees + native yield which will eventually put Berachain out there.

[Beraprophet]

Hi Ozzy,

Thanks for the detailed write-up and for taking the time to dissect the current dynamics of Berachain’s Proof-of-Liquidity system.

I agree with many of your observations, especially regarding:

• The current lack of incentive to hold BERA
• How BGT emissions and LRDs distort value capture
• The issue of dead liquidity vs. productive volume

However, I’d like to challenge the idea that BGT must be killed entirely. I believe there’s a more balanced and flexible path forward that preserves the benefits of BGT as a governance/coordination tool, while fixing its current flaws.

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Core Suggestion: Dual Reward Mechanism (BERA + BGT)

We don’t need to completely eliminate BGT to solve the systemic issues. Consider this:

• Split emissions: Redirect 50% of PoL rewards to BERA and the rest to BGT.
  → This sharply reduces BGT’s premium while maintaining its utility as a signaling mechanism.
• 1-way BGT → BERA burn remains: Prevents easy dump loops and gives BGT intrinsic value.
• BERA becomes a yield-bearing asset: LPs and stakers who receive BERA rewards can reinvest or hold — driving real demand and making BERA deflationary by utility.
• Reduced BGT inflation: With BERA absorbing part of the reward pressure, BGT emissions can be cut, and its premium minimized.
• Net effect: BGT still serves as a governance and vault routing token, but BERA becomes the core economic unit with real utility and value accrual.
• Also make a burn mechanism that burn 20-30% of BERA when you convert from BGT, that way we ensure low conversion rate and low inflation.

Would like do hear your opinion, also do we know what v1.2 brings ?

[ioachimviju]

@ozzy

PoL is great, just not in the current state, hence my suggestion to eliminate BGT entirely or reduce exposure to LRDs on a tax level. So imagine you have a protocol, and you want more liquidity on your desired pair → you bribe. The LRD can just come in list you, people will use it to farm their token “LBGT or iBGT” for instance with 100% APR.

wow ozzy, this is incredibly well thought out.

one of the biggest challenges though, and i think you’d agree, is that most people don’t understand any of this. even advanced DeFi geek struggle to keep up. that’s part of the problem: we’re dealing with complex mechanics in a narrative-first ecosystem.

that said, what you’ve laid out here is a critical step forward. whether or not this is the path, it’s a clear signal that changes must happen—for the sake of $BERA, for the builders who are still here, and for the long-term survival of the chain.

appreciate the thought, the transparency, and the effort you keep putting in, brother.