Messari's Comprehensive Interpretation of Axelar: How to Connect the Future of Cosmos and EVM with Cross-Chain Liquidity

Original Title: “Understanding Axelar: A Comprehensive Overview”

Author: Red Sheehan, Messari

Compiled by: Elvin, ChainCatcher

Main Points:

1. Axelar is not just a bridge; it also provides cross-chain logic programming and the ability to transmit arbitrary data.
2. The upcoming Axelar VM will allow permissionless connections for new chains.
3. Axelar's cross-chain token service has entered the testnet, supporting the transfer of native tokens rather than wrapped tokens across chains.
4. AXL may update its token economics to sustainably support more chains by reducing the token inflation rate for each added chain.
5. Among the top 15 most active EVM chains, 10 are using Axelar technology. Axelar focuses on bringing more EVM and Ethereum-based chains.

I. Background

With the development of modular blockchains, Layer-2 rollups, and application-specific chains, the number and diversity of blockchains are continuously expanding. However, the market lacks solutions that enable developers to efficiently traverse multiple multi-chain ecosystems. The Axelar project provides developers with a secure cross-chain development platform accessible via APIs and SDKs. These developer resources are primarily easy-to-use, plug-and-play integration solutions. Therefore, Axelar may be a good choice for those looking to build fast cross-chain functionalities in dApps.

The Axelar project began in 2020, built using various Cosmos technologies, aiming to provide interoperability with Ethereum and other networks. From the outset, Axelar has been more than just a Cosmos interoperability hub.

The fragmentation of liquidity, services, and users creates friction between ecosystems and sovereign networks. Axelar's technology aims to enable more complex cross-chain functionalities than simply transferring wrapped assets to different blockchains. Axelar addresses this issue by focusing on full-stack interoperability—full-stack means that Axelar supports not only bridging any information/assets but also permissionless overlay programmability, executing smart contracts and dApps across networks.

The Axelar community is working to expand the number of connected networks (55 as of the time of writing) through a three-pronged approach: adjusting the economic structure of the network, launching the Axelar VM to support permissionless connections, and exploring more efficient solutions like light clients. These initiatives aim to connect Axelar to hundreds of chains.

II. Technology

Axelar's technology consists of three main components:

1. A decentralized network, primarily built on open-source Cosmos technology.
2. A set of gateway smart contracts that provide connections between the Axelar network and its interconnected external chains.
3. A software development kit (SDK) composed of developer tools and application programming interfaces, including a block explorer, Axelarscan, 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 (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 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:

• The consensus algorithm, namely Tendermint.
• The socket protocol, namely the Application BlockChain Interface (ABCI).

Tendermint is used to validate requests on the source chain and confirm changes on the target chain. Tendermint consensus provides instant finality and Byzantine fault tolerance. While 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 capable of connecting EVM and Cosmos chains.

(2) Consensus and Security Approach

Axelar's network employs a Delegated Proof of Stake (DPoS) consensus mechanism. Validators generate new blocks, participate in multi-signatures, and vote on the state of external chains. Token holders earn AXL stakes by delegating tokens to the validators' pools. This parameter can only be adjusted through on-chain governance when the top 75 ranked validators enter the active set. Both delegated validators and operating validators are permissionless.

Every PoS consensus mechanism has the potential to concentrate voting power in the hands of a few dominant voters. Axelar employs quadratic voting in its consensus mechanism to mitigate this risk. In quadratic voting, voting power does not increase linearly with stake. To increase voting power, Axelar validators must exponentially increase their delegated stake.

Additionally, Axelar applies network functionalities that can pause traffic from malicious interconnected chains and limit throughput over a period through contract restrictions. Axelar's hub-and-spoke network structure enhances the efficiency of these functionalities. During the Multichain collapse, cross-chain exchange services built using Axelar were able to maintain security and liquidity by isolating compromised connections.

(3) Axelar Virtual Machine

The launch of the Axelar Virtual Machine (AVM) will expand Axelar's offerings from bridging and messaging 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 (like token conversions), helping to reduce overhead for developers and simplify user experiences. Developers can deploy contracts written in any language that can compile to WebAssembly (Wasm) on the AVM. Furthermore, the AVM is expected to play a key role in the token economics of Axelar's native token, AXL, aimed at expanding the network through the anticipated diffusion of Ethereum-based L2 blockchains (see the AXL token section below for details).

Since the AVM is permissionless, any developer can leverage it. The Axelar Foundation supports development teams in expanding the ecosystem, enhancing security, and designing interchain orchestration templates on the AVM. The first product under development is the Interchain Token Service (ITS), which is now available on the testnet. Other services supported by the AVM include the Interchain Amplifier and Interchain Maestro.

(4) Interchain Token Service (ITS)

ITS is a service designed to preserve the interchangeability and customization of native tokens across multiple blockchains. These preserved tokens are referred to as cross-chain tokens. This is a familiar feature for those who understand LayerZero's Omnichain Fungible Tokens and the IBC connection network using Interchain Accounts (ICA) and Interchain Queries (ICQ).

Unlike these alternatives, Axelar ITS supports standardized wrappers and standardized tokens; these features facilitate one-click deployments across multiple chains. ITS also provides native support for arbitrary data and rapid deterministic widgets.

With ITS, developers can deploy interchain tokens across multiple chains simultaneously and automate tasks such as supply management. Cross-chain tokens are supported by the security protocols of the Axelar network and can operate on any EVM-compatible chain connected to the Axelar network.

(5) Interchain Amplifier

Once launched, the Interchain Amplifier will enable developers to connect new blockchains to the Axelar network permissionlessly. This benefits new ecosystems, such as modular blockchains built on Ethereum, and dApps that wish to customize cross-chain processes.

(6) Interchain Maestro

Interchain Maestro is a set of orchestration contracts and templates that assist in designing, deploying, and managing 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

Like the internet, the crypto space consists of different networks. BGP and HTTP protocols enable these different networks to communicate to the best of their abilities: without guarantees, improvements, or added functionalities. An overlay network is built on top of existing networks, aiming to provide a richer and more seamless level of service. Examples of overlay networks include Akamai and Cloudflare.

Axelar can be viewed as an overlay network for blockchains. It employs 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) 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 the secure transmission of arbitrary data, including function calls that enable cross-blockchain composable liquidity and computation. For example, applications can bridge tokens and instructions, depositing them into contracts or exchanging them on DEXs, providing a one-click user experience regardless of blockchain boundaries.

Cross-Chain Gateway Protocol

The Cross-Chain Gateway Protocol (CGP) operates similarly to the internet's Border Gateway Protocol (BGP). BGP essentially serves as 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 situated above the 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 functionalities for the Axelar network:

1. 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 rapid deterministic widgets.
2. Paying transaction fees on connected networks. AXL tokens can be automatically converted into the gas tokens required by the connected chains.
3. Staking or delegating to participate in consensus and reward consensus participants.
4. Voting on governance proposals.

The token was launched in 2022, designed to allow permissionless use of the Axelar network. The initial supply of AXL is 1 billion tokens, which will be fully minted by 2026. The release schedule for the team, company, supporters, and community is planned for three months after the token issuance; the community sale of tokens will be released slightly earlier and at an accelerated pace.

Due to the issuance of staking rewards, AXL experiences inflation. However, this situation may change with the introduction of a new token economic model.

New Token Economics

As the Axelar network scales, the proposed new AXL token economics introduces a series of changes to enhance the utility and value capture of AXL. In the long term, with the increase in new chain activities, these changes may lead to overall deflation of AXL. These changes include adding a step in the process to burn gas between the gas receivers and the network.

Process: Gas receivers convert local tokens to AXL

Reducing Inflation Rate

Until recently, Axelar validators incentivized supporting more chain connections by linearly increasing by 0.75% for each external chain supported (such as EVM chains). This meant a total inflation rate of 11.5% (1% base inflation rate + 14 externally supported chains, each at 0.75%).

In October of this year, a new AXL token economic model was proposed, gradually reducing the reward per chain from 0.75% to 0.3%. This 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 would reduce the annual inflation rate from 11.5% to 5.2%. Since the proposal was published, two new chains (Scroll, followed by Centrifuge) have been added, bringing Axelar's current inflation rate to 5.8%.

Gas Burn Mechanism

Currently, gas fees paid in AXL are distributed to validators and stakers. The Axelar Foundation proposes to burn these fees, applying deflationary pressure to the total supply. This variable supply pressure could 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 voting from Axelar validators. Axelar is developing a more permissionless path that does not incur 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 insert new chains into the Axelar network. This essentially automated process will include a method to guide validator incentives by setting up an AXL-funded reward pool for early validators. These AXL-funded reward pools are necessary for new chains unless they already have significant transaction volume and can pass fees to validators as a substitute for rewards.

With Ethereum-based infrastructures like the dAppchain ecosystem and tools like Rollups-as-a-Service, launching new L2 blockchains on Ethereum will become easier. Axelar positions itself as a permissionless connectivity component to achieve the anticipated growth in this category. If the L2 category expands and the strategy succeeds, 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, by connecting to one chain in a multi-chain ecosystem, users can access the entire ecosystem, albeit not directly. For example, the connection with Avalanche provides a secure path to subnets, while the connection with Polkadot offers a secure path to parachains, and so on.

According to data from Axelarscan, at the time of this report's release, Polygon, Avalanche, and Osmosis were the top source and destination chains over the past 30 days; AXL, ETH, and USDC were the leading assets according to Axelarscan. EVM users are particularly active on Axelar, with 10 out of the top 15 active chains being EVM-based.

Ethereum Ecosystem

Ethereum's rollup-centric roadmap is still in its early stages, with new rollups and rollup development kits being regularly announced and released. Ethereum modularity may see hundreds of L2 and L3 networks emerge. Without full-stack interoperability between L2s, user experience and developer capabilities will be affected by the fragmentation of liquidity and users. Full-stack interoperability includes bridging any information/assets and permissionless overlay messaging. 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 by trading volume in the Cosmos. 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, which utilizes the validator sets of both networks for bidirectional security. While this may just be 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, i.e., bridging using wrapped tokens. Until recently, this was Axelar's primary use case. In September 2023, the use of GMP surpassed basic bridging for the first time in transaction counts and nominal transaction volume. Since then, the usage rate of GMP has consistently outpaced basic bridging.

As of the writing of this article, Axelar has executed over 1 million transactions, with a cumulative transaction volume nearing $7 billion.

Intent: Squid and MetaMask

Squid is a liquidity router based on Axelar, enabling cross-chain swaps and bridging using GMP. Recently, it implemented a feature called GMP Boost, achieving rapid finality. Standard cross-chain transactions typically take several minutes, as bridges must wait for a transaction on one chain to complete before acting on another chain (e.g., minting wrapped tokens). Essentially, GMP Boost allows dApps like Squid to deliver the required assets within seconds and assume the risk of chain reconstruction in exchange for a small fee.

Using off-chain paths to achieve on-chain results is an innovative application of intent. Standard transactions are imperative, explicitly listing all steps, while intent is declarative, focusing on the achieved outcome.

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 very challenging. Uniswap chose Axelar as one of the two interoperability platforms qualified to support cross-chain upgrades and deployed on Filecoin's smart contract blockchain, the Filecoin Virtual Machine (FVM), using Axelar.

Real-World Assets (RWA)

JPMorgan's Onyx recently announced a proof of concept that utilizes Axelar to connect the Apollo token fund on the Provenance blockchain with Onyx's digital asset blockchain, where Onyx applies logic for automated portfolio adjustments.

DeFi Pathways (DeFi Onramps): dYdX and Squid

At the time of writing, dYdX is launching its V4 version based on a dedicated application chain. As the largest perp swap DEX by trading volume, dYdX is using Axelar and Squid to make 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 in the Microsoft Azure marketplace. This allows companies using Azure to seamlessly connect with crypto applications, protocols, and blockchains.

VI. Future Outlook

There are suggestions to expand Axelar from dozens of chains to hundreds or even thousands. Secondary and modular Ethereum networks are a major focus of this strategy. The proposal outlines short-term, medium-term, and long-term expansion strategies.

The short-term strategy discussed in the AXL token section aims to reduce inflation rates while adding new external chains and increasing deflationary pressure through gas fee burning.

The medium-term strategy is based on the Axelar VM. The AVM will allow permissionless connections for new chains. Enabling AVM functionalities (like the Interchain Amplifier) can automatically handle most of the technical overhead required for new chain connections. Unlike the current system, which incentivizes validators to support new chains by increasing inflation rates, third-party resources can pool AXL to directly fund supporting validators.

The long-term strategy concerns lightweight clients. Since lightweight clients are also connected to the Interchain Amplifier, no external validators are needed. Only relayers require incentives, as packets still need to be relayed.

VII. Competitive Landscape

Many protocols and teams are focused on interoperability, but most have a limited scope. Axelar's full-stack interoperability bridges any information/assets, arbitrary data (GMP), and permissionless overlay messaging (programmability). Most interoperability solutions are essentially bridges that can only transfer wrapped assets. Some interoperability solutions can transmit arbitrary data. However, few, like Axelar, possess overlay network functionalities that can program cross-chain logic into cross-chain environments.

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 distinctions between Axelar and these two solutions is Axelar's permissionless validator set. It uses this set of validators to facilitate interchain messaging rather than multi-signature validation.

In other interoperability solutions using decentralized validator sets, Axelar validators can choose which chains to support. This diversifies the validator set supporting Axelar's security model, as different ideological niches can form to support certain networks. Mandating the entire validator set to validate is not inherently good or bad, but it reduces the participation of opinionated operators who may 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 flexible, customizable configurations of oracles and relayers but ultimately operates on a 2-to-2 multi-signature basis between these two external entities (oracles and relayers). In contrast, Axelar has built a complete set of validators to ensure the security of interchain messages 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. Compared to a single Axelar validator, these standard configurations of oracles and relayers are trusted more, as validating Axelar messages requires a two-thirds majority vote.

Chainlink

Chainlink is a mature DeFi price oracle provider, but Chainlink CCIP is a standalone new product that is not yet live. Like LayerZero, CCIP relies on multi-signature validation to verify, sort, and transmit interchain information. CCIP relies on Chainlink oracles, which can operate permissionlessly but allow data to be incorporated into Chainlink's price reference sources. 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 functionalities for cross-chain programmability. The upcoming Axelar VM will be at the core of many of these new features, such as the Interchain Token Service (ITS). Other functionalities and connections will be established by chains wishing to leverage cross-chain capabilities.

The development of the Axelar VM and Interchain Token Service (ITS) will complement Axelar's existing general messaging and transfer protocols, but another impending change involves the economics of the ecosystem. The AXL token proposes several transformative suggestions to position the network economically, accommodating dozens, hundreds, or even thousands of new networks. Modular roadmaps like Ethereum's create demand for such large-scale connectivity.