Can the PoL mechanism still be saved? Looking at the liquidity game from BERA’s new low.

Recently, the price of BERA fell to 2.66 USD, reaching a new low since the TGE in February this year. Since March, BERA has been on a downward trend; what has happened to the once-flourishing Berachain?

TVL dropped from 3.4 billion to 1.147 billion.

Berachain, as an emerging public chain, has attracted significant market attention even before its mainnet launch due to its meme culture, liquidity mechanism, and support from well-known VCs. Its core innovation lies in its Liquidity Proof (PoL) mechanism, which incentivizes on-chain liquidity through BGT emissions and bribery. However, the complexity of this mechanism makes it difficult to attract new users and also exposes sustainability issues. PoL relies on the continuous injection of liquidity, but when market conditions deteriorate or incentives decrease, liquidity providers quickly withdraw, leading to a sharp decline in total locked value.

According to defiLma data, its total TVL has fallen from a peak of $3.493 billion on March 28 to $1.147 billion now, a decline of over 67%.

As early as the beginning of April this year, well-known arbitrage KOL Benmo tweeted that Berachain might be facing issues, with the TVL of its second pool significantly decreasing in proportion to token distribution, and the token emission mechanism being problematic, which may render its POL mechanism unworkable.

As time approached recently, the liquidity pool TVL in the above figure saw a more significant decline.

These three liquidity pools are the core liquidity pools of Berachain. Due to the reduced token incentive allocation ratio under the PoL mechanism (especially the “second pool” which is a non-main pool), liquidity is rapidly flowing out. This reflects three key issues: liquidity providers lack long-term confidence, and they flee as soon as incentives decrease. The mechanism that relies on token incentives to maintain the ecosystem is unstable; there is insufficient real demand, and it only attracts users by relying on “airdrop farming”.

A considerable amount of BGT has been released, mostly distributed to BERA and BGT liquidity tokens as the deposited asset treasury, while other assets have few users and trading volume. Over half of the bribes also come from WBERA, BGT derivatives, and HONEY, and the asset structure of their bribes is concerning.

In the long run, if this issue is not resolved, the mining pool will eventually collapse.

10 million BERA tokens unlocked causing market selling pressure

Berachain officially unlocked 10 million BERA on May 6. This portion is mainly for airdrops, and if calculated at a unit price of 3 dollars, its total value is approximately 30 million dollars in selling pressure. As mentioned earlier, most users participating in Berachain are arbitrage players, and once the incentives decrease, they will quickly choose to leave. Mining and selling has become a regular operation.

In addition, BERA has long been criticized as a typical VC coin, with 34.31% of its total supply allocated to private investors. In comparison, the share of VC typically fluctuates around 20%, while the nearly 35% allocation has drawn significant criticism for its VC coin.

Smokey the Bera, the anonymous co-founder of Berachain, stated in an interview with Un Chained, “I don’t think the criticism is entirely wrong. If we could do it all over again, and the team could start from scratch, we might not sell so much of the supply to venture capital firms. In fact, most of the supply was sold during the seed round at the beginning of 2022. At that time, we thought it might be an interesting thing, but we didn’t expect it to grow to the scale it has now. So I think these criticisms are valid. In fact, over time, we have been working to buy back that portion of the supply from the seed round and subsequent Series A rounds, so we can minimize the dilution suffered by the community.”

After the market’s enthusiasm quickly dissipated, the buying pressure on the BERA token is under strain, making it difficult for the coin price to rise.

Lianchuang once again admits to making a mistake “not setting a Boyco TVL limit”

In mid-May, Smokey the Bera, the anonymous co-founder of Berachain, admitted to making mistakes while interacting with the community in the comments section, including not setting a Boyco TVL limit and failing to issue BERA incentives.

Why do these two errors have negative impacts? The higher the TVL, the rewards obtained should decrease non-linearly or have a cap to prevent excessive capital concentration and to avoid incentives being “plundered.” Without a cap, the larger the TVL, the more tokens are obtained, leading to large holders like Boyco being able to infinitely cycle and extract BERA incentives. This mechanism effectively defaults to “whoever has more money dominates,” completely breaking fairness.

Incentives should also stimulate diversified ecological participation through PoL, but the result has led to important tokens like BGT and HONEY being almost entirely harvested by a few individuals, directly causing dissatisfaction and a trust crisis within the community. Once other users discover that the incentives are all consumed by large holders, they will choose to withdraw or wait and see, resulting in a Liquidity avalanche effect.

“If the participation in the Boyco event airdrop of BERA incentives is not announced, it has become another point of dissatisfaction in the community. If the protocol sets an incentive model, and the project side skips the incentive distribution without announcement, it essentially violates the on-chain rules and will make any large fund participants feel uneasy: will my rewards also be arbitrarily canceled in the future?”

The well-known KOL Bing Frog commented on this incident, saying, “Several months have passed, yet Berachain keeps making the same mistakes and just can’t learn how to change?” He further questioned, “This only indicates that they knew about these issues from the very beginning. They have heard the community’s feedback; it’s not that they didn’t hear it or don’t know where the problem lies. It’s just that from the very start, they never intended to change.”

So, has Berachain really been taking action to “improve” recently? At least not in terms of airdrop incentives.

However, recently, the official announcement of the protocol-level upgrade introduced configurable BGT distribution reward durations. Vault managers can now set the reward cycle to 3 to 7 days, with a 1-day cooldown period between changes. All newly created vaults will default to a 7-day cycle. This change provides the team with greater flexibility, allowing the emission pace to better align with vault strategies and user experience.

In addition, proposals for the upgrade of PoL are also underway.

The value capture of BERA still needs to be strengthened.

BERA is the Gas token for all transactions and smart contract executions on the Berachain network. It is a pure consumable, and the incentives on the protocol essentially extract value from Berachain with high bribery efficiency.

The BERA token does not have governance rights, but rather delegates governance rights to BGT holders, which also somewhat undermines the value of BERA.

BERA urgently needs more value capture mechanisms.

Berachain co-founder announced its POL V1.1 proposal on May 11, aiming to strengthen the value capture mechanism of BERA while maintaining incentive efficiency. The core content includes: the protocol will collect a small portion of the bribery incentives from ecological applications and deploy them to Protocol owned liquidity, used to establish BERA core trading pair LPs (such as BERA-HONEY, BERA-wBTC on BEX), thereby achieving:

• Enhance the depth and stability of on-chain basic trading pairs,
• Reduce BERA Liquidity
• Increase the source of long-term fee income (initial income should be prioritized for deployment to major trading pairs; later it can be used for staking to validation nodes operated by the foundation and directed to distribute BGT to the RV of native applications, deleGate to the nodes operated by innovative application parties, form new LPs with other mainstream assets, and deploy to other native protocols such as Bend, Berp, etc.)

The proposal suggests initially charging an incentive redistribution fee at a fixed rate of 20%, and gradually introducing a dynamic rate model:

• The application of bribery incentives is highly efficient (bribe efficiency) → The fee rate is relatively low.
• Application of bribery selection incentives is inefficient → Fee ratio adjustment
• The control range is set between 10%-30%, adjusted in conjunction with market conditions. This mechanism encourages efficient resource utilization and forms a feedback loop with the actual performance of the application.

Recently, Smokey revealed that a new PoL proposal v1.2 will be released soon, which is expected to enhance the value capture of its token by integrating feedback from various parties.

Summary

Once it was so bustling and lively, now it is equally silent. After a long period of sluggish coin prices, the Berachain community quickly became silent as well. How Berachain will truly solve the problems remains unknown, but time waits for no one. If the official actions remain slow, they may soon be abandoned by the community.

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