Proof-of-Liquidity Explained

A simple yet detailed explanation of Proof-of-Liquidity.

darwizzynft

Posted on Jun 24, 2025

Proof-of-Liquidity has been live on Berachain for a while now.

However, it’s still left a lot of people wondering:

“What does Proof-of-Liquidity actually mean?”

I mean sure, you can always check the docs right?

But the truth is, most of us just don’t understand the language used.

It’s too technical, too detailed, and there’s just too much text to go through.

That’s why, in this article, we’ve decided to explain Proof-of-Liquidity in a way so simple – that even someone who’s never touched Crypto can understand what it is and how it works.

So without further ado, let’s dive in.

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Not familiar with Berachain? Check out our simple introduction here.

What is Proof-of-Liquidity?

Proof-of-Liquidity (PoL) is a mechanism used by projects to keep a network running smoothly by keeping liquidity providers, validators, applications and users happy all at once.

Proof-of-Liquidity literally means to prove that a project or platform has enough available liquidity (funds or assets) to actually run smoothly.

Instead of locking up tokens to secure the blockchain, users provide liquidity.

In return, PoL rewards people for providing liquidity.

Why? Because it means others can use the liquidity for trading or borrowing.

Meaning more activity and users for applications, and the platform in general.

Why do people care?

Relationships are built on trust. The same concept applies especially in Crypto.

People won’t trust a business if they feel that it doesn’t have the funds/assets to continue running smoothly long-term and expanding overtime. You’ll find that a lack of trust in Crypto projects is even more common, as there are no banks or governments in control.

Proof-of-Liquidity builds that trust by being transparent and showing proof of how much assets are available to be used by the project, giving users and investors more confidence.

PoL essentially says:

“Hey guys, don’t worry, we’ve got money, and it’s ready to be used!”

How does Proof-of-Liquidity work?

To understand how PoL works, we’ll be using Berachain as an example.

Users provide liquidity → Berachain benefits → Users get rewarded → Validators use it

Users add their tokens to a pool, and these pools allow other users to use them in dApps (decentralised apps)

As a result, Berachain benefits as people can use dApps smoothly with low fees and fast trading, keeping things ticking and enhancing network liquidity.

Then, those who added their tokens to a pool get rewarded with $BGT (Bera Governance Token). The more liquidity they provide, the more $BGT they earn, meaning more influence when it comes to decisions being made. ($BGT can also be burnt 1:1 directly for $BERA, but $BERA can’t be swapped for $BGT)

Lastly, Validators (who run the blockchain) use $BGT to secure the network.

Community happy. dApps happy. Berachain happy. Everybody wins.

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To learn more about Berachain, read our Berachain 101 article here

PoL IRL

Still confused about how Proof-of-Liquidity works?

Here’s a real-life example.

Imagine you and your friends are playing with trading cards.

You have a really rare card, and you want to trade it for another rare card you like.

But before your friend agrees, they want to make sure you actually have the rare card to give them. So, you show it to them — hold it up and say, "See? I’ve got it here mate!"

That’s clear "proof" that you can make the trade.

Now let’s apply the same concept to Cryptocurrency instead of trading cards.

Proof-of-Liquidity is a way to show that you have enough of that digital money ready to use or trade, kind of like showing your friend the rare card you have.

It’s a way to prove that you’re legit. Your chain is real. You’re not lying about what you have, and you really have the assets you say you do, and it’s available to use/access right away.

That’s Proof-of-Liquidity. Explained.

How is it different from other "Proofs"

You might have heard of “Proof-of-Work” or “Proof-of-Stake” before.

Like Proof-of-Liquidity, these are mechanisms used in Crypto to run networks.

So what’s the difference?

Proof-of-liquidity isn’t about securing a blockchain — it’s more about trust in a system.

It’s essentially saying:

"We’ve got enough fuel to keep this machine running."

Credit: TradeDog

Challenges and Risks

Faking It: Someone could borrow money just to show it off, then give it back after the proof. That’s deception and not real Proof-of-Liquidity.

Market Changes: If the value of the network token crashes, or if the overall economy is dying, the "proof" might not mean much anymore.

Centralisation: If only a small group of a few people control the liquid funds, it could go against the decentralised nature that many users want in Crypto.

Why It’s Useful

Projects use Proof-of-Liquidity to attract users.

If a new project launches and says, "We’ve got $1 million in liquidity locked up," it’s a signal that they’re serious and less likely to vanish overnight. (although it’s still very possible)

PoL is also important for things like yield farming or liquidity pools, where people pool their money together to earn rewards.

So, in short, Proof-of-Liquidity is all about showing you’ve got the cash (or crypto) ready to go, proving it in a way others can check, and keeping trust alive in a wild, digital asset world.

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Disclaimer: The information provided in this article is NOT financial advice and has ONLY been presented for informational and educational purposes