Detailed Explanation of the Cross-Chain Communication Protocol Axelar: How to Unlock Cross-Chain Composability and Liquidity?

AxelarNetwork
2022-04-18 12:09:02
Collection
Axelar aims to break down the barriers of cross-chain communication, connecting users, assets, and dApps across multiple blockchain ecosystems, enabling developers to build on the best platforms that meet their needs while leveraging the Axelar stack to unlock cross-chain composability and liquidity.

Organizer: Linqi, Chain Catcher

Introduction: After the cross-chain bridge Stargate under LayerZero gained popularity, the cross-chain protocol track has become the focus of market attention, and Axelar Network is another cross-chain interoperability protocol worth noting.

Axelar aims to break down the barriers of cross-chain communication, connecting users, assets, and dApps across multiple blockchain ecosystems, enabling developers to build on the best platforms that meet their needs while leveraging the Axelar stack to unlock cross-chain composability and liquidity.

In February of this year, Axelar announced the completion of a $35 million funding round, achieving a valuation of $1 billion, with investors including Dragonfly Capital, Polychain Capital, North Island Ventures, Rockaway Blockchain Fund, Cygni Capital, Lemniscap, Olive Tree Capital, Blockchange Ventures, and others.

The following is an overview of the project's basic architecture and token model organized by Chain Catcher based on Axelar's official blog articles ("An Introduction To The Axelar Network", "An Overview of AXL Token Economics").

Background and Introduction

Despite the significant growth in demand and usage of Web3, it is still in its infancy. New consensus mechanisms and smart contract languages are supporting the development of new decentralized applications aimed at serving the next billion users. Today, there is a strong and rapidly growing demand for cross-chain services among these innovative ecosystems.

L1 blockchains provide robust security guarantees, while existing cross-chain infrastructure has weaker security assurances. There is a serious issue regarding scalability: N bilateral bridges between N networks would require N² bridges. Therefore, a universal network that handles routing, translation, and security in any way between connected blockchains is needed.

Comparing this to the current state of Web2. When we use applications like Zoom, we must consider factors like the number of participants, buffering, screen sharing, etc. We do not have to think about the underlying networks involved. Since call participants may be spread across the globe, many different network connections come together to enable our communication. Internet protocols like BGP connect these networks to exchange data, while overlay networks like Content Delivery Networks (CDNs) provide the seamless experience we expect. These protocols and the service layer supporting interoperability across networks form the foundation of the Web2 applications we use.

Providing a universal routing, translation, and security overlay network for Web3 is a necessary condition for Web3 applications to have the scalability and seamlessness of today's Web2 applications.

What is the Axelar Network?

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Axelar is a universal overlay network that securely connects all blockchain ecosystems, applications, assets, and users to provide interoperability for Web3. Axelar consists of a decentralized validator network, secure gateway contracts, unified translation, routing architecture, and a suite of software development kits (SDKs) and application programming interfaces (APIs) to achieve composability between blockchains. This supports developers in building on the best platforms for their use cases while being able to access users, assets, and applications from each other’s ecosystems. It relies on a network architecture that provides a unified codebase and governance structure rather than paired cross-chain bridges.

Axelar's ultimate goal is to build the underlying infrastructure for the next billion people entering Web3. To achieve this, Axelar will:

  • Enable blockchain developers to easily enter and communicate with other chains.
  • Provide cross-chain composability for decentralized application (dApp) developers.
  • Allow users to interact seamlessly with applications across multiple ecosystems.

The Axelar SDK provides a rich suite for developing Web3 applications, ensuring developers have the tools they need to build. With these tools and APIs, developers can write dApps using the Axelar network and its SDK that can be easily deployed across all Axelar-connected ecosystems. In other words, Axelar distills cross-chain interoperability into a set of simple API requests. This is absolutely core to its adoption, as the developer experience around deploying Web3 applications must be similar to that of today’s Web2 developers, where underlying network and ecosystem-specific deployment considerations are largely eliminated.

How does Axelar work?

The Axelar network has three key components across two functional layers.

A decentralized network

First is the decentralized network itself, supported by a group of validators responsible for maintaining the network and executing transactions. Validators run a cross-chain gateway protocol, which is a multiparty cryptographic overlay layer situated above L1 blockchains. It is responsible for executing read and write operations on gateway smart contracts deployed on the connected external chains and voting and certifying events on those chains.

Gateway smart contracts

The second component is the gateway—smart contracts that provide connectivity between the Axelar network and its interconnected L1 blockchains. Validators monitor the gateways for incoming transactions read by the validators. They then reach consensus on the validity of the transaction; once consensus is reached, the validators write to the gateway of the target chain to execute the cross-chain transaction. The validators and gateways form the core infrastructure layer.

Developer tools

Above the validators and gateways are the APIs and SDKs (which enable developers to easily access the libraries and tools of the Axelar network). This is the application development layer, where developers will use it to compose across any two chains in a single "hop," thereby adding universal interoperability to their blockchains and applications. With Axelar, they can lock, unlock, and transfer assets between any two addresses on any two blockchain platforms, execute cross-chain application triggers, and handle any cross-chain requests more broadly.

How to use Axelar?

There are primarily four ways to interact with the Axelar network.

The first is the SDK described above, which developers will use to integrate their Web3 applications. To learn more about the Axelar SDK, please check our developer documentation and join our Discord.

The second way is to run a node or validator, participating in the core underlying processes that ensure network security and validate cross-chain transactions. Validator setup documentation.

The third is to lead or support the integration of a new blockchain with the Axelar network. With each new blockchain connected to the Axelar network, the potential value provided to developers and end-users will grow exponentially. Currently, adding new blockchains is not open to Axelar network users. However, this testnet demonstration shows that this operation can be completed in just 10 minutes, showcasing the simplicity and developer-friendliness of this feature.

The fourth is to use Axelar's newly launched decentralized cross-chain asset transfer application Satellite. Currently, Satellite supports transferring native Terra assets like Luna and UST across a set of EVM and non-EVM blockchains. The supported networks include Avalanche, Ethereum, Fantom, Moonbeam, Polygon, and Terra. Support for other networks and assets will be rolled out in the coming weeks and months. Satellite demonstrates the potential seamlessness to end-users: they can exchange assets in previously isolated ecosystems without switching user interfaces back and forth.

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AXL Token Economics

The token economics of AXL is designed to create support for the Axelar network to achieve the following key outcomes.

  • Security. An appropriate incentive model with healthy staking rewards to encourage a broad validator community to operate secure nodes.
  • Decentralization. A token distributed among a wide range of holders who will delegate to a decentralized group of validators and contribute to governance decisions.
  • Durability. The token economics are designed to encourage the general maintenance of all key Axelar-related processes (such as block validation).
  • Ecosystem growth. The token incentivizes dApp builders to use the Axelar API for cross-chain development.

AXL Genesis Distribution

In the Axelar genesis block, a total of 1 billion AXL tokens will be issued and distributed to the following stakeholders and projects.

  • Team: existing employees and advisors. 17% is allocated to the core team.
  • Company: Axelar Inc.'s operating funds and incentives for future employees. Corporate operations account for 5%.
  • Supporters: seed round (4%), Series A (12.64%), and Series B (3.5%) investors.
  • Community sale (5%): a public sale to be conducted after the mainnet launch, aimed at distributing tokens to community members.
  • Community projects (including insurance funds) (96%): testnet/dashboard/wallet/developer grants, liquidity rewards, and other incentive programs managed by the Axelar Foundation. At least 5% of the total supply will be allocated from community programs to the insurance fund and insurance plans.

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Figure 1: AXL token distribution at genesis

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Table 1: Transaction terms for AXL supporters

Genesis Token Unlock Schedule Table

Most tokens are locked at genesis; they can be staked but cannot be sold or transferred before unlocking or release. The unlock schedule is set to begin on May 11, but it may be adjusted due to technical or other constraints.

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Table 2: AXL genesis token distribution and unlock schedule

The chart in Figure 2 shows the unlock schedule for AXL genesis tokens.

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Figure 2: AXL unlock schedule

Transaction Fees and Rewards

The transaction fees, rewards, and burn structure of AXL have been detailed in another article. Below, we will explain how the locked genesis tokens, issued genesis tokens, and reward tokens combine to form the circulating supply and total supply.

Circulating Supply and Total Supply

The circulating supply is defined by the number of tokens available for use, equivalent to the number of released genesis tokens plus the number of tokens minted as rewards. Rewards injected into the system are unlocked from the moment they are minted by the protocol. The rate at which rewards are issued is influenced by factors such as the amount of delegated staking, the number of connected chains, and governance choices. A portion of the network fees collected by the network may be used to burn part of the supply, in which case the network may become deflationary.

The example circulating supply chart in Figure 3 is based on the following assumptions:

  1. All tokens (including locked tokens) are staked and earn 15% APY, with token holders running their own validators.
  2. The tokens for corporate operations and community program portions unlock over four years.

Please note that the current plans for delegated locked tokens may change due to technical feasibility constraints.

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Figure 3: Sample AXL circulating supply (issued tokens + reward tokens)

Until all genesis tokens are released, the total supply will always be greater than the circulating supply. The total supply at any given time equals the total number of genesis tokens (locked and unlocked) plus the total number of minted reward tokens. The total supply chart in Figure 3 shows the expected growth of total supply over time, assuming the same assumptions used in the circulating supply chart in Figure 2 (sample staking at 15% APY).

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Figure 4: Sample AXL total supply (genesis distribution + rewards), over 4 years

Looking Ahead

Over the past 20 years, we have witnessed the evolution of the internet, with Web2 applications being able to scale easily and provide users with rich, seamless experiences. We are now embarking on a new journey. Web3 is still in its infancy. Developers are free to experiment with innovative programming languages, blockchain architectures, and consensus mechanisms without sacrificing access to users and liquidity, which is crucial.

From its inception, Axelar has bet on a multichain future. Today, that bet has been validated, and the multichain future has become a reality. However, ensuring that a multichain ecosystem can scale securely and support millions of users making billions of dollars in transactions is a daunting task that requires carefully constructed architecture. Current paired solutions are not suitable for this task.

Just as Akamai and CDNs created revolutionary opportunities in Web2, Axelar's universal overlay network will create revolutionary opportunities in Web3, enabling secure and composable interoperability between all blockchain ecosystems. Just as Web2 developers can easily deploy their web applications on any network to serve end-users, Axelar's APIs will enable developers to easily deploy Web3 applications on any L1 blockchain without needing to understand each specific consideration.

Axelar is the answer to the growing damage to L1 security assurances caused by cross-chain connections. Axelar is a universal decentralized transport layer supported by permissionless validators and powered by Tendermint. It allows cross-chain applications to escape the insecurity of specific cross-chain bridges. As a universal overlay network, Axelar provides routing, translation, and security between all blockchains, delivering Web3 interoperability with maximum composability and security.

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