Incentive Marketplace

Proof-of-Liquidity (PoL) enables protocols to encourage validators to direct their $BGT emissions to a protocol's Reward Vault using whitelisted Incentive tokens. In doing so, protocols attract users to their protocol with $BGT rewards.

How Incentives Work

Validators can capture Incentives offered by Whitelisted Reward Vaults by directing their $BGT emissions towards those Reward Vaults, defined by a validator's Reward Allocation - the list of Reward Vaults a validator directs percentages of its $BGT emissions to.

Incentive Distribution Flow

The distribution of Incentives follows this process:

1. A User Boosts (by associating their $BGT with a validator) to increase a validator's $BGT emissions they receive when proposing a block.
2. A Validator receives block rewards in the form of $BGT emissions, where the amount is influenced by Boost (see $BGT Emissions Per Block), and directs emissions toward Whitelisted Reward Vaults chosen by the validator.
3. A Protocol can offer up to two different Incentive Tokens to encourage validators to direct $BGT emissions to their Reward Vault.
4. When the $BGT block reward emissions are distributed:
   • The validator's operator address receives a commission (percentage of all the Incentive Tokens captured).
   • The remaining Incentives, for users who boosted the validator, are sent to a contract and backend service that manages the distribution and claiming of these tokens. The backend API updates proofs of the user's entitlement to Incentive tokens every 24 hours. This eligibility never expires.
5. A user (Booster) wanting to claim their Incentive token rewards retrieves this proof and claims their incentive token rewards through the BGTIncentiveDistributor contract. All proof handling is done by interacting with Berachain Hub.

Incentives & Users

As an overview, Incentives involve 3 different parties:

User	Description & Motivation
Booster	Any user that boosts a validator with $BGT. This increases a validator's $BGT emissions, allowing them to capture more Incentives from Reward Vaults. Boosters receive a portion of these Incentives.
Validator	A node in the Active Set that directs $BGT emissions to different Reward Vaults defined by their Reward Allocation distribution, captures Incentives from Reward Vaults, and takes a percentage (Commission Rate) of the Incentives captured.
Protocol	An entity, group, or organization that offers Incentive tokens for their respective Reward Vault with the goal of capturing $BGT emissions for their protocol and/or users.

Incentive Mechanics

Behind Incentives, there are additional mechanics to consider beyond the high-level overview of how distribution works.

Whitelisting Incentive Tokens

Only Whitelisted Reward Vaults can offer Incentives. A governance process must whitelist each Incentive Token, where the proposer needs to specify both the Token and a Token Manager.

A Reward Vault can have up to two unique Incentive Tokens whitelisted. Adding or replacing a token requires passing a governance proposal.

Incentive Token Managers

Only Incentive Token Managers of a Reward Vault can offer Incentives. One wallet address is responsible for offering an Incentive Token. The same wallet address can be set as a Token Manager for multiple Incentive Tokens.

A Governance proposal will specify Token Managers when proposing an Incentive Token. Changing a Token or Token Manager requires passing a governance proposal.

Offering Incentives

A Reward Vault can offer up to two Incentive Tokens simultaneously. The offered amount cannot be withdrawn or revoked.

The Incentive Token Manager must define an Incentive Rate, greater than the minimum approved in the Governance proposal, when initially offering the Incentive Tokens and cannot decrease it until the supply of the Incentive Tokens offered has been exhausted by validators directing $BGT emissions. The Token Manager can deposit additional Incentive Tokens anytime, with an option to increase the rate at the same time.

Additionally, any user can contribute an Incentive Token amount to the Reward Vault, but the Token Manager will decide when to apply that amount and at a rate of their choosing.

$$BGT=\frac{tokenAmount}{ratePerBGT}$$

Incentive Amount	Incentive Rate	Incentivized $BGT
2,000 $USDC	10 /$BGT	200 $BGT

Scenario: increase incentive rate 10% + deposit additional tokens (500 $USDC)

New Incentive Amount	New Incentive Rate	New Incentivized $BGT
2,500 $USDC	11 /$BGT	227 $BGT

Key takeaways are that Token Managers:

• ✅ Can increase the Incentive Tokens by any number, keeping the same Incentive Rate.
• ✅ Can increase the Incentive Rate when they deposit additional Incentive Tokens.
• ✅ Can set a lower Incentive Rate only when the Incentive Tokens have been fully exhausted.
• ❌ Cannot decrease the Incentive Rate while an existing Incentive is active.
• ❌ Cannot reclaim or return the Incentive Tokens once they are added.

Incentive Commission and Distribution

Each validator can set a percentage that they take as a commission of all Incentive Tokens received for directing $BGT emissions to different Reward Vaults offering Incentives. Every time $BGT block rewards are distributed, the validator will receive their commission rate of Incentive Tokens.

Example:

Incentive Tokens	Incentive Rate
100 $USDC	100 /$BGT

Validator A has an Incentive Commission of 5% and directs 1 $BGT of emissions toward the Reward Vault.

From 100 $USDC, the validator would get 5 $USDC, based on their commission, leaving 95 $USDC for anyone who boosted the validator, which can include themselves. The amount of Incentive Tokens distributed to each booster is based on their proportion of the total $BGT boosting that validator.

Party	$BGT Boost To Val A	% of Total Boost	Total Incentive Token Rewards
Validator A	20 $BGT	25%	.05 ⨉100 + .25 ⨉95 = 28.75 $USDC
Manny	40 $BGT	50%	.5 ⨉ 95 = 47.50 $USDC
Cami	10 $BGT	12.5%	.125 ⨉ 95 = 11.875 $USDC
Jintao	10 $BGT	12.5%	.125 ⨉ 95 = 11.875 $USDC

A validator can change their commission percentage by first queueing the rate to notify users of the upcoming change, waiting 16,382 blocks, and then anyone may activate the new rate for the validator.