Deconstructing Berachain: The Double-Edged Sword Effect and Risk Prevention of PoL Flywheel

Author: Tranks, Research Analyst at DeSpread

This article does not cover the basic information of Berachain. If you are a beginner in Berachain, it is recommended to read the following articles before reading this article.

Explore Berachain: A bear that grasps liquidity and security tightly

Berachain - Bear Village Adventure

Growth 0 to 1: Berachain

1. Introduction

With the decline of the meme coin market, the market's interest in DeFi has started to increase. In this trend, the Berachain ecosystem, which offers low token volatility and high returns, has also begun to attract new users.

From the launch of the Berachain mainnet on February 6, 2025 to the writing of this article on March 4, the TVL of Berachain has steadily increased to $32 billion, surpassing Base in the overall TVL ranking and reaching sixth place overall.

Berachain TVL Trend; Source: Defi Llama

Core projects in the ecosystem such as Kodiak, Yeet, and Ramen Finance have been preparing since the Berachain testnet phase and have gradually listed after the launch of the Berachain mainnet. However, these ecosystem protocols have not yet been registered in the reward pool for issuing $BGT. Currently, providing liquidity to the five pools within BeraSwap is the only way to earn $BGT.

Reward Vaults List; Source: Berahub

Users can provide liquidity to the BeraSwap liquidity pool, receive LP tokens, deposit them into protocols that support the liquidity of $BGT such as Infrared and Stride, and then use the received liquid $BGT tokens in other DeFi protocols. In addition, users can also deposit the same LP tokens into the liquidity aggregator Beradrome to acquire Beradrome's native token $BERO, stake $BERA, and earn rewards accumulated in Beradrome, thereby implementing various ecosystem participation strategies.

In addition, the first phase of Berachain governance has started the registration of the ecological protocol reward pool on February 26th. With these requests integrated into the protocol and protocol rewards being paid to validators, Berachain's ecosystem gameplay is expected to become more diverse. In this process, the role of $BGT, which has the authority to receive rewards and allocate network rewards, will become more important, and the flywheel based on the PoL (Proof of Liquidity) structure will also be launched, leading to more users and liquidity flowing into Berachain.

In this article, we will examine the flywheel structure of Berachain in detail to assist new users in managing risks, and discuss the surface risks and preventive measures of Berachain's flywheel.

2. Understand Berachain flywheel

Berachain adopts the PoL structure, where validators, ecosystem protocols, and liquidity providers must propose and provide value to each other network participants.

Each participant in the network forms a state of consistent incentives, and the growth and decline of each role are directly related to each other. When each participant has a positive impact on other participants, the following virtuous cycle will operate:

With the growth and expansion of the ecosystem, the incentives paid to validators by the protocol will also increase.

With the increase in rewards distributed to $BGT holders, the demand for acquiring $BGT by providing liquidity increases, while the demand for burning $BGT decreases, resulting in a decrease in the issuance of $BERA.

With the increase in liquidity supply, the overall ecosystem grows and expands accordingly.

When this virtuous flywheel is in operation, the price of $BERA, the TVL of the ecological protocol, and the overall ecological profit will increase, enabling all ecological participants to benefit from it. However, to ensure the smooth operation of the flywheel, the following three conditions must be met:

Losses from protocol reward expenditures < The profit obtained by the protocol from reward expenditures and liquidity provision

The volatility risk exposed by purchasing/holding ecological tokens < The profit obtained from providing liquidity $BGT

Exposure to the volatility risk of holding $BERA < rewards profit obtained by entrusting $BGT

When all the above conditions are met, the flywheel will start to operate. Once initiated, each condition will have a positive impact on the others, enabling the flywheel effect to keep spinning, with the robustness and strength of the flywheel depending on the degree of condition fulfillment.

The flywheel structure of Berachain appears to have unique features and advantages that are not found in other PoS structures, but when one condition cannot be met due to specific reasons (and cannot be restored to its original state in the short term), these conditions will begin to have a negative impact on other conditions, and the flywheel will start to run in reverse as follows:

As the ecosystem contracts, the rewards paid to validators by the protocol decrease.

With the decrease in rewards distributed to $BGT holders, the demand for obtaining $BGT by providing liquidity decreases, the demand for burning $BGT increases, and the issuance of $BERA increases.

As the supply of liquidity decreases, the ecology shrinks.

In this reverse flywheel state, the price of $BERA, the TVL of the ecological protocol, and the overall profit of the ecosystem will all decrease until the conditions for the flywheel operation are met again.

If only considering the demand within the ecosystem in the near future, 1) it is expected that many protocols will emerge seeking to issue their own tokens as rewards; 2) as the emission of $BGT has just begun, the farming efficiency of each $BGT is very high, so the demand for providing liquidity and accumulating $BGT will be relatively high.

For these reasons, it is very likely that Fei Lun will operate in the early stages of the mainnet launch, but macroeconomic market trends and investment trends in other industries will also affect Fei Lun's operation, so it is difficult to assert whether Fei Lun will operate successfully.

Next, we will explore several possible risk factors and scenarios that may trigger the reverse flywheel during operation.

3. Reverse Flywheel Plot

3.1. $BERA crash

$BERA plays the following key roles in the Berachain ecosystem:

Staking for running nodes

Ensure the minimum value of $BGT

Used as a deposit asset in various liquidity pools

Therefore, the downward trend of $BERA value can also be seen as a weakening of network security, the decrease in the minimum value of $BGT, and the reduction of ecosystem liquidity. For participants in the Berachain network, the role played by the price of $BERA is more important than the main network token prices played by participants in other networks.

When the flywheel is running smoothly, even if the price of $BERA drops to some extent, if the incentive yield can be maintained, it can continue to create demand for $BERA. However, on the contrary, the decline in the value of $BERA may have a negative impact on the ecological protocol, reduce the incentive yield, cause users to demand burning $BGT to exchange for $BERA, or remove $BERA supplied to the liquidity pool and demand for sale in the market. This may be the starting point of the reverse flywheel, leading to another decline in the value of $BERA.

Therefore, we should pay special attention to the following situations:

3.1.1. Large-scale $BERA unlocking

In addition to the issuance of $BERA through burning $BGT, there is also a pre-arranged unlocking plan for $BERA, with a total issuance of 500M, the unlocking schedule is as follows:

$BERA Unlock Schedule; Source: Berachain Docs

Investors, early core contributors, and independent community distribution will have a linear unlocking plan starting in February 2026, one year after the mainnet launch. Factors that may trigger market selling pressure in the short term due to the increase in the circulation of $BERA include:

Distributions received by the protocol and community through the RFB program (approximately 2.04% of the total issuance)

The quota allocated through the Boyco plan (about 2% of the total issuance)

Among them, the amount allocated to users through the RFB plan by the protocol and the community must have a distribution period of at least 6 months, and due to the different distribution times of each protocol, it is not expected to cause significant selling pressure on the market in the short term.

However, Boyco's allocated amount is expected to be distributed in about 2 months, similar to the current airdrop mechanism. In this case, approximately 2% of $BERA, equivalent to the total issuance, will be supplied to the market, potentially causing selling pressure. In addition, the assets deposited in the Boyco plan will also be unlocked when distributing $BERA airdrops, potentially leading to a decrease in liquidity within the ecosystem. This will create a favorable environment to trigger a reverse flywheel, causing both the price of $BERA and ecosystem liquidity to decrease simultaneously.

Therefore, it will be crucial to observe whether the ecosystem can establish an attractive flywheel before the Boyco plan ends, to effectively absorb and release $BERA and the liquidity of the ecosystem into the market.

3.1.2. $BGT holders mass exodus and panic selling

To obtain $BGT, users must deposit liquidity into a liquidity pool that can distribute BGT rewards and commit enough time. However, through the Redeem feature of BeraHub, users can burn $BGT delegated to validators at any time and receive $BERA for sale, with only about 5 hours of unlocking time required during the process.

Berachain requires an Unboost time of about 5 hours; Source: BeraHub

If users holding a large amount of $BGT simultaneously exit the ecosystem, the circulation of $BERA may increase rapidly. If the price of $BERA consequently drops significantly in a short period, it may trigger panic selling by other $BGT holders and users providing liquidity for $BERA, leading to even greater declines. Therefore, it is necessary to monitor the trend of $BGT burning to understand the dynamics of the current ecosystem.

$BGT Emission & Burn Trend; Source: @thj

In addition, the trend of providing liquidity incentives and $BGT yield is the most critical factor in determining the burning and delegation demand of $BGT. By continuously observing each trend, potential risk situations mentioned above can be predicted to some extent, as well as the likelihood of flywheel recovery if a large-scale $BGT burn occurs.

At the same time, the demand for the liquidity of $BGT tokens will increase with the increase of the incentive rate, leading to a rise in price; and as the incentive rate decreases, the demand will also decrease, and the price will fall. Therefore, if it is difficult to grasp the historical reward rate and $BGT yield data, the approximate value can be estimated by reflecting the premium trend of the liquidity of $BGT relative to $BERA, which reflects the intrinsic value of $BGT.

iBGT/BERA Price Chart; Source: Dex Screener

However, the price of the liquid $BGT token is influenced not only by the intrinsic value of $BGT, but also by the incentive distribution mechanism of the liquidity protocol and other protocol-related factors, so these factors should also be taken into account.

3.2. Inflation and Slower Growth

In addition to the 500M $BERA distributed to network participants within three years of the mainnet launch, Berachain has an annual inflation rate of about 10% for $BGT. Although some of the network fees submitted by users will be burned, it is difficult to anticipate a significant amount of burning due to Berachain's main activity of depositing assets into the liquidity pool and earning interest.

This means that even if Berachain establishes a positive flywheel three years after unlocking all $BERA, to maintain it for a year, there needs to be a way to attract inflows of external funds greater than the inflation rate during this period.

Berachain's founder Smokey The Bera mentioned in an interview with Bell Curve that they are developing a dynamic inflation model, which will change according to the reward rate of distributing $BGT to address the above-mentioned issues.

While this feature may help control the acceleration of the flywheel and contribute to the sustainability of development, as long as 'inflation' continues to exist, causing a downward trend in the price of $BERA and the reverse flywheel of ecological contraction at certain stages is inevitable. Therefore, even from a long-term perspective, it is necessary to continuously monitor the above-mentioned ecological indicators to diagnose the current status of the ecosystem.

In addition, in Berachain, it is an inefficient investment strategy to simply hold $BERA spot without utilizing it in the ecosystem, as it will be unable to recover the value diluted by 'inflation'. Therefore, for users who wish to build positions using $BERA, it is crucial to deposit it into the ecosystem protocol to actively generate interest.

If users wish to establish stable positions in the ecosystem in the long term, it may be effective to conservatively use assets with less impact from price volatility (such as $BTC, $ETH, stablecoins, etc.) to accumulate $BGT or engage in compound deposit operations.

3.3. Monopoly $BGT

In most of the recent mainnets that adopt the PoS structure, entities with larger stakes can receive more network rewards. This can lead to a consolidation of validators' stake ratios and pose risks of network centralization.

Validator Staking Market Share in the Ethereum Network; Source: @hildobby

Berachain, which was created by modifying the basic PoS structure, has also experienced this phenomenon. In addition, in Berachain, validators who hold a large amount of $BGT can directly intervene in the ecosystem and unilaterally design a structure that is beneficial to themselves, so $BGT monopoly will lead to ecological monopoly, which will have a greater risk of network token monopoly than other PoS-based networks.

To address this issue, the team has set a maximum limit of $BERA stake that affects block creation permissions to 10M and introduced a method where Boosting becomes inefficient as the decision to produce $BGT in each block increases the number of $BGT representative rights. However, these limitations can be circumvented by controlling multiple nodes distributed by a single entity or collusion among multiple validators.

In particular, the liquidity protocol $BGT has advantages in attracting liquidity funds for the Berachain reward pool, as the potential value of 'liquidity funds' is high. Users can deposit the received liquidity funds into the reward pool, directly accumulating $BGT. In addition, by returning the $BGT to the nodes they operate or cooperate with, this protocol can obtain a large amount of $BGT emission voting rights without having to negotiate with other ecological entities.

If these protocols were to additionally emit these voting rights $BGT into liquidity pools containing liquidity $BGT tokens, the liquidity $BGT protocol would be able to establish its own independent flywheel, increasing the demand for liquidity provided to the protocol, even without paying independent rewards.

In this case, the flywheel of the liquidity $BGT protocol itself will become as powerful as the ratio of $BGT held by the protocol and the total $BGT issued within the ecosystem. If multiple liquidity $BGT protocols acquire a large amount of $BGT in the above manner and continue to pursue the direction of only increasing the liquidity supply of their own liquidity $BGT tokens, it may suppress the improvement of liquidity of other protocols, hinder the launch and development of new protocols, limit the diversification of the ecosystem, ultimately leading to the contraction of the ecosystem, triggering a reverse flywheel.

As mentioned earlier, it is possible to structurally constrain the monopoly of $BGT through the protocol operation mechanism, but it is difficult to completely block it. Therefore, the most reliable way to prevent a specific entity from monopolizing the ecosystem is for participants to reach a consensus on the sustainability of the ecosystem before the monopoly structure is consolidated, and for this consensus to receive continued attention and efforts from the community.

4. Summary

So far, we have discussed how Berachain's flywheel operates, its operating conditions, and the reverse flywheel plot. In addition to the possibilities introduced in this article, if the three conditions driving the flywheel are not met, the reverse flywheel will also operate, so it is very important to continue monitoring network and ecological indicators to evaluate the operation status of the flywheel in Berachain.

In addition, unfamiliar PoL mechanisms and various forms of DeFi protocols utilizing this mechanism are combining to create complex derivative products and synthetic assets that are difficult to understand intuitively. Therefore, users need to actively understand their portfolio structure and be aware in advance of overlapping risks in terms of structure and security.

From a long-term perspective, the challenge facing Berachain is to continuously expand the ecosystem while also devising a strategy to increase network fees to counter the possibility of a reverse flywheel caused by inflation. It is necessary to closely monitor whether consumer applications such as Perp DEX or blockchain games can settle in the ecosystem to generate real user traffic beyond 'simple deposits'.

I hope this article can help users clearly understand the Berachain ecosystem and effectively respond to the impending reverse flywheel.