PoL V1.1 - Bera in Control

Proposals
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Proposal to Introduce PoL v1.1

May 10, 2025

Context

Authors: Smokey, Jack, Carnation, with assistance from other members of Bera Labs.

Since Proof of Liquidity (PoL) went live just over a month ago, it has processed more than USD$10 million of incentives and allocated over USD$14 million of Bera Governance Token (BGT) rewards to the users of Berachain’s apps (https://dune.com/thj/pol-on-berachain). This proof of concept has shown the power of PoL in allocating application incentives at a chain level.

Despite the achievements, both the core team and the community have noted inefficiencies with the current PoL system, and have worked toward various improvements for the next iteration of PoL.

Most notably, there remains a firm gap between the value accrued to BGT and the chain token (BERA). This proposal aims to create long-term BERA value capture aligned with the interests of the network, while continuing to drive value for the chain and keep the PoL mechanism intact.

Within this framework, there are a few specific end goals:

  • Retain the PoL flywheel, while directly creating value for BERA
  • Create Chain Owned Liquidity (as described further below) that benefits the ecosystem & synergizes with native dApps
  • Allow for a more laissez faire incentive policy, as value will now be programmatically captured by the network, rather than needing to be mandated through governance
  • Create a more efficient incentive market
  • Maintain upside for BGT holders & PoL believers without a complete reworking of the existing system

Rejected Implementations

As the community has sought to contribute to PoL, they’ve suggested a number of potential fixes. These are all design spaces that we’ve explored, but generally set aside for reasons relating to the end goals above. We’ll run through a few of the more popular suggested implementations from the community and internally, as well as the rejection logic for each.

Locking Mechanism / ve3,3

A BERA locking mechanism that allows users to convert BERA to BGT would essentially create a massive growth in BGT supply, compressing the BGT premium and diluting BGT yield aggressively. This would then decrease the attractiveness of holding BGT relative to BERA, thus causing existing BGT holders to redeem to BERA, offsetting a portion of the BERA supply taken offline and shifting the existing flywheel. While this was a solution that we considered and discussed for an extended period of time, the lack of long-term effectiveness of ve3,3 based systems, and the complexity of locking-based models for a chain level protocol were deemed to outweigh simpler & friendlier UX alternatives. Ultimately, Berachain is a chain that goes far beyond DeFi, and these sorts of mechanisms will serve as a meaningful impediment to broader adoption and ease of use.

Variable Burn on BGT redemptions

A variable burn on BGT redemptions would allow for BGT to convert back to BERA at a slight penalty to the original 1:1 peg, with the penalty amount being burned. The variable amount would be determined by tracking metrics such as incentive efficiency, LST premiums, etc.

The main outcome of the burn would be a reduction in LST premiums, and the protocol would reduce the max potential redemptions. However, liquidity providers would factor the burn in their expected yield, and this would lead to fewer liquidity providers being active on Berachain. Also, since the “Burn” is limited to a fraction of newly redeemed BERA, it doesn’t act as a sink or as a source of value accrual for existing BERA tokens.

In short, any benefit from the burn would likely be equally accomplished through lowering inflation or future changes to economic monetary policy of the chain, without introducing additional user and LP complexity.

Combined BERA + BGT staking

This solution involved having BERA staked in validators to direct a portion of the BGT block rewards, rather than having BGT boosted in validators direct 100% (current state). While this would help somewhat with BERA value accrual, there were two fundamental limitations to this framework.

First, the private stake present in validators would lower the fair distribution of BGT, increasing yield for both private and public BERA stakers. Our goal with any modifications was to ensure that the primary focus was on improving the liquid ecosystem revolving around BERA as opposed to favoring private round stakers in any manner. Second, due to the size of nominal stake relative to BGT, the impact of shifting this would likely offset BGT yield and cause BGT redemptions more than it would improve BERA staking yields, making it a lackluster tradeoff.

Enforcing BERA as the only incentive token paid to validators

Given that the majority of incentives currently are already paid in BERA tokens, there is likely little incremental benefit when the protocol enforces the incentives to be in BERA tokens. A variation of this could involve giving a bonus to the Reward Vaults when incentives are voluntarily paid in BERA tokens.

Realistically, based on what historical data has shown from incentive-based models, the majority of distributions are generally sold regardless. In effect, any benefit in the short term from converting application incentives to BERA would likely be offset later when end recipients then liquidated their boost incentives. As a result, at best this is a marginal gain, and likely ends without noticeable effect.

Forcing BERA Pairing

An alternative option for driving on-chain demand for BERA revolved around the idea of mandating that protocols utilize or pair against BERA in some manner. While that may generate some value from a purely fundamental point of view, it would also become meaningfully exclusionary for the dozens of teams in the ecosystem who wish to create a wider variety of pairs (stables, LSTs, etc). This goes without mentioning the many variants or more complex types of staking tokens which may partially use BERA (ie. IVLP type products), or imbalanced DEX positions which may be composed of a small amount of BERA.

From community discourse and internal discussions, this option felt like it would be more likely to alienate teams in the ecosystem as opposed to helping to scale Berachain over time.

Proposed Solution: PoL v1.1

After extensive consideration toward PoL v1.1, we would like to present some of the ideas that have resonated the most with applications, users, and liquid investors.

In short, PoL v1.1 would implement a variable rate fee to the redistribution of incentives given by applications (not on the BGT distributed to a rewards vault). This ensures that more of the value of PoL for applications remains intact, at the expense of a small haircut to BGT yield. If done correctly, this haircut in yield can be offset by increased demand for BERA through mechanisms described below, as well as through higher incentive revenue for the chain (higher BERA/BGT value = more total value in incentives that the chain can support while maintaining some constant incentive efficiency for applications). A major focus for the incentives collected through incentive redistribution is the permanent removal of BERA from supply, primarily through the creation and maintenance of ‘Chain Owned Liquidity’, which will also drive utility for the ecosystem and ongoing fee generation levers for growth.

In the early phases, the revenue generated from incentive redistribution will be primarily focused on Chain Owned Liquidity in major pairs on BEX (e.g. BERA-HONEY, BERA-wBTC), but can easily be extended over time into supply for other native dApps. In tandem with other PoL projects like auto-incentives (recycling fees from LP on BEX into more PoL incentives), it creates a long-term aligned and sustainable lever for both practical liquidity growth and decreasing circulating supply of BERA. This implementation would likely also allow the protocol to reduce existing PoL governance oversight in certain areas, including (but not limited to) caps on the amount of PoL usable within a Reward Vault. Notably, this liquidity would fundamentally be owned by the chain itself; not Labs, nor the Foundation.

In a future where a high enough density of Chain Owned Liquidity has been reached, and the marginal benefit of more major liquidity is small, then other mechanisms to take BERA supply permanently offline may be considered as a replacement. This is including, but not limited to, beginning to take pairs in other major ecosystem tokens or other incentive tokens from protocols.

Implementation

Change Overview:

  • A dynamic rate fee is taken from Reward Vault incentives picked up by the validators and given to BGT boosters. This does not impact the amount of BGT going towards the Reward Vaults.
  • The rate is proposed to begin at a fixed rate of 20%, before transitioning to a dynamic model.
  • Incentives collected in BERA tokens will remain in BERA (no selling of BERA), while non-BERA tokens are eligible to be converted to other major assets.
  • Periodically, the collected BERA and Majors will be paired in a LP on BEX.
  • The initial focus / pair of interest would be BERA-HONEY LP, as one of the most actively traded and fee-generating pairs.
  • Any excess BERA will have a few options for being deployed, in example, but not limited to:
    • Staked into Foundation-operated validators to direct rewards to Reward Vaults of the native dApps of Berachain (i.e. BEX to start with, potentially others in future)
    • Delegated to application validators that create novel use-cases for validators within their PoL mechanism design
    • Deployed into future native applications like BEND single-sided as a borrowable asset
    • Remain in a smart contract to be paired into a BERA-Major LP down the line
  • The fees (i.e. swap fees, staking rewards, etc.) produced by the Chain Owned Liquidity will be periodically collected and used to collect more BERA-Major LP.
  • Restrictions around Protocol Owned Liquidity within PoL would be reduced, as this change would further disable negative impacts.

Suggested implementation will involve a two step process:

  1. First, begin with a flat incentive redistribution of 20%, to begin value capture

  2. As an option to smooth transition, begin week one with a 5% fixed rate, and ramp up to 20%, increasing 5% each week.

  3. Second, concurrently discuss and finalize implementation on a more comprehensive framework for incentive redistribution to ensure a more nuanced approach

Dynamic Incentive Rate Model:

The proposed framework here to be discussed by the community would involve a variable rate incentive redistribution framework based on the efficiency of spend in PoL. When applications are achieving high return on incentive spend, the incentive redistribution captured by the protocol will be higher. As incentive efficiency improves over time, the variable rate for redistribution will trend downward. Additionally, this incentive redistribution would be effected on the incentive distributed by the application, rather than on the BGT output. This maintains the expected spend efficiency for the application incentivizing, at the expense of slightly lowering BGT yields (more on this later).

The goal with this model would be to ensure that applications are still achieving positive return on investment spend, gently encouraging more efficient incentive spend over time, and capping the incentive redistribution as a factor of the value that applications capture (rather than a fixed rate that could exceed value captured through Proof of Liquidity).

A sample formula for this below:

Incentive Redistribution Rate = K*[1-(R/BERA)]

with a floor of 10% and a cap of 30%

Where:

  • K is some constant fixed rate, suggested 40% (e.g. the incentive recapture is 40% of the value created by PoL)
  • R is the rate an application is incentivizing per BGT in the PoL orderbook
  • BERA is the price of BERA at the time that the application is filled by a validator

This rate is charged on a per-fill basis, meaning that two bids at different rates in the order book will each be priced and incentives will be redistributed independently and accordingly. Additionally, this model intentionally does not account for the impacts of the BGT premium, as this value capture for LPs should remain intact as long as it exists.

Based on our sample modelling and historical backtesting, generally we’d expect this rate to average at around 15% of posted incentives. In the current incentive environment, this would result in low eight-figures of revenue for the protocol, which would be utilized to permanently take BERA supply offline through productive creation of Chain Owned Liquidity that can create compounding growth over time. Combined with fee generation from major pairs like BERA-HONEY, and BEND upon launch, this can quickly evolve into mid 8 to low 9 figures of productive liquidity and value capture around BERA.

Drawbacks of Incentive Redistribution

The primary drawback of Incentive Redistribution would be an effective reduction of BGT yield and short term compression of the BGT premium. That said, there were a few reasons this route was considered as the primary option:

  1. Over time, the BGT yield and premium would naturally compress as new BGT inflation comes online. Eventually, users would start to burn some BGT for BERA, which would reduce the claims on incentive yield and naturally reach a steady-state equilibrium.
  2. The impact of lack of BERA accrual in the current system likely hurts BGT yields more than the proposed changes. The maximal amount of incentive intake that the system can support is effectively a function of: [Bribe Efficiency]*[BGT emitted], where the value of BGT emitted is correlated to BERA. As a result, improving BERA fundamentals increases the effective capacity of the system to support incentives at scale.
  3. Through thoughtful implementation of a PoL v1.1 mechanism, the impact on BGT can be minimized, especially relative to the improvements in the core PoL loop.
  4. Based on our research, we’d expect the average incentive redistribution rate of 12-15% to result in a reduction of the BGT premium from ~1.45 to ~1.25, which is variable based on the rate of inflation over the period of the implementation and the future yields from PoL / BGT burns. Ideally a portion/all of this delta would be offset through more direct value capture for BERA as a result of implementation.

4a. Additionally, given a meaningful portion and the majority of current BGT holders are using leverage to magnify yield exposure, the expected rate of return relative to other major staking assets should remain meaningful.
4b. A lower BGT premium that results from an increase in BERA value also leads to reduced downside risk to BGT holders.

  1. The plan would require liquidation of non-BERA incentive tokens. Realistically, this isn’t a major change, as based on on-chain data from both PoL (and basically every other incentive program in history) the majority of incentives are already currently liquidated into HONEY/BERA or autocompounded.

5a. At the very least, the new model would reduce the amount of liquidation pressure from BERA-denominated incentives, thus helping bolster any correlated assets.

Timelines

We’re seeking feedback, questions, and critiques on this proposal for one week. If significant flaws or alternatives are not raised, the proposal would move to a vote by the BGT Foundation.

Addendum - Other Potential Changes for PoL v1.1

While not being strictly required to implement Incentive Redistribution, the authors also wanted community feedback on other improvements that could complement and enhance the effectiveness of the Incentive Redistribution strategy.

  1. 10-20% fixed BGT emissions towards BEX major pairings, ensuring that major BERA denominated and stable pairs will have sufficient liquidity on Berachain. This will also reduce the need for other protocols to incentivize this liquidity.
  2. Enabling BEX’s auto-incentives, where the protocol fees collected by BEX are automatically forwarded as incentives for BEX’s own reward vaults. This is expected to increase the revenue going back into PoL and enhancing returns for BGT and validators. Beyond BEX, other native Apps could also adopt auto-incentives to incentivize their users and offer competitive yields.

The Incentive Redistribution in PoL v1.1 will continuously help increase the permanent liquidity for BERA-Major pairings, which will act as supply sinks for BERA. The permanent liquidity will generate an increasing amount of fees over time, some of which will continue to deepen the liquidity for BERA/Majors and the auto-incentive portion will increase the overall returns towards BGT. The positive flywheel here is that Incentive Redistribution leads to more Chain Owned Liquidity, which leads to more fees produced over time, which leads to more incentives passed back to PoL, which leads to more redistribution earnings.

Berachain.

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Curious to understand at what rate the incentives would be added to the reward vault at / how this would be determined. Would it be set by someone manually at the Foundation? Or would it be algorithmically set?

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Great to hear and I think we’re all in agreement.

My questions are

  • With 20% of reward vault incentives going to a BERA - HONEY BEX Chain owned liquidity, ultimately this only results in a 10% buy pressure on BERA. Whilst a step in the right direction to fixing the mismatch between BERA and BGT, I’m not sure this is solving it. To me this seems like a strategy to deepen liquidity at the expense of BGT yield.
  • Chain owned liquidity is great but in a V2 style setting, is there a more effective manner of deploying this liquidity? Even a wide range V3 would be magnitudes more effective at price stability and ability to absorb BERA.
  • How soon could we see the other majors paired with BERA too? Would it be strategic once BERA-HONEY reaches x amount in TVL for example?

Overall, I’m pro 1.1 and happy to see improvements to the system, you have my support!

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Hi Smokey! Andrew from Defiance Capital here. These are my personal views but suffice to say I’ve been a big fan or berachain for a while and have been active on almost all aspects of the chain since it’s launch in Feb. On a high level, POL gives every app the best chance of finding their footing as they always get back more in dollar terms per unit bribe they provide. In this way, berachain can be best thought of as the Y-combinator on steroids for crypto apps and we are 100% looking forward to POL being validated. Making bera-majors more attractive on bex is absolutely the correct thing to do imo, and reducing bgt yield slightly without affecting the attractiveness of the bribe system is the best way to do it. Mega bullish bera!

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Title: Why Lowering the BGT Premium Risks Undermining Berachain’s Liquidity Engine
Authors: Beraprophet

Berachain’s recently proposed PoL v1.1 update introduces a dynamic 20% fee on application incentives, redirecting part of the rewards into Chain Owned Liquidity (COL) in an attempt to strengthen BERA’s long-term value accrual. While the intention to bolster BERA fundamentals is laudable, the proposed implementation—by design—risks undermining the core engine of Berachain’s current success: the incentive flywheel driven by the BGT premium.

This article outlines the critical flaws in the proposal and explains why compressing the BGT premium may prove counterproductive to Berachain’s long-term goals.

1. Lowering the BGT Premium Reduces LP APRs and Incentive Attractiveness

At the heart of the current PoL model lies the BGT premium—the market value of iBGT (or BGT) relative to BERA. Liquidity providers (LPs) earn BGT rewards that they can sell at a premium to BERA, effectively increasing their real returns above the nominal APR. A higher BGT premium directly translates to higher realized yields for LPs.

By implementing a 20% haircut on incentives distributed to BGT boosters, the PoL v1.1 model compresses the BGT premium, as explicitly acknowledged by the authors, with expected values dropping from ~1.45 to ~1.25. This 15–20% decline in premium would result in:

  • Lower APRs for LPs, reducing the core reason to participate in Berachain liquidity provisioning
  • A decline in LP activity, which would impair trading depth, slippage, and user experience across Berachain dApps
  • Reduced demand for BGT, since its reward potential is weakened

This self-reinforcing feedback loop could cause LPs to exit the ecosystem in search of higher yields elsewhere, thereby weakening the protocol’s liquidity depth and value proposition.

2. Lower Premium = Higher BGT Redemptions = More BERA Inflation = More Sell Pressure

The BGT token can be redeemed 1:1 for BERA. As the BGT premium falls, arbitrage incentives shift:

  • At a higher premium, users prefer to farm BGT and sell it on the open market
  • At a lower premium, users are more likely to redeem BGT for BERA, increasing circulating BERA supply

This reintroduces inflationary pressure on BERA—ironically the very issue PoL v1.1 aims to solve by driving value to BERA. More redemptions dilute BERA, offsetting any buy-side support created through 20% liquidity seeding in BERA-HONEY or other pairs.

Essentially, the BGT-to-BERA redemption arbitrage flips from a safety valve to a supply faucet, defeating the purpose of creating long-term BERA scarcity.

3. Incentive Redistribution Undermines the Flywheel Effect

The current PoL flywheel works like this:

  1. Apps distribute BGT incentives
  2. LPs stake in PoL to farm BGT
  3. BGT premium amplifies LP yield
  4. More capital flows into LPs and Berachain apps
  5. App liquidity improves, making the ecosystem attractive
  6. Apps allocate more incentives → flywheel spins faster

Introducing a 20% tax on incentives slows this loop by diminishing the reward at step 3. This is not a marginal change. The proposed model enforces this haircut on the application side, further distancing app developers from the impact of their incentive efficiency.

Instead of refining incentive targeting, the proposal simply introduces friction in a system that was previously capital efficient. This could result in less incentive deployment overall or lower willingness to pay for PoL boosts, stalling the flywheel.

4. COL Doesn’t Offset the Harm to Organic Liquidity

The proposal claims that BERA-HONEY and other Chain Owned Liquidity pairs will provide “deep liquidity” and “ongoing fee generation.” While true in principle, this approach fails to address a key issue:

  • Protocol-owned liquidity is passive and rigid
  • User-owned liquidity is dynamic, reactive, and incentivized

COL cannot replace the depth and agility provided by incentivized user liquidity. Nor can it scale in proportion to ecosystem growth unless the protocol becomes the dominant liquidity provider—which would require orders of magnitude more capital and would crowd out community participation.

Additionally, the assumption that fees from COL can sustainably replace the yields of active LPs is unproven. In most DeFi ecosystems, LPs seek volatile APRs that come from speculation, not the thin margins of base swap fees.

5. Governance and Complexity Risks

This proposal introduces:

  • Additional governance overhead for managing the incentive redistribution parameters
  • More smart contract complexity in tracking incentive efficiency per validator fill
  • New assumptions about price discovery and redemption behavior

All of these introduce execution and UX risk—particularly at the validator and dApp level. The dynamic model using [K * (1 – R/BERA)] may work in simulation but could behave unpredictably in practice, especially in volatile markets.

Berachain prides itself on being chain-agnostic and user-friendly. Adding too many chain-level knobs to micromanage incentives is a step backward in composability.

Conclusion: Protect the BGT Premium, Preserve the Flywheel

Rather than dilute the BGT reward mechanism and divert 20% of rewards toward rigid protocol liquidity, Berachain should focus on strengthening the existing system:

  • Preserve the BGT premium to sustain high LP yields and incentivize ongoing liquidity provision
  • Explore non-dilutive value accrual models for BERA, such as fixed staking, burning mechanisms, or real yield from application revenue
  • Consider aligning protocol incentives with BGT holders, not by taxing rewards but by adding complementary mechanisms (e.g., boosting yield via fee redirection or auto-compounding)

PoL v1.1 may unintentionally slow the very flywheel it was designed to optimize. As the ecosystem grows, preserving its core incentives must remain the highest priority.

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.

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This proposal seems material enough to be decided by an on-chain governance vote rather than being mandated top-down by the Foundation.

What is the point of accumulating and delegating BGT if we can’t vote on proposals that bring a material impact to BGT economics?

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Although I believe this is a proposal in the right direction, as @Beraprophet pointed out, I’m also concerned of the additional complexity this would add to an already complex system as Pol. I’d go for a simpler approach that makes $bera a more valuable token, like buybacks or some kind of burn mechanism to potentially offset inflation.

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This wouldn’t really add any new complexity at all. Everything would be handled on the backend, and the system would effectively remain exactly the same from a user/dApp facing POV.

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Want to respond to this in more depth as I think there are some good points in here, albeit ones that we’ve debated at length. All of these are my thoughts and not the thoughts on the Foundation.

1. Lowering the BGT Premium Reduces LP APRs and Incentive Attractiveness

This is true, and one of the primary points against the proposal. HOWEVER, it’s not necessarily correct. First, while we mention an expected reduction of the BGT Premium, that isn’t guranteed to be true. As long as the BGT yield remains meaningfully above where you can get equivalent BERA yield (it will), and the premium is floating (it is), there’s nothing that strictly anchors it at one point over another. In short: a 45% premium is just as rational as a 25% premium (or just as irrational), and as such predicting the premium is hard. Especially if right now premiums are lower because of perceived correlation to and lack of value on the correlated token (BERA), users may place a lower premium on BGT that would be mitigated by more value flowing to BERA. Beyond that, the value that really matters is the reduction in BGT premiums relative to the value increase of BERA as a result of the program and fundamentals improvement. If the value gained by BERA outweighs the delta in premiums lost (which I’m not actually convinced will happen because of this), then the LP point is moot. The final point worth noting is that protecting our BGT premiums blindly is a fools errand. As new BGT inflation comes online, BGT premiums will naturally decrease along yield as the number of claims to the incentive revenue increases. At the best protecting BGT premiums is a short term game, whereas monetizing some of the BGT premium today to create liquidity depth and insulation for the protocol down the line seems prudent.

TLDR: I’m not convinced that premiums actually decline because of this, they will decline eventually anyway, and what really matters isn’t just premiums in a vaccum, it’s the delta of premium growth relative to fundamental growth.

2. Lower Premium = Higher BGT Redemptions = More BERA Inflation = More Sell Pressure

This is again technically correct, but not practically correct.

First, the majority of users/farmers are not participating in naked BGT, they’re participating in LST BGT. At any premium, no one will choose to burn into BERA, they’ll simply sell into BERA/HONEY/etc , which is already what’s happening anyway. That sale lowers the premium, and creates a new incentive for someone else to purchase to access the yield.

Second, the yield reduction takes an asset that’s ranged between 150-250% APY to one that will still likely be 100%+ APY for the forseeable future. I am in no way, shape, or form convinced that the marginal seller is meaningfully going go have a different target outcome at those two values. Over time, the yield would compress (as mentioned above), but that timeline isn’t meaningfully affected by these changes.

3. Incentive Redistribution Undermines the Flywheel Effect

This point I actually strongly disagree with. The important place of disagreement here happens where you think the point of friction is. As it stands today, there is a ‘flywheel’ of sorts, but there’s also a really important handwaving step, which is “more value flows into the ecosystem”, which is handwaved as then making BERA go up, without actually having a direct method of creating that alignment. The impact of this, as we’ve seen in prod, is that no one buys this thesis, and everyone just shifts toward BGT. The problem with is is:

  1. the topline capacity of the system to support incentives is denominated in BERA (you could argue in BGT as BERA+premium, but we’ve seen that BERA value has been a much more important proxy- e..g BGT premium has remained fairly consistent + BERA). As a result, the value of the system is in constant crunch due to perceived and real lack of demand for the native asset.
  2. The flywheel only actually exists when there is a direct lever to generate value on that portion of the flywheel. The issue with the current flywheel isn’t the velocity of the system, it’s the fact that the velocity is compromised due to the handwaving in the middle. Any dampening to the system only matters relative to the acceleration of the system that’s generated from potential BERA fundamental improvements.

I talk more about this in prior points, but this is ultimately a question of relative value. The risk for decreasing velocity in my eyes is outweighed by the benefit of increasing velocity in BGT correlated asset, and increasing the capacity of the system in aggregate, while also recognizing that BGT’s velocity will ome down over time regardless.

4. COL Doesn’t Offset the Harm to Organic Liquidity

I don’t really understand this point at all. The goal here isn’t to “sustainably replace the yields of active LPs”. That wasn’t a claim that was made, nor is it the goal. The goal is to build a long-term and unremovable set of sinks for BERA and BERA-MAJOR LPs, up to some maximum amount of liquidity that starts having diseconomies of scale. This wouldn’t be user LP, and so there isn’t a goal for replacing yields of active LPs. Active LPs in most situations wouldn’t be impacted by this (e.g. BEX vs Kodiak) and there aren’t any real active LPs of any size in the current reflected BEX pools anyway.

It’s not trying to replace the depth or agility of user liquidity (although I disagree on the depth point- stickiy chain owned/protocol owned liquidity can be meaningful vs transitory and mercenary user liquidity), nor is it targeting the types of pools that those users generally deposit into.

5. Governance and Complexity Risks

  • Concern One: Additional governance overhead for managing the incentive redistribution parameters. This isn’t something I see as having meaningful new overhead for Governance. It should be adjust only rarely, if ever. This is not a compelling reason not to do it in my eyes.
    Concern Two: More smart contract complexity in tracking incentive efficiency per validator fill. Based on our discussions, much of this logic could exist offchain, much in the same way that validators are currently running a standardized BribeBoost platform. This is the current primary area for exploration, but is largely more a question of pricing than it is meaningful new smart contract logic.
  • Concern Three: New assumptions about price discovery and redemption behavior. I disagree that there’s meaningful new execution/UX risk at the validator and app level. From the validator and App POV, their UX is exactly the same, place a bid for some amount of BGT, at some rate, with some size. They get filled in exactly the same way. The only real change is for BGT delegates to that validator, and on the topline of validator commission. This is not an impact on the BGT received per gauge, only the incentives received by BGT. It won’t change the current interfacing for incentives at all.

Conclusion: Protect the BGT Premium, Preserve the Flywheel

The counter suggestions from yourselves and others generally boil down to:

  1. Explore solutions should as fixed staking/burning/real yield mechanisms. We’ve explored all of these extensively, and the reality is that fixed staking solutions are problematic due to the private stake, burning/real yield mechanisms in some form have to be derived from the BGT incentives in some capacity, as the other sources of revenue for the chain are meaningless on a relative size basis. I’ve yet to see any proposal that ends up helpful at scale.
  2. Consider Aligning protocol incentives not through taxes, but by complementary mechanisms. These are solutions that we have considered at length (and are even implementing), but these are not sufficient at scale to really underwrite any sort of meaningful change for BERA. In capacity, boosted yield ends up as a tax for someone else (moving funds around), unless you increase the topline inflation of the chain, which doesn’t help the underlying issue. Auto-compounding often causes its own set of issues, as it means BGT/BERA compression as people leave from the underlying rewards asset into other LP stakes, etc… I’m not convinced these work, despite spending a lot of time discussing them as well. They’re supplementary, not replacing.

The issue is not the speed of the flywheel as it stands, it’s closing the handwaving step between chain growth and BERA that has fundamentally caused many to doubt the flywheel itself, as it’s missing a linking premise.

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i think that in the case of a general purpose smart contract chain such as berachain its important to think of who an upgrade actually effects since there is so many different stakeholders. In this case bribers (developers) are the only ones who will notice a material change to the system while every other user such as the “casual $bera enjoyoooor” who sees more value accrual to $bera without any UX change, or the “liquidity providooor” who also is earning the same BGT rate without any change to their UX or PnL.

Even for the developer experience changing slightly, in the end it is to the benefit to them. After reflecting on it a while, the user who clicks the most buttons out of everyone (developers) having to click a few more buttons to maintain their PoL experience should not change much.

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I dont think that applicaitons/incentive providers will notice any difference materially. I’tll just be boosters.

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Thanks, Jack—really appreciate your thoughtful and comprehensive response. I may be wrong on some points, and I always welcome the chance to sharpen my thinking. I’m also a huge fan of your work and how you consistently approach Berachain’s development with long-term vision and intellectual honesty.

That said, I still believe there are real risks in PoL v1.1 that merit deeper scrutiny—especially when it comes to emissions, premium integrity, and flywheel sequencing.

1. Let’s Quantify the Inflation Concern

Currently, the total BGT supply sits at 11.97 million. With approximately 120,000 new BGT minted daily, the projected supply in just 200 days will rise to 35.97 million BGT—a +200.5% increase.

This means inflation alone will triple the circulating supply, even before factoring in adoption growth or yield tapering.

This has two critical effects:

  • APY Dilution: Assuming the reward pool is constant, the per-token yield drops ~67%. In other words, the real APY from staking BGT will be just ~33% of what it is today, even before any new friction is added.
  • Premium Compression is Inevitable: Even if PoL v1.1 doesn’t directly reduce the BGT premium, inflation will. Tripling the token supply with no proportionate demand increase erodes scarcity and undermines reward pricing.

2. The “Handwaving” Step and Flywheel Disbelief

You made a great point: the current flywheel doesn’t have a clean, mechanical loop from BGT value accrual back into BERA demand. That’s fair.

But weakening the strongest part of the loop (BGT premium-driven LP incentives) before solving the value capture issue seems backwards. The existing model—while imperfect—has demonstrably worked. It brought capital, activity, and depth into the system.

What’s missing is not momentum—it’s closure. A more constructive sequencing would be:

First, prove BERA value capture via COL ROI, protocol fees, or sustainable sinks.
Then, taper BGT premiums in favor of system-wide resilience.

Otherwise, we’re asking users to accept degraded incentives today for promised value tomorrow. That’s a tough sell in any market.

Also, when BGT premiums are high, BERA becomes the gateway to farming that premium. That’s exactly the kind of endogenous demand loop we want. It mirrors Bitcoin mining dynamics: when BTC price rises, people rush to accumulate hashpower (here, BERA) to capture future rewards.

That dynamic doesn’t need to be broken—it needs to be completed with better value paths into BERA.

3. A Better Fix: Target Incentive Efficiency, Not Just Sinks

BullaExchange put it well in a recent post:

“The idea of a permanent liquidity source that lowers dependence on emissions is good. But the issue of inefficient BGT distribution is not being addressed. Some of the highest BGT-capturing vaults have low bribe rates. Slashing mechanisms ought to be introduced for more efficient BGT distributions, which would increase BGT premiums via more value being added per BGT spend.”

I think this is spot on.

Rather than broadly taxing emissions (via COL) and reducing their potency, we could sharpen the allocation of existing BGT. Introduce performance-based slashing for vaults that capture value without returning it. This would both:

  • Increase value per BGT spent
  • Incentivize more efficient gauge competition
  • Naturally support premium maintenance without collateral damage to LPs

In other words, don’t weaken the flywheel—optimize it.

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I agree strongly with point 1. As I’ve said a bunch of times, POL is a factor of inflation increase delta relative to incentive increase delta. The problem with only focusing on POL optimzation is that your topline for incentive increase delta is bound by BERA very directly, and as such without improvements to that portion of the system, the system will not be able to outpace inflation growth in the short term (with less float) or long term (at steady state)

  1. That is basically what is happening! BGT Premiums will gradually taper over time as the fixed tax rate increases w/w - as mentioned in the original document it wouldn’ go 0->20% , it would happen gradually. I’m also still candidly very unconvinced that the impact in premiums will be as dramatic as some of the modeling we’ve done, but we wanted to be transparent about potential downsides. That closure look is basically exactly what we’re trying to implement. The thing no one has been able to address for me is how you ever generate COL/protocol fees/sustainable sinks without removing some small amount of value from BGT. I’m also not convinced that when BGT premiums are high that BERA becomes the gateway to farming the premium. With LSTs, you can enter through effectively any asset (and HONEY->BERA->BGT LST) is a buy ,then a sell of the BERA, so largely functionally a wash. I feel quite strongly that we’re not breakin the dynamic, but if folks have other concrete suggestions for alternative models that they think break the dyamic less and achieve the same outcome, let me know.

  2. For this, 100%. We have spent a TON of time discussing POL v2 recently and how we optimize some of the maker and taker side ont he incentive side. I don’t think this should be viewed at all as binary or at odds with the suggestions we laid out. Rather it plays complementary to any token changes discussed. At the same time, the other important thing to note are :

  • meaningful changes to POL will happen in the order of months, not weeks
  • weakness of BERA without a concrete value link caps in the incentive capaicty of the system
  • capping the incentive capacity of the sysystem with ongoing dilution accelerates teh compression of BGT premiums
  • as a result the immediate need is to create a concrete method of value connection to increase system topline to work on the other things in parallel.
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I actually don’t share the concern that “BERA lacks a value link.” If anything, one of the most elegant design choices in Berachain is that BERA itself is non-inflationary—you’ve separated emissions into BGT, which is a huge differentiator vs. other L1s.

In that sense, I’d argue that BGT is the value BERA accrues, by not being emitted as BERA. Every BGT emission cycle preserves BERA’s integrity. This setup isn’t neutral—it’s inherently deflationary for BERA over time, due to LP and staking of BERA.

We have an L1 where the base token is used for security and transactions—but doesn’t suffer emissions due to validator or incentive dilution—that is value accrual. Every other chain emits their native coin. Berachain doesn’t. That’s powerful.

Appreciate the thoughtful dialogue and the work you and the team continue to put into refining the protocol. These design debates are what make Berachain so exciting to follow. Looking forward to seeing how it all evolves.

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I’d have one question about the mechanics of this upgrade. How would the incentives be converted for bear, in case of dapps native tokens being used as incentives? Would the 20% be immediately swapped for bera/honey? That being the case, don’t you guys think this shouldn’t be well received by developers, which would have they a share of their incentives being automatically sold?

I wonder if some kind of auction mechanism could be used here, which would allow the community itself to bid those incentives with bera, and only then use that bera to form COL. That way we wouldn’t have a definitive “20% incentive tokens other than bera and majors will be immediately dumped”, but instead those incentives could be rotated into different actors, that could have different plans for it. Also, we’d still have bera supply being redirected from circulating supply to be added to COL. I’d love to hear thoughts on this.

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On any incentives marketplace (Berachain’s, but also VoteMarket, HiddenHand, Paladin from the Ethereum DeFi side), the most likely path for the incentives is to be sold at the end. The proposal doesn’t really make this situation better or worse.

For applications that wish to avoid any sell pressure of their own token, they could opt to use a different token as the incentive, such as HONEY. Apps that prioritize this point should look for ways to generate real fees from the users, and forward a portion of those fees as the incentives to get more BGT back to the users.

Lastly, auctions can be an interesting method to conduct the actual conversion of incentive tokens into HONEY or BERA, but there is not a giant difference between auctions and sell orders. Even using a market order to sell, if there is an interested bidder they would come in to bid, just like if the sale was through an auction.

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I think the way to phrase it would be, BERA is inflationary, but the inflation is not realized until someone redeems their BGT rewards for BERA. There have been a minority of users who have been redeeming their BGT for BERA, which has resulted in a slightly higher BERA supply today than compared to the BERA supply at genesis.

As for deflationary pressures, LP pools and BERA staking are temporary supply sinks, but users are free to withdraw their BERA from these activities, whereas Chain Owned Liquidity will contain assets that will never been withdrawn (and released into circulation).

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I think this is a fair point, that the current POL allocations should have an optimization step that takes reviews the impact of the reward vaults. However, doing this alone doesn’t direct increase the value that will go towards BERA.

I would be in favor of shifting some of the value from BGT towards BERA as the first set of features to be implemented in POL, and the Reward Vault optimization and review process be considered for the next set of POL improvements.

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Appreciate your comments as well! The side effect of the current design that I’ve seen in production is that Berachain is gonna remain fundamentally rate limited until we can unlock the value link. While I think it’s quite reasonable to say that the design choice is the value accrual, the market hasn’t viewed it as such. While we can argue whether or not the BGT premium is what matters - the numbers tell a different story. Depsite incentive efficiency compressing, the total incentives posted/week have consistently followed / tracked BERA price. If the counter was true, then we would’ve expected incentives to remain higher, with premiums on BGT LSTs increasing.

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I’d echo Carnation’s points on this one. The point certainly has merit but the tricky part is that most of the eco tokens (with a couple notable exceptions) - lack a bid. This is best reflected in the volume on a number of these pairs. One could argue that an auction helps here but I think it’s also fair to say that the difference is a bit negligible.

To also add to what Carnation mentioned, internal data also indicates that 80-95% of incentives are sold; with notable exceptions being $PLUG at 50%, and $iBGT at 62%. Even 75% of $BERA is sold off. So in this case, the behaviour isn’t really changing, except the incentives are going towards at least supporting the base asset / the chain that people are building on, as opposed to a potential mercenary farmer.

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