Key insights
Axelar has the ability to program cross-chain logic and transfer arbitrary data;
The upcoming Axelar VM will allow permissionless connections to new chains;
Axelar’s cross-chain token service is under testing and supports cross-chain transfers of local tokens rather than encapsulated tokens;
Updated AXL token economics model. This model allows the network to sustainably support more chains by reducing the token inflation rate with each additional chain;
Currently, 10 of the top 15 chains ranked by activity on Axelar are based on EVM. Axelar is focused on connecting more EVM-compatible and Ethereum-based chains.
background
The number and diversity of blockchains continues to expand with the growth of modular blockchains, Layer 2, and application-specific chains. However, the market lacks solutions for developers to span multiple multi-chain ecosystems in an economical and efficient manner. 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 leverages various Cosmos technologies to achieve interoperability with Ethereum and other networks. Axelar’s technology is designed to allow for more complex cross-chain functionality, beyond simply moving wrapped assets to different blockchains. Axelar addresses this problem by focusing on full-stack interoperability — full-stack means that Axelar not only supports bridging of any information/asset, but also supports permissionless overlay programming, enabling smart contracts and DApps across networks.
The Axelar community is working to expand the number of connected networks (55 as of publishing) through a three-pronged approach:
Adjust the economic structure of the network;
Released Axelar VM to support permissionless connection of projects;
And explore more efficient solutions, such as lightweight clients.
The initiatives aim to connect Axelar to hundreds of chains.
technology
Axelar has three main components:
Distributed network: mainly built on open source Cosmos technology.
Gateway Smart Contract: Provides connectivity between the Axelar Network and its interconnected external chains.
A software development kit (SDK) of developer tools and APIs, including the Axelarscan block explorer for tracking cross-chain transactions.
Network Architecture
The Axelar Network is built with the Cosmos SDK, CometBFT, and the 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 a custom application layer or state machine, 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 networking and consensus layers through two main components:
The consensus algorithm, namely Tendermint;
Socket protocol, 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 immediate finality and Byzantine fault tolerance. While this particular 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 the EVM and the Cosmos chain.
Consensus & Security Solutions
The Axelar network uses a Delegated Proof of Stake (DPoS) consensus mechanism. Validators generate new blocks, participate in multi-party signatures, and vote on external chain states. Token holders stake AXL by delegating tokens to a validator’s staking pool. Only the top 75 validators are in the active set, and this parameter can be adjusted through on-chain governance. Delegation to validators and running validators are permissionless.
Every PoS consensus mechanism carries the risk of concentrating voting power in the hands of a few dominant parties. Axelar mitigates this risk by adopting a quadratic voting mechanism, where voting power does not increase linearly with stake. To increase their voting power, Axelar validators must exponentially increase their delegated stake.
Additionally, Axelar applies network features that allow it to pause traffic from malicious interconnected chains and employs contractual limits to restrict the maximum amount that can be transferred in a period of time. Axelar’s hub-and-spoke network topology improves the efficiency of these features. During a multi-chain crash, cross-chain exchange services built with Axelar were able to remain secure and liquid by isolating compromised connections.
Shoulders WC
The introduction of Axelar VM (AVM) expands Axelar’s capabilities from bridging and messaging 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 developer overhead and simplify the user experience by abstracting cross-chain tasks such as token conversions. Developers can deploy contracts on AVM using any language that compiles to WebAssembly (Wasm). In addition, AVM is expected to play a key role in the token economic model of Axelar’s native token AXL.
Since the AVM is permissionless, any developer can leverage it. The Axelar Foundation supports development teams working on expanding the ecosystem, improving security, and designing interchain orchestration templates on the AVM. The first product is the Interchain Token Service (ITS), which is currently available on the testnet. Other services enabled by the AVM include the Interchain Amplifier and Interchain Master.
Cross-chain token services
The Interchain Token Service (ITS) is a service designed to preserve native token commonality and custom functionality across multiple blockchains. These preserved tokens are called Interchain Tokens. This will be a familiar feature for those familiar with LayerZero’s Omnichain Fungible Tokens and IBC connecting networks using Interchain Accounts (ICA) and Interchain Queries (ICQ).
Unlike these alternatives, Axelar ITS supports canonical packaging and standardized tokens; these features enable one-click deployment to multiple chains. ITS also natively supports arbitrary data and fast finality devices.
With ITS, developers can deploy cross-chain tokens on multiple chains simultaneously and automate tasks such as supply management. Cross-chain tokens are backed by the Axelar Network’s security protocol and can run on any EVM-compatible chain connected to the Axelar Network.
Interchain Amplifier
Interchain Amplifier will enable developers to permissionlessly connect new blockchains to the Axelar network. This will benefit new ecosystems, such as those building modular blockchains on Ethereum, as well as DApps that want to customize cross-chain processes.
Interchain Maestro
Interchain Maestro is a set of orchestration contracts and templates that help design, deploy, and manage DApps on multiple chains. The Interchain Token Service (ITS) is a component within the broader scope of Interchain Maestro.
Axelar is an overlay network
The Internet, like crypto space, is made up of a variety of networks. The protocols BGP and HTTP enable these various networks to communicate on top of each other, but with no guarantees, improvements, or added functionality. Overlay networks are networks that are built on top of existing networks to provide richer and more seamless service levels. Examples of overlay networks include Akamai and Cloudflare.
Axelar can be viewed as an overlay network for blockchains. Axelar employs various cross-chain communication protocols and smart contract logic to facilitate its connectivity and interoperability.
Universal Messaging
Since its mainnet launch in May 2022, Generalized Messaging (GMP) has allowed applications connected to Axelar to transfer any payload between different chains, including function calls and other logic. GMP leverages Axelar's validator set for security and a decentralized protocol for routing and conversion. Unlike other cross-chain bridges, GMP supports the secure transmission of arbitrary data, including function calls, enabling composable liquidity and computation between different blockchains. For example, an application can bridge tokens and instructions across chains, deposit them into a contract or exchange them on a decentralized exchange, enabling a one-click user experience without considering blockchain boundaries.
Cross-chain Gateway Protocol
The Cross-Chain Gateway Protocol (CGP) operates similarly to the Internet’s Border Gateway Protocol (BGP). BGP is essentially a relay center designed to securely pass 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 that sits on top of CGP. CTP allows DApps to interact with various blockchains, enabling the transmission of cross-chain assets and arbitrary messages.
AXL Token Economics
The AXL token provides the following functions to the Axelar network:
Pay transaction fees on Axelar. This includes fees for services built on top of the Axelar programmable interoperability layer, such as developer automation, cross-chain gas conversions, and fast finality gadgets;
Pay transaction fees on connected networks. AXL tokens can be automatically converted into the required Gas tokens on the connected chain;
Participate in consensus through staking or delegation and reward consensus participants;
Vote on governance proposals.
The AXL token is launched in 2022 and is designed to make Axelar's network permissionless. The initial supply of AXL is 1 billion and will be fully released in 2026. The issuance for teams, companies, supporters and community projects is scheduled to start three months after the token launch; the issuance of community sale tokens starts earlier.
There is some inflation in AXL tokens due to the issuance of staking rewards. But this may change as new token economic models are proposed.
New Token Economic Model
The updated AXL token economics model introduces a series of changes designed to increase the utility and value capture of the AXL token as the Axelar network scales. These changes could make AXL deflationary in general in the long term and as activity on new chains increases. These changes include adding a step in the process to burn gas between the gas receiver and the network.
Lower inflation rate
Until recently, Axelar validators were incentivized to support more chains by linearly increasing their rewards by 0.75% for each additional externally supported chain (e.g. the EVM chain). This meant that the total inflation rate was 11.5% (1% base inflation + 0.75% for 14 externally supported chains each).
In October, a new AXL token economic model was proposed, which aims to gradually reduce the rewards per chain from 0.75% to 0.3%. The proposal passed an on-chain vote and will gradually take effect, eventually locking in on December 8, 2023. This will reduce the annual inflation rate from 11.5% to 5.2%, based on an equivalent number of chains. Since the proposal was released, Axelar has added two new chains (Scroll and Centrifuge), bringing Axelar's current inflation rate to 5.8%.
Gas combustion mechanism
Currently, gas fees paid in AXL are distributed among validators and stakers. The Axelar Foundation's proposal would burn these fees, exerting deflationary pressure on the total supply. This variable supply pressure could deflate the network with enough activity.
Increased demand for new chain connections
Currently, it is a complex process for new chains to connect to the Axelar network. This requires support from Axelar developers and votes from Axelar validators. Axelar is developing a more permissionless path that is non-inflationary and could create buying demand for AXL tokens.
Once developed, Interchain Amplifier will allow developers to instantiate a series of smart contract templates to plug new chains into the Axelar network. This largely automated process will include a way to kick-start validator incentives by setting up reward pools funded by AXL to provide rewards to early validators. These AXL-funded reward pools will be necessary for new chains, except for those that already have a lot of transaction volume and where fees can be routed to validators instead of rewards.
With Ethereum-based infrastructure like the DApp Chain ecosystem and tools like Rollups-as-a-Service, it will be easier to launch new L2 blockchains on Ethereum. Axelar is positioning itself as the permissionless connectivity component for expected growth. If the L2 category expands and the strategy is successful, it could become a significant driver of demand for the AXL token.
Current state of the Axelar ecosystem
Connected Ecosystem
Axelar is known for its interconnectivity within and between the Cosmos and Ethereum ecosystems. Axelar also has the ability to connect to unique VMs and consensus mechanisms. As of the time of reporting, Axelar has connected 55 chains, including Arbitrum, Avalanche, Base, BNB Chain, Ethereum, Optimism, Polkadot, Polygon, Scroll, Sui, and various Cosmos-based chains. In addition, Axelar's connection to one chain in a multi-chain ecosystem indirectly provides users with access to the entire ecosystem. For example, connecting to Avalanche provides a secure path to a subnet, while connecting to Polkadot provides a secure path to a parachain, and so on.
According to Axelarscan, Polygon, Avalanche and Osmosis were the most active source and destination chains during the reporting period, while AXL, ETH and USDC were the most popular assets. EVM users were particularly active on Axelar, with 10 of the top 15 chains based on activity being EVM-based.
Ethereum Ecosystem
Ethereum’s Rollup-centric roadmap is still in its early stages, with new Rollups and Rollup development tools announced and released regularly. Ethereum’s modularity could see hundreds of L2 and L3 networks. In the absence of full-stack interoperability between L2s, user experience and developer capabilities will suffer due to fragmentation of liquidity and users. Full-stack interoperability includes bridging any information/asset and permissionless overlay messaging. The Axelar Network meets both criteria through its existing communication protocol and the new AVM.
Cosmos Ecosystem
Axelar is the initiator of most of the cross-chain activity on Osmosis, the largest Cosmos decentralized exchange by transaction volume. Due to the symbiotic relationship between the two networks, community members have even explored forms of shared security. One of these is Mesh Security, a two-way security that leverages the validator sets of both networks. While this may only be a concept, collaborations with other ecosystems are already happening. In early 2023, a portion of AXL tokens were airdropped to Osmosis users.
Axelar Supported Applications
Axelar is already integrated and utilized by various applications and services:
DeFi (decentralized finance): dYdX, Frax Finance, Lido, PancakeSwap, Uniswap;
Enterprises: Mastercard, Microsoft, JPMorgan Chase’s Onyx;
Loans against real assets (RWAs): Centrifuge, Circle, Ondo Finance, Provenance;
Wallets: Blockchain.com, Ledger, MetaMask, TrustWallet.
Cross-chain example
Axelar’s gateway smart contract allows cross-chain token transfers, i.e. cross-chain bridging using wrapped tokens. In September 2023, GMP usage surpassed basic bridging for the first time in terms of both number of transactions and notional volume. GMP has been ahead of basic bridging usage since then.
To date, Axelar has executed more than 1 million transactions with a cumulative transaction volume of nearly US$7 billion.
Intent: Squid and MetaMask
Squid is an Axelar-based liquidity router that uses GMP for cross-chain swaps and bridging. Recently, Squid implemented a feature called GMP Boost, which enables fast finality. Normal cross-chain transactions usually take several minutes because the bridge needs to wait for transaction finality on one chain before performing actions on the other chain (such as minting wrapped tokens). Essentially, GMP Boost allows dApps like Squid to deliver the required assets in seconds in exchange for a tip to cover the chain reorganization risk.
Leveraging off-chain paths to achieve on-chain results is an innovative application of intent. Unlike standard transactions, which have clear instructions and clearly list all steps, intent is declarative and focuses on the results achieved.
Cross-chain governance: Filecoin and Uniswap
Uniswap was originally built on Ethereum and later expanded to multiple chains. This made it difficult to deploy updates outside of Ethereum. After selecting Axelar as one of two interoperability platforms that support cross-chain upgrades, Uniswap used Axelar to deploy on Filecoin’s smart contract blockchain, Filecoin Virtual Machine (FVM).
Real World Assets (RWAs): JPMorgan and Provenance
JPMorgan-owned Onyx recently announced a proof-of-concept project in which Axelar was used to connect Apollo funds tokenized on the Provenance blockchain with the Onyx digital asset blockchain, where Onyx applied logic for automated portfolio rebalancing.
DeFi entry: dYdX and Squid
dYdX launches V4, built on a dedicated appchain. dYdX, the largest perpetual exchange decentralized exchange by volume, is using Axelar and Squid to facilitate streamlined deposits from any connected chain.
Connecting traditional technology
Axelar and Microsoft announced a partnership in 2023 to integrate Axelar into Microsoft’s Azure Marketplace as an interoperability provider. The partnership enables companies using Azure to seamlessly connect to crypto applications, protocols, and blockchains.
route map
The new proposal aims to scale Axelar from dozens of chains to hundreds or even thousands of chains. The strategy focuses on L2 and modular Ethereum networks. The proposal includes short-term, medium-term and long-term expansion strategies.
The short-term strategy was discussed above in the AXL token section. This strategy aims to reduce inflation as new external chains are added and increase deflationary pressure by burning transaction fees.
The medium-term strategy is based on the Axelar Virtual Machine. The AVM will allow permissionless connection of new chains. AVM-enabled features, 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 pool AXL tokens to directly fund support for validators.
The long-term strategy focuses on light clients. Given that light clients also connect to the Interchain Amplifier, the need for external validators will be eliminated. Only relayers need to be incentivized since packets still need to be relayed.
Competitive Landscape
Many protocols and teams are focused on interoperability, but they mostly view this problem in a more limited scope. Axelar’s full-stack interoperability bridges any information/asset, arbitrary data (GMP), and permissionless overlay messaging (programmability). Most interoperability solutions are bridging in nature and can only transfer encapsulated assets. There are other interoperability solutions that can transfer arbitrary data. But few solutions, other than Axelar, have the functionality 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. Nonetheless, 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 messaging, rather than using multi-signatures.
In other interoperability solutions that use 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. Mandating that the entire validator set validates is not inherently good or bad, but it may reduce participation from opinionated operators with their own agendas, potentially limiting scalability. Axelar currently has more validators than any other interoperability network (75 at the time of writing).
LayerZero
LayerZero allows for flexible and customized configurations with oracles and relayers, but ultimately operates on a 2-of-2 multisig basis of these two off-chain entities (oracle and relayer). Axelar, on the other hand, has built an entire validator set for securing cross-chain messages between chains. LayerZero’s default configuration relies on oracles managed by Google and relayers operated by LayerZero Labs. Protocols can specify custom validation libraries, oracles, and relayers, making decentralization implementation-dependent. More trust is placed on these standard configuration oracles and relayers than on individual Axelar validators, as a two-thirds majority vote is required to validate an Axelar message.
Chain link
Chainlink is a well-known provider of DeFi price oracles, but Chainlink CCIP is a separate and yet-to-be-launched new product. Similar to LayerZero, CCIP relies on multi-signatures to verify, order, and deliver cross-chain messages. CCIP relies on Chainlink oracles, which are free to operate but require 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 separate node roles (such as oracle nodes, execution nodes, and risk management nodes).
Summarize
As Axelar adds new features for cross-chain programmability, it continues to add more differentiation than traditional bridge solutions. The upcoming Axelar VM will be at the heart of many new features, such as cross-chain token services.
The development of the Axelar Virtual Machine and cross-chain services will complement Axelar’s existing general purpose messaging and transfer protocols. There are several proposed changes to the AXL token to make the network economically adaptable to dozens, hundreds, or even thousands of new networks. The modular roadmap of blockchains like Ethereum demonstrates the need for connectivity at this scale.