Importance of Proof of Liquidity

What is Proof of Liquidity?

Proof of Liquidity (PoL) is a novel concept introduced by Berachain, designed to optimise the efficiency and incentives within decentralised finance (DeFi). Unlike traditional staking mechanisms that can sometimes be detrimental to liquidity providers (LPs), PoL aligns the incentives for both stakers and LPs. This alignment increases capital efficiency, deepens liquidity in the ecosystem, and reduces slippage and bid-ask spreads.

In Proof of Liquidity, protocols bribe validators with governance tokens to boost their own liquidity, shaping a "bribe-based economy”. This means that protocols and users are incentivised to contribute liquidity and participate actively in the ecosystem rather than focusing solely on staking rewards. We like to think of POL as “the unfair advantage,” not in the sense that it's not a meritocracy, but more like being given a pass to use steroids in your next race after having won the previous one. You still had to put the work in to win, but it's going to make the next one a lot easier. It also forces incumbents to keep an ear to the ground, as steroids don't work if you don't train.

Sustainability:

Attracting liquidity in DeFi hinges on protocols' ability to offer compelling incentives. Typically, the more incentives a protocol provides, the more liquidity it can attract. However, this liquidity is essentially rented and will only remain if you keep paying and as long as there aren't better incentives offered elsewhere. These incentives usually come from governance token emissions by the protocols. Since these tokens do not have infinite supplies, incentives eventually run out. Meaning the mercenary capital will eventually move to greener pastures. PoL changes the game by embedding incentives directly into the blockchain. As long as the chain continues to operate, incentives can be distributed, and liquidity incentivised. This shifts the focus from how protocols can pay for participation to how they can align with validators and the wider ecosystem to create better offerings. Protocols that deliver superior products and generate higher value—whether through fees or other means—will find that the comparative unit cost of the tokens used for bribes becomes more economical, enhancing their overall success and sustainability. This approach forces incumbents to stay engaged with the community and ecosystem, while new protocols must be creative to stand out. Beraborrow is uniquely positioned to capitalise on PoL due to the composability of $NECT. This allows the protocol to capture PoL emissions effectively and transform them into more $NECT, creating a sustainable cycle of growth while maintaining governance access.

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