Original Title: "Understanding Axelar: A Comprehensive Overview"
Author: Red Sheehan, Messari
Translation: Elvin, ChainCatcher
Key Points:
- Axelar not only serves as a bridge, but also provides the ability to program cross-chain logic and transfer arbitrary data.
- The upcoming Axelar VM will allow permissionless connections for new chains.
- Axelar's cross-chain token service has entered the testnet, supporting cross-chain transfer of native tokens rather than wrapped tokens.
- AXL may update token economics, allowing the network to sustainably support more chains by reducing the token inflation rate for each added chain.
- Among the top 15 active EVM chains, 10 are currently using Axelar technology. Axelar is focused on introducing more EVM and Ethereum-based chains.
I. Background
With the development of modular blockchains, Layer-2 rollups, and specific application chains, the number and diversity of blockchains are constantly expanding. However, the market lacks developers who can economically and efficiently traverse multiple multi-chain ecosystems. The Axelar project provides developers with a secure cross-chain development platform accessible through APIs and SDKs. These developer resources are primarily easy-to-use, plug-and-play integrated solutions. Therefore, Axelar may be a good choice for dApps looking to build fast cross-chain functionality.
The Axelar project began in 2020, utilizing various Cosmos technologies, aiming to provide interoperability with Ethereum and other networks. From the beginning, Axelar was not just a Cosmos interoperability hub.
Liquidity, services, and user decentralization create friction between ecosystems and sovereign networks. Axelar's technology aims to achieve more complex cross-chain functionality than simply transferring bundled assets to different blockchains. Axelar addresses this issue by focusing on full-stack interoperability - full-stack meaning that Axelar not only supports bridging any information/assets, but also supports permissionless programmability, cross-network execution of smart contracts, and dApps.
The Axelar community is working to expand the number of connected networks (currently 55 at the time of writing) through three main approaches: adjusting the network's economic structure, releasing Axelar VM to support permissionless connections, and exploring more efficient solution clients such as light clients. These measures aim to connect Axelar to hundreds of chains.
II. Technology
Axelar's technology consists of three main components:
- A decentralized network primarily built on open-source Cosmos technology.
- A set of gateway smart contracts providing connectivity between the Axelar network and its interconnected external chains.
- A software development kit (SDK) consisting of development tools and application interfaces, including the Axelarscan block explorer for tracking cross-chain transactions.
(1) Network Architecture
The Axelar network is built using the Cosmos SDK, CometBFT, and CosmWasm VM. The Cosmos SDK is an open-source software development kit for building sovereign, multi-asset, public PoS blockchains. It is used to build custom application layers or state machines, while CometBFT is used to securely replicate that state machine across all nodes in the network. CometBFT is an application-agnostic engine that handles the network and consensus layers through two main components:
Consensus algorithm, namely Tendermint.
Socket protocol, namely Application Blockchain Interface (ABCI).
Tendermint is used to validate requests from the source chain and confirm changes on the target chain. Tendermint consensus provides instant finality and Byzantine fault tolerance. Although this specific consensus method only validates cross-chain communication, Axelar can connect various forms of consensus. For example, Axelar is one of the few cross-chain protocols that can connect EVM and Cosmos chains.
(2) Consensus and Security Measures
Axelar's network adopts a Delegated Proof of Stake (DPoS) consensus mechanism. Validators generate new blocks, participate in multi-signature, and vote on the state of external chains. Token holders gain stake in AXL by delegating their tokens to validator pools. This parameter can only be adjusted through on-chain governance when the top 75 validators are in the active set. Both delegating validators and running validators are permissionless.
Every PoS consensus mechanism has the potential to concentrate voting power in the hands of a few dominant voters. Axelar mitigates this risk in its consensus mechanism by employing quadratic voting. In quadratic voting, voting power does not linearly increase with stake. To increase their voting power in Axelar, validators must double their delegated stake.
Additionally, Axelar applies network capabilities to pause traffic from malicious interchain links and restrict the volume of transfers within a period through contract limits. Axelar's hub-and-spoke network structure enhances the efficiency of these capabilities. During Multichain outages, cross-chain exchange services built using Axelar can maintain security and liquidity by isolating damaged connections.
(3) Axelar Virtual Machine (AVM)
The launch of the Axelar Virtual Machine (AVM) will expand Axelar's product from bridging and message passing to a fully programmable cross-chain layer. It enables developers to deploy smart contracts on Axelar and build cross-chain developer tools. Smart contracts abstract cross-chain tasks, such as token conversions, to reduce developer overhead and simplify user experience. Developers can deploy contracts written in any language that compiles to WebAssembly (Wasm) on AVM. Additionally, AVM is expected to play a key role in Axelar's native token AXL's token economics. Axelar's token is designed to expand the network through expected diffusion on Ethereum-based L2 blockchains (see AXL Token section below).
As AVM is permissionless, any developer can leverage it. The Axelar Foundation supports development teams in expanding the ecosystem on AVM, enhancing security, and designing interchain orchestration templates on AVM. The first product under development is the Interchain Token Service (ITS), which is now available on the testnet. Other services supported by AVM include Interchain Amplifier and Interchain Maestro.
(4) Interchain Token Service (ITS)
ITS is a service designed to preserve the fungibility and custom functionality of native tokens across multiple blockchains. These preserved tokens are referred to as cross-chain tokens. This is a familiar feature for those familiar with LayerZero's Omnichain Fungible Tokens and IBC-connected networks using Interchain Accounts (ICA) and Interchain Queries (ICQ).
Unlike these alternative solutions, Axelar ITS supports standardized wrappers and tokens, enabling one-click deployment across multiple chains. ITS also provides native support for arbitrary data and fast deterministic gadgets.
With ITS, developers can deploy interchain tokens across multiple chains and automatically execute tasks such as supply management. Cross-chain tokens, supported by Axelar network's security protocols, can run on any EVM-compatible chain connected to the Axelar network.
(5) Interchain Amplifier
Once the Interchain Amplifier is launched, developers will be able to connect new blockchains to the Axelar network without permission. This benefits new ecosystems, such as modular blockchains built on Ethereum, and dApps looking to customize cross-chain processes.
(6) Interchain Maestro
Interchain Maestro is a set of orchestration contracts and templates to help design, deploy, and manage dApps across multiple chains. It is similar to Kubernetes. ITS is a single component of the broader Interchain Maestro.
III. Axelar as an Overlay Network
Just like the internet, the crypto space is composed of different networks. BGP and HTTP protocols enable these different networks to communicate best-effort: without guarantees, improvements, or added functionality. An overlay network is a network built on top of existing networks, designed to provide a richer, more seamless level of service. Examples of overlay networks include Akamai and Cloudflare.
Axelar can be seen as an overlay network for blockchains. It utilizes various cross-chain communication protocols and smart contract logic to facilitate its connectivity and interoperability.
General Message Passing
Since its release to the mainnet in May 2022, General Message Passing (GMP) allows applications connected to Axelar to move any payload across chains, including function calls and other logic. GMP uses Axelar's validator set to ensure security and employs decentralized protocols for routing and transformation. Unlike basic cross-chain bridges, it supports secure transmission of arbitrary data, including function calls that enable cross-blockchain composability of liquidity and computation. For example, applications can bridge tokens and instructions, deposit them into contracts, or exchange them on DEX, providing a seamless user experience regardless of blockchain boundaries.
Cross-Chain Gateway Protocol
The operation of the Cross-Chain Gateway Protocol (CGP) is similar to the Border Gateway Protocol (BGP) on the internet. BGP is essentially a relay center designed to securely transmit data between internet networks, much like how a post office sorts and delivers mail. Similarly, Axelar's CGP has two key functions: state synchronization and asset transfer.
Cross-Chain Transfer Protocol
The Cross-Chain Transfer Protocol (CTP) is akin to the Hypertext Transfer Protocol (HTTP) on the internet. It is an application-level file transfer mechanism built on top of CGP. CTP allows dApps to interact with various blockchains, enabling the transfer of cross-chain assets and arbitrary information.
IV. AXL Token
The AXL utility token provides the following functions for the Axelar network:
- Paying transaction fees on Axelar, including fees for services built on top of Axelar's programmable interoperability layer, such as developer automation, cross-chain gas conversion, and fast deterministic gadgets.
- Paying transaction fees on connected networks. AXL tokens can be automatically converted to the gas token required by the connected chain.
- Staking or delegating for consensus participation and rewarding consensus participants.
- Voting on governance proposals.
The token was launched in 2022 to enable permissionless usage of the Axelar network. The initial supply is 1 billion tokens, to be fully vested by 2026. The release schedule for the team, company, supporters, and community-planned tokens is three months after the token issuance; community sale tokens are released earlier and at an accelerated pace.
Due to the distribution of staking rewards, AXL experiences inflation. However, with the proposed new token economic model, this situation may change.
New Token Economics
As the Axelar network scales, the proposed new AXL token economics introduces a series of changes to enhance AXL's utility and value accrual. In the long run, these changes may lead to an overall deflation of AXL as new chain activity increases. These changes include adding a step in the process to burn gas between the gas receiver and the network.
Reduced Inflation Rate
Until recently, Axelar validators were incentivized to support more chain connections by linearly increasing rewards by 0.75% for each supported external chain (e.g., EVM chains). This meant a total inflation rate of 11.5% (1% base inflation rate + 14 supported external chains, each at 0.75%).
In October of this year, a proposal was made to gradually reduce the per-chain reward from 0.75% to 0.3%. The proposal was approved through on-chain voting and is being gradually implemented, with the final phase locked in on December 8, 2023. Based on an equal number of chains, this will reduce the annual inflation rate from 11.5% to 5.2%. Since the proposal's release, two new chains (Scroll, followed by Centrifuge) have been added, bringing Axelar's current inflation rate to 5.8%.
Gas Burning Mechanism
Currently, gas fees paid in AXL are distributed to validators and stakers. The Axelar Foundation's proposal is to burn these fees, exerting deflationary pressure on the total supply. This variable supply pressure may lead to network deflation under sufficient activity.
Increased Demand for New Chain Connections
Currently, connecting new chains to the Axelar network is a complex process. It requires support from Axelar developers and votes from Axelar validators. Axelar is developing a more permissionless path that does not involve inflation and may create buying pressure for AXL tokens.
Once developed, the Interchain Amplifier will allow developers to instantiate a series of smart contract templates to plug new chains into the Axelar network. This essentially automated process will include a method to incentivize validators by setting up AXL-funded reward pools for early validators. These AXL-funded reward pools are necessary for new chains unless they already have significant transaction volume and can transmit fees to validators instead of rewards.
The launch of new L2 blockchains on Ethereum will become easier with infrastructure such as the dAppchain ecosystem and tools like Rollups-as-a-Service. Axelar positions itself as a permissionless connector to facilitate the expected growth in this category. If the L2 category expands and the strategy is successful, it could become a significant driver of AXL demand.
V. Current State of the Axelar Ecosystem
Interconnected Ecosystem
Axelar is known for its connectivity within and between the Cosmos and Ethereum ecosystems. However, it also has the capability to connect unique virtual machines and consensus mechanisms. At the time of writing, Axelar has connected 55 chains, including Arbitrum, Avalanche, Base, BNB Chain, Ethereum, Optimism, Polkadot, Polygon, Scroll, Sui, and various Cosmos-based chains. Additionally, connecting to one chain within a multi-chain ecosystem grants access to the entire ecosystem, albeit indirectly. For example, connecting to Avalanche provides a secure path to subnets, while connecting to Polkadot provides a secure path to parachains, and so on.
According to Axelarscan data, at the time of this report, Polygon, Avalanche, and Osmosis are the top source and destination chains within the last 30 days; according to Axelarscan, AXL, ETH, and USDC are the top assets. EVM users are particularly active on Axelar, with 10 out of the top 15 active chains being EVM-based.
Ethereum Ecosystem
The Ethereum rollup-centric roadmap is still in its early stages, with new rollups and rollup development toolkits being regularly announced and released. Ethereum's modularization could potentially lead to hundreds of L2 and L3 networks. Without full-stack interoperability between L2s, user experience and developer capabilities will be affected by liquidity and user fragmentation. Full-stack interoperability includes bridging of any information/assets and permissionless overlay message passing. The Axelar network meets both of these standards through its existing communication protocols and the new AVM.
Cosmos Ecosystem
Axelar is the source of most cross-chain activity on Osmosis, the largest DEX in the Cosmos ecosystem. Due to the symbiotic relationship between the two networks, community members have even explored shared security forms between the two networks. One idea is mesh security, a bidirectional security utilizing the validator sets of both networks. While this may be just a concept, other ecosystem collaborations have already begun. In early 2023, a portion of AXL tokens was airdropped to Osmosis users.
Applications Using Axelar
Axelar has been integrated and utilized by various applications and services:
- DeFi: dYdX, Frax Finance, Lido, PancakeSwap, Uniswap
- Enterprises: Mastercard, Microsoft, JPMorgan's Onyx
- RWAs: Centrifuge, Circle, Ondo Finance, Provenance
- Wallets: Blockchain.com, Ledger, MetaMask, TrustWallet
Cross-Chain Use Cases
Axelar's gateway smart contracts allow for cross-chain token transfers, bridging using wrapped tokens. Until recently, this was the primary use case for Axelar. In September 2023, the usage of GMP surpassed basic bridging in terms of transaction count and nominal transaction volume for the first time. Since then, GMP usage has consistently outpaced basic bridging.
As of the time of writing, Axelar has executed over 1 million transactions, with a cumulative transaction volume close to $7 billion.
Intent: Squid and MetaMask
Squid is a liquidity router built on Axelar, enabling cross-chain swaps and bridging using GMP. Recently, it implemented a feature called GMP Boost, enabling fast finality. Standard cross-chain transactions typically take several minutes as the bridging mechanism needs to wait for a transaction on one chain to complete before taking action on another chain (e.g., minting wrapped tokens). Essentially, GMP Boost allows dApps like Squid to deliver the required assets within seconds and take on the risk of chain reorgs in exchange for a small fee.
Implementing on-chain results using off-chain paths is an innovative application of intent. Standard transactions are imperative, explicitly listing all steps, while intent is declarative, focusing on achieving the result.
Cross-Chain Governance: Filecoin and Uniswap
Uniswap was initially built on Ethereum and later expanded to multiple chains. This made it very challenging to deploy updates outside of Ethereum. Uniswap chose Axelar as one of the two interoperability platforms qualified to support cross-chain upgrades and deployed on the Filecoin Virtual Machine (FVM) using Axelar.
Real World Assets (RWA)
JPMorgan's Onyx recently announced a proof of concept utilizing Axelar to connect the Apollo token fund on the Provenance blockchain with Onyx's digital asset blockchain, where logic for automatically adjusting portfolios is applied.
DeFi Onramps: dYdX and Squid
At the time of writing, dYdX is rolling out the V4 version based on a dedicated application chain. By transaction volume, the largest perp swap DEX, dYdX, is using Axelar and Squid, making deposits from any connected chain more convenient.
Connecting Traditional Technologies
Axelar and Microsoft announced a partnership in 2023 to integrate Axelar as an interoperability provider for the Microsoft Azure Marketplace. This allows companies using Azure to seamlessly connect with crypto applications, protocols, and blockchains.
VI. Future Outlook
Some have suggested expanding Axelar from dozens of chains to hundreds or even thousands of chains. The focus of the strategy is on L2 and modular Ethereum networks. The proposal outlines short-term, medium-term, and long-term expansion strategies.
The AXL token section above discusses the short-term strategy. Its purpose is to reduce the inflation rate when adding new external chains and increase deflationary pressure by burning transaction fees.
The medium-term strategy is based on Axelar VM. AVM will allow permissionless connection of new chains. Enabling features of AVM (such as Interchain Amplifier) can automate much of the technical overhead required for connecting new chains. Unlike the current system that incentivizes validators to support new chains by increasing the inflation rate, third-party resources can pool AXL to directly fund supporting validators.
The long-term strategy is about small clients. Since small clients are also connected to the Interchain Amplifier, they do not require external validators. Only relayers need incentives, as data packets still need to be relayed.
VII. Competitive Landscape
Many protocols and teams are focused on interoperability, but most have relatively limited scopes. Axelar's full-stack interoperability bridges the gap for any information/assets, arbitrary data (GMP), and permissionless overlay message passing (programmability). Most interoperability solutions are essentially bridges that can only transfer wrapped assets. There are some interoperability solutions that can transfer arbitrary data. However, apart from Axelar, there are few functionalities like overlay networks that can program cross-chain logic into a cross-chain environment.
LayerZero and Chainlink are two well-known competing cross-chain networks. LayerZero's Omnichain Fungible Tokens (OFT) and Chainlink's Cross-Chain Interoperability Protocol (CCIP) are similar in many ways to Axelar's various cross-chain protocols and ITS. Nevertheless, one of the main differences between Axelar and these two solutions is Axelar's permissionless validator set. It uses this set of validators to facilitate cross-chain message passing, rather than multiple validations.
In other interoperability solutions that use decentralized validator sets, Axelar validators can choose which chains to support. This makes the validator set supporting the Axelar security model more diverse, as different ideological niches can form to support certain networks. While there is no inherent superiority or inferiority in forcing the entire validator set to validate, it may reduce the participation of opinionated operators, as they have their own agendas, potentially limiting scalability. Axelar has more validators (75 at the time of writing) than any other cross-chain network.
LayerZero
LayerZero allows for flexible, customized configuration of oracles and relayers, but ultimately operates on a 2-of-2 multisig basis with these two entities (oracles and relayers) outside of the two chains. On the other hand, Axelar has built a full set of validators for ensuring cross-chain message security between chains. LayerZero's default configuration relies on a Google-managed oracle and a relayer operated by LayerZero Labs. The protocol can specify custom validation libraries, oracles, and relayers, making decentralization dependent on specific implementations. The validation of Axelar-pulled messages requires a two-thirds majority vote, and people trust these standard-configured oracles and relayers more than a single Axelar-pulled validator, as they are more trusted.
Chainlink
Chainlink is a mature provider of DeFi price oracles, but Chainlink CCIP is a separate new product that has not yet been launched. Like LayerZero, CCIP relies on multisig to validate, order, and relay cross-chain information. CCIP relies on Chainlink oracles, which can operate permissionlessly but allow data to be included in Chainlink's price reference feeds. In contrast, Axelar's permissionless validator set allows validators to serve all roles, rather than separating node roles (i.e., oracle nodes, execution nodes, and risk management nodes).
VIII. Conclusion
Axelar continues to distance itself from traditional bridges and adds new cross-chain programmable features. The upcoming Axelar VM will be the core of many new features, such as Interchain Token Service (ITS). Other functionalities and connections will be established by chains that wish to leverage cross-chain capabilities.
The development of Axelar VM and Interchain Token Service (ITS) will complement Axelar's existing generic message passing and transport protocols, but another upcoming change involves the economics of the ecosystem. The AXL token proposes several reform suggestions to position the network economically to accommodate dozens, hundreds, or even thousands of new networks. The demand for such large-scale connections is posed by modular roadmaps like Ethereum's.
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