Author: RedSheehan

Compiled by: Odaily Planet Daily, How

Messari recently wrote a long article analyzing Axelar, starting from the multi-chain environment and conducting a comprehensive analysis of Axelar from the perspectives of technology, AXL token economics, ecological status, future plans, and competitors.

Key Insights

• Axelar has the ability to program cross-chain logic and transmit arbitrary data;

• The upcoming Axelar VM will allow permissionless connections for new chains;

• Axelar's cross-chain token service is in testing, supporting cross-chain transfers of native tokens rather than wrapped tokens;

• Updated AXL token economic model. The model makes the network sustainable to support more chains by reducing the inflation rate of tokens for each additional chain;

• Currently, based on activity, 10 out of the top 15 chains connected to Axelar are EVM-based. Axelar focuses on integrating more EVM-compatible and Ethereum-based chains.

Background

With the growth of modular blockchains, Layer 2, and specific application chains, the number and diversity of blockchains continue to expand. However, the market lacks solutions for developers to economically cross multiple multi-chain ecosystems. Axelar provides developers with a secure cross-chain development platform through API and SDK accessibility. These developer resources are mainly easy-to-use plug-and-play integration solutions. Therefore, Axelar is a good choice for DApps that want to quickly build cross-chain capabilities.

Founded in 2020, Axelar utilizes various Cosmos technologies to achieve interoperability with Ethereum and other networks. Axelar's technology aims to enable more complex cross-chain functionality, not just transferring encapsulated assets to different blockchains. Axelar addresses this issue by focusing on full-stack interoperability—full-stack meaning that Axelar supports not only bridging any information/assets but also supports permissionless programmability to enable cross-network smart contracts and DApps.

The Axelar community is working to expand the number of connected networks (currently 55) through a three-pronged approach:

• Adjusting the economic structure of networks;

• Releasing Axelar VM to support permissionless connections for projects;

• Exploring more efficient solutions, such as lightweight clients.

These measures aim to connect Axelar to hundreds of chains.

Technology

Axelar has three main components:

• Distributed network: primarily built on open-source Cosmos technology.

• Gateway smart contracts: provide connectivity between the Axelar network and its interconnected external chains.

• Software development kit (SDK) for developer tools and APIs, including Axelarscan for tracking cross-chain transactions in a block explorer.

Network Architecture

The Axelar network is built using Cosmos SDK, CometBFT, and CosmWasm VM. Cosmos SDK is an open-source software development kit (SDK) 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 this 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.

Consensus & Security Solutions

The Axelar 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 stake AXL by delegating tokens to validator staking pools. Only the top 75 validators are in the active set, a parameter that can be adjusted through on-chain governance. Delegating to validators and running validators are permissionless.

Every PoS consensus mechanism carries the risk of centralizing voting power in the hands of a few dominant players. Axelar mitigates this risk by employing a quadratic voting mechanism, where voting power does not linearly increase with staking. To increase their voting power, Axelar validators must exponentially increase their delegated stake.

Additionally, Axelar applies network capabilities to be able to pause traffic from malicious interconnected chains and employs contract limits to restrict the maximum amount that can be transferred within a period. Axelar's radial network topology enhances the efficiency of these capabilities. During multi-chain outages, cross-chain exchange services built using Axelar can maintain security and liquidity by isolating damaged connections.

Axelar VM

The introduction of Axelar VM (AVM) extends Axelar's capabilities 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 development tools. Smart contracts can help reduce developers' overhead and simplify user experience by abstracting cross-chain tasks, such as token conversions. Developers can deploy contracts on AVM using any language compiled into WebAssembly (Wasm). Additionally, AVM is expected to play a key role in Axelar's native token AXL's token economic model.

As AVM is permissionless, any developer can leverage it. The Axelar Foundation supports development teams focused on expanding the ecosystem, improving security, and designing inter-chain orchestration templates on AVM. The first product is the Interchain Token Service (ITS), currently available on the testnet. Other services enabled by AVM include Interchain Amplifier and Interchain Maestro.

Interchain Token Service

The Interchain Token Service (ITS) is 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 will be a familiar feature for those familiar with LayerZero's Omnichain Fungible Tokens and using Interchain Accounts (ICA) and Interchain Queries (ICQ) in IBC-connected networks.

Unlike these alternative solutions, Axelar ITS supports standard encapsulation and standardized tokens, enabling one-click deployment across multiple chains. ITS also natively supports arbitrary data and fast finality devices.

Through ITS, developers can deploy cross-chain tokens on multiple chains simultaneously and automate tasks such as supply management. Cross-chain tokens are supported by the security protocol of the Axelar network and can run on any EVM-compatible chain connected to the Axelar network.

Interchain Amplifier

The Interchain Amplifier will allow developers to connect new blockchains to the Axelar network without permission. This will benefit new ecosystems, such as modular blockchains built on Ethereum, and DApps that wish to customize cross-chain processes.

Interchain Maestro

Interchain Maestro is a set of orchestration contracts and templates to help design, deploy, and manage DApps across multiple chains. The Interchain Token Service (ITS) is a component within the broader scope of Interchain Maestro.

Axelar as an Overlay Network

The internet, like the crypto space, is composed of diverse networks. Protocols like BGP and HTTP enable these diverse networks to communicate on this basis, but without guarantees, improvements, or added functionality. An overlay network is built on top of existing networks, providing a richer and more seamless level of service. Examples of overlay networks include Akamai and Cloudflare.

Axelar can be seen as an overlay network for blockchains. Axelar utilizes various cross-chain communication protocols and smart contract logic to facilitate its connectivity and interoperability.

General Message Passing

Since its mainnet launch in May 2022, General Message Passing (GMP) has allowed applications connected to Axelar to transfer any payload between different chains, including function calls and other logic. GMP leverages Axelar's set of validators to ensure security and utilizes decentralized protocols for routing and conversion. Unlike other cross-chain bridges, GMP supports secure transfer of arbitrary data, including function calls, enabling composability of liquidity and computation across different blockchains. For example, an application can bridge tokens and instructions across chains, deposit them into contracts, or exchange them on decentralized exchanges, achieving a seamless user experience across blockchain boundaries.

Cross-Chain Gateway Protocol

The Cross-Chain Gateway Protocol (CGP) operates similarly to the Border Gateway Protocol (BGP) on the internet. BGP is essentially a relay center designed to securely transmit data between internet networks. Axelar's CGP has two key functions: state synchronization and asset transfer.

Cross-Chain Transfer Protocol

The Cross-Chain Transfer Protocol (CTP) is similar to the Hypertext Transfer Protocol (HTTP) on the internet. It is an application-level file transfer mechanism situated above CGP. CTP allows DApps to interact with various blockchains, enabling the transfer of cross-chain assets and arbitrary messages.

AXL Token Economics

The AXL token serves the following functions within the Axelar network:

• Paying transaction fees on Axelar. This includes fees for services built on top of Axelar's programmable interoperability layer, such as developer automation, cross-chain gas conversion, and fast deterministic tooling;

• Paying transaction fees on connected networks. AXL tokens can be automatically converted to the required Gas token on the connected chain;

• Participating in consensus through staking or delegation and rewarding consensus participants;

• Voting on governance proposals.

The AXL token was launched in 2022 with the aim of making the Axelar network permissionless. The initial supply is 1 billion, to be fully released by 2026. The issuance plan for the team, company, supporters, and community projects begins three months after the token launch; community sale token issuance starts earlier.

Due to the distribution of staking rewards, AXL tokens experience a certain level of inflation. However, with the introduction of the new token economic model, this situation may change.

New Token Economic Model

The updated AXL token economic model introduces a series of changes aimed at increasing the utility and value capture of AXL tokens as the Axelar network scales. In the long run, these changes may lead to an overall deflationary effect on AXL, especially as activity on new chains increases. These changes include adding a step in the process to burn Gas between the Gas recipient 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 additional externally supported chain (e.g., EVM chains). This resulted in a total inflation rate of 11.5% (1% base inflation + 14 externally supported chains, each at 0.75%).

In October, a new AXL token economic model was proposed to gradually reduce rewards for each chain from 0.75% to 0.3%. The proposal passed through on-chain voting and will gradually take effect, ultimately locking in on December 8, 2023. This will reduce the annual inflation rate from 11.5% to 5.2%, based on the equivalent number of chains. Since the proposal's release, Axelar has added two new chains (Scroll and Centrifuge), bringing Axelar's current inflation rate to 5.8%.

Gas Burning Mechanism

Currently, Gas fees paid in AXL are allocated to validators and stakers. A proposal from the Axelar Foundation will burn these fees, exerting deflationary pressure on the total supply. This variable supply pressure may lead to network deflation under sufficient activity.

Increased Demand from New Chain Connections

Currently, connecting new chains to the Axelar network is a complex process requiring support from Axelar developers and voting from Axelar validators. Axelar is developing a more permissionless path, which is non-inflationary and may create demand 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 mostly automated process will include a way to reward early validators by setting up AXL-funded reward pools, kickstarting validator incentives. These AXL-funded reward pools will be necessary for new chains, except those with significant transaction volume where fees can be routed to validators instead of rewards.

As Ethereum's infrastructure, such as DApp chain ecosystems and Rollups-as-a-Service tools, makes it easier to launch new L2 blockchains on Ethereum, Axelar is positioning itself as the anticipated growth component for permissionless connections. If L2 category expansion and strategies are successful, it could become a significant driver of AXL token demand.

Current State of the Axelar Ecosystem

Connected Ecosystem

Axelar is known for its connectivity within and between the Cosmos and Ethereum ecosystems. Axelar also has the ability to connect to unique VMs and consensus mechanisms. As of the report's publication, Axelar has connected to 55 chains, including Arbitrum, Avalanche, Base, BNB Chain, Ethereum, Optimism, Polkadot, Polygon, Scroll, Sui, and various Cosmos-based chains. Additionally, Axelar's connection to one chain indirectly provides access for users to the entire ecosystem. 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 data from Axelarscan, Polygon, Avalanche, and Osmosis are the most active source and target chains at the time of the report, and AXL, ETH, and USDC are the most popular assets. EVM users are particularly active on Axelar, with 10 out of the top 15 chains based on EVM according to activity.

Ethereum Ecosystem

The roadmap centered around Ethereum's Rollups is still in its early stages, with new Rollups and Rollup development tools being announced and released regularly. Ethereum's modularity may see hundreds of L2 and L3 networks. In the absence of full-stack interoperability between L2s, user experience and developer capabilities will be affected by liquidity and fragmentation. Full-stack interoperability includes bridging 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 a major initiator of cross-chain activity on Osmosis (the largest decentralized exchange on a transaction volume basis). Due to the symbiotic relationship between the two networks, community members have even explored forms of shared security. One such form is MeshSecurity, a form of bidirectional security leveraging the validator sets of both networks. While this may only be a concept, collaborations with other ecosystems have already taken place. In early 2023, a portion of AXL tokens was airdropped to Osmosis users.

Axelar-Supported Applications

Axelar has been integrated and leveraged by various applications and services:

• DeFi (Decentralized Finance): dYdX, FraxFinance, Lido, PancakeSwap, Uniswap;

• Enterprises: Mastercard, Microsoft, Onyx under J.P. Morgan;

• Real World Asset (RWA) Lending: Centrifuge, Circle, OndoFinance, Provenance;

• Wallets: Blockchain.com, Ledger, MetaMask, TrustWallet.

Cross-Chain Examples

Axelar's gateway smart contracts allow for cross-chain token transfers, using wrapped tokens for cross-chain bridging. As of September 2023, GMP usage has surpassed basic bridging in terms of transaction count and nominal transaction volume for the first time. Since then, GMP has consistently led in bridging usage.

To date, Axelar has executed over 1 million transactions, with a cumulative transaction volume approaching $7 billion.

Intent: Squid and MetaMask

Squid is a liquidity router built on Axelar, enabling cross-chain swaps and bridging using GMP. Recently, Squid implemented a feature called GMPBoost, enabling fast finality. Normal cross-chain transactions typically take minutes, as the bridging needs to wait for transaction finality on one chain before executing actions on another chain (e.g., minting wrapped tokens). Essentially, GMP Boost allows dApps like Squid to deliver the required assets in seconds in exchange for a fee to bear the reorganization risk of the chain.

Achieving on-chain results through off-chain paths is an innovative application of Intent. Unlike standard transactions, which are imperative and explicitly list all steps, Intent is declarative and focuses on achieving results.

Cross-Chain Governance: Filecoin and Uniswap

Uniswap was initially built on Ethereum and later expanded to multiple chains. This made deploying updates outside of Ethereum challenging. After choosing Axelar as one of the interoperability platforms supporting cross-chain upgrades, Uniswap deployed on the Filecoin Virtual Machine (FVM) blockchain using Axelar.

Real World Assets (RWAs): J.P. Morgan and Provenance

J.P. Morgan's Onyx recently announced a proof of concept project where Axelar was used to connect tokenized Apollo funds on the Provenance blockchain with Onyx's digital asset blockchain, applying logic for automated rebalancing.

DeFi Onboarding: dYdX and Squid

dYdX launched V4, which is built on a dedicated application chain. The largest perpetual exchange decentralized exchange by trading volume, dYdX, is using Axelar and Squid to facilitate simplified deposits from any connected chain.

Connecting Traditional Tech

Axelar and Microsoft announced a partnership in 2023, integrating Axelar as an interoperability provider into Microsoft's Azure Marketplace. This collaboration helps companies using Azure seamlessly connect to crypto applications, protocols, and blockchains.

Roadmap

The new proposal aims to expand Axelar from dozens of chains to hundreds or even thousands of chains. The strategic focus is on the L2 and modular Ethereum network. The proposal includes short-term, medium-term, and long-term expansion strategies.

The short-term strategy has been discussed in the AXL token section above. The strategy aims to reduce the inflation rate as additional external chains are added and increase deflationary pressure by burning transaction fees.

The medium-term strategy is based on the Axelar Virtual Machine (AVM). The AVM will enable permissionless connections for new chains. Features enabled by AVM, such as the Interchain Amplifier, can automate much of the technical overhead required for new chain connections. Unlike the current system of incentivizing validators to support new chains by increasing inflation, third-party sources can directly fund supporting validators.

The long-term strategy primarily focuses on lightweight clients. With lightweight clients also connecting to the Interchain Amplifier, the need for external validators is eliminated. Only relayers need to be incentivized, as data packets still need to be relayed.

Competitive Landscape

Many protocols and teams are focused on interoperability, but most view the issue with a more limited scope. Axelar's full-stack interoperability bridges 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 other interoperability solutions that can transfer arbitrary data, but few, if any, besides Axelar, have the capabilities of an overlay network and provide the ability to program cross-chain logic in a cross-chain environment.

LayerZero and Chainlink are two prominent 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. However, one of the main differences between Axelar and these two solutions is Axelar's permissionless validator set. Axelar uses this set to facilitate inter-chain message passing, rather than using multi-signatures.

In other interoperability solutions using a decentralized validator set, Axelar's validators can choose which chains to support. This allows for a more diverse validator set to support Axelar's security model, as different ideological factions can form to support specific networks. While requiring the entire validator set to validate is not inherently good or bad, it may reduce the participation of opinionated operators holding their own agendas, potentially limiting scalability. Axelar currently has more validators than any other cross-chain network (75 at the time of writing).

LayerZero

LayerZero allows for flexible and customizable configurations using oracles and relayers, but ultimately operates on a 2-of-2 multi-signature basis between these two off-chain entities (oracles and relayers). Axelar, on the other hand, has established an entire validator set for securing cross-chain messages. LayerZero's default configuration relies on oracles managed by Google and relayers operated by LayerZero Labs. The protocol can specify custom validator sets, oracles, and relayers, making decentralization dependent on specific implementations. More trust is placed in these standard-configured oracles and relayers compared to individual Axelar validators, as a two-thirds majority is required to validate Axelar's messages.

Chainlink

Chainlink is a well-known provider of DeFi price oracles, but Chainlink CCIP is a standalone and yet-to-be-launched new product. Similar to LayerZero, CCIP relies on multi-signatures to validate, order, and relay cross-chain messages. CCIP depends on Chainlink oracles, which can operate freely but need permission to include data in Chainlink's price reference data. In contrast, Axelar's permissionless validator set enables validators to take on all roles, rather than separating node roles (such as oracle nodes, execution nodes, and risk management nodes).

Conclusion

As Axelar adds new features for cross-chain programmability, it continues to differentiate itself from traditional bridging solutions. The upcoming Axelar VM will be at the core of many new functionalities, such as cross-chain token services.

The development of Axelar Virtual Machine and cross-chain services will complement Axelar's existing general message passing and transfer protocols. Proposed changes to the AXL token aim to make the network economically adaptable to dozens, hundreds, or even thousands of new networks. Roadmaps like Ethereum's modular roadmap demonstrate the demand for this scale of connectivity.

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