Proof of Liquidity

Proof of Liquidity (PoL) is a novel Sybil resistance mechanism that utilizes a user's history of providing liquidity as the basis for voting power in the network. This approach aligns economic incentives between validators, liquidity providers, and applications in a more sustainable way than traditional models.

Core Concepts

Theoretical Foundation

Proof of Liquidity builds upon established DeFi mechanisms while solving key issues:

1. Beyond ve-Tokenomics: While ve (vote-escrowed) models like Curve's allow governance participation, PoL integrates liquidity provision directly with network security

2. Separation of Economic Activities: PoL uses distinct tokens for consensus security, governance, and transaction fees

3. Sustainable Incentives: Unlike traditional DEX inflation models that dilute token value, PoL creates a circular economic system

Implementation Models

Berachain Implementation

Berachain pioneered the PoL model with a tri-token design:

• $BERA: Transferable token used for transaction fees and staking (security layer)

• $BGT: Non-transferable governance token earned by providing liquidity

• $HONEY: Stablecoin for value transfer within the ecosystem

Key Technical Components:

• Validators stake $BERA to join the consensus set

• Block rewards are paid in $BGT based on validator's "boost" percentage

• "Boost" is calculated from delegated $BGT from token holders

• Validators direct emissions to reward vaults, which distribute $BGT to liquidity providers

Flow of Value:

1. Validators stake $BERA as security bond

2. Validators receive $BGT rewards for block production

3. Validators direct $BGT rewards to protocol reward vaults

4. Liquidity providers stake receipt tokens in reward vaults to earn $BGT

5. $BGT holders delegate to validators to boost their rewards

6. Protocols provide incentives to validators to attract emissions

Sunrise Implementation

Sunrise builds upon PoL concepts with its own architecture:

• $vRISE: Non-transferable token for staking and governance

• $RISE: Transferable token used as gas and fees

Technical Implementation:

• Liquidity providers in the x/liquiditypool module earn $vRISE

• $vRISE holders can stake in the x/staking module

• Stakers participate in gauge voting through the x/liquidityincentive module

• Gauge voters decide which pools receive $vRISE incentives

• Voters earn rewards from pool profits, aligning incentives

Technical Architecture

Sunrise Modules

The Sunrise implementation consists of several key modules that interact to create the PoL ecosystem:

	Function
x/liquiditypool	Core AMM functionality
x/liquidityincentive	Gauge voting and incentive distribution
x/swap	Token swap implementation
x/staking	vRISE staking management

Gauge Voting System

The gauge voting system is the cornerstone of PoL implementations:

1. Epoch-Based Voting:

• Voting power is determined by staked $vRISE at epoch start

• Each epoch spans a predefined number of blocks (configurable via governance)

• Votes is cleared each time a new epoch is created

1. Reward Distribution:

$$\text{pool rewards} = \text{total rewards} \times \text{pool's voting power} / \text{total voting power of all pools}$$

$$\text{user rewards} = \text{pool rewards} \times \text{user voting power} / \text{pool's voting power}$$

• Emissions are calculated per block

• Distribution based on voted gauge weights and each user's voting power

• Rewards are accumulated in the user's position. Can be claimed at any time

Consensus Implementation

Sunrise uses CometBFT (Tendermint) for consensus with the following specifications:

• Maximum Validator Set: 100 validators

• Block Time: ~10 seconds

• Validator Selection: Based on stake weight

Future plans include investigating Mysticeti integration to enhance throughput

Technical Advantages

Capital Efficiency

Unlike traditional PoS where staked tokens are idle, PoL enables:

• Active capital utilization through liquidity provision

• Dual earning opportunities (staking + liquidity fees)

• Lower opportunity cost for network security

Economic Alignment

The technical design creates circular dependencies that align incentives:

• Validators need delegated $RISE/$vRISE to maximize rewards

• Applications need validator emissions for liquidity

• Users need to provide liquidity to earn governance tokens

• The inflation rewards will be distributed with $RISE which doesn't lead to the dilution of $vRISE (governance token)

Function	Token(s)	Details
Security	RISE + vRISE	Both vRISE & RISE can be staked for Consensus
Governance	vRISE	vRISE is used for On-chain governance and Gauge Voting
Security Emissions	RISE	RISE is distributed for stakers as consensus rewards
LP Emissions	vRISE	vRISE is distributed for LPs as incentives
Fee	Any (swapped to RISE)	RISE is used as a transaction fee

Legend: = RISE = vRISE

Note: In Sunrise, the roles and rewards for each token are clearly defined. This clear separation of functions helps prevent dilution of network security when governance or liquidity rewards are distributed.

Security Considerations

The implementation includes several security measures:

• Slashing Conditions: Validators risk losing staked assets for misbehavior

• Governance Safeguards: Weighted voting prevents capture

• Incentive Compatibility: Economic design disincentivizes attacks

Performance Considerations

PoL implementations must balance several performance factors:

• Epoch Length: Longer epochs reduce computational overhead but decrease responsiveness

• Validator Set Size: Larger sets increase decentralization but may impact consensus speed

• Vote Processing: Batch processing of votes at epoch boundaries to minimize gas costs

• Receipt Token Calculations: Optimized tracking of liquidity positions and reward distribution

Future Directions

Several technical enhancements are being explored:

1. Mysticeti Integration: Investigating the adoption of Mysticeti consensus to enhance throughput

2. Cross-Chain Gauges: Enabling voting for liquidity on connected chains

3. Dynamic Emission Schedules: Algorithmic adjustment of emissions based on network metrics

4. Advanced Reward Mechanisms: More sophisticated reward distribution using bonding curves

References

• Berachain: Flow of Value
• ve(3,3) Tokenomics
• Curve Finance ve-Token Model
• Mysticeti Consensus