Original title: 《Understanding Axelar: A Comprehensive Overview》

Original author: Red Sheehan

Original source: Messari

Key points

1. Axelar is more than just a cross-chain bridge: it provides the ability to program cross-chain logic and pass arbitrary data.

2. The upcoming Axelar virtual machine will allow permissionless connections for new chains.

3. Axelar's inter-chain token service has been launched on the testnet, supporting cross-chain transfers of native tokens rather than wrapped tokens.

4. New token economics have been proposed for AXL. They will enable the network to sustainably support more chains by reducing the token inflation rate for each additional chain.

5. As of press time, 10 of Axelar's top 15 most active chains are based on EVM. Axelar is focused on joining more chains based on EVM and Ethereum.

Background

The number and diversity of blockchains are expanding with the growth of modular blockchains, L2 rollups, and application-specific chains. However, the market lacks solutions that allow developers to cost-effectively span 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 mainly easy-to-use plug-and-play integration solutions. Therefore, Axelar is a good choice for dApps that want to build fast cross-chain functionality.

Founded in 2020, Axelar is built on Cosmos technology to provide interoperability with Ethereum and other networks. From the beginning, Axelar was intended to be more than just a Cosmos interoperability hub.

The fragmentation of liquidity, services, and users creates friction between ecosystems and sovereign networks. Axelar’s technology is designed to enable cross-chain functionality that is more complex than simply moving wrapped assets to different blockchains. Axelar addresses this by focusing on full-stack interoperability — full-stack meaning that Axelar supports not only bridging any information/asset, 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 at press time) by a. adjusting the economic structure of the networks, b. releasing the Axelar Virtual Machine to support permissionless connectivity, and c. exploring more efficient solutions such as light clients. These initiatives are designed to connect Axelar to several chains.

Technology

Axelar consists of three main components:

1. A decentralized network. Mainly developed based on the open source Cosmos technology.

2. A set of gateway smart contracts that provide connectivity between the Axelar network and its interconnected external chains.

3. A software development kit (SDK) consisting of developer tools and APIs, including a block explorer Axelarscan for tracking cross-chain transactions.

Network Architecture

Axelar Network is built using 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 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:

1. A consensus algorithm, namely Tendermint.

2. A socket protocol, namely Application Blockchain Interface (ABCI).

Tendermint is used to verify requests on the source chain and confirm changes on the target chain. Tendermint consensus provides immediate finality and Byzantine fault tolerance. While this specific consensus method can only verify 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 and Security Path

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 gain AXL equity by delegating tokens to the validator's equity pool. Only the top 75 validators are in the active set, a parameter that can be adjusted through on-chain governance. Delegating to a validator and running a validator are both permissionless.

Every PoS consensus mechanism carries the risk of concentrating voting power among a few dominant stakeholders. Axelar mitigates this risk through quadratic voting in its consensus mechanism. With quadratic voting, voting power does not increase linearly with the amount staked. For Axelar validators to increase their voting power, they must increase their staked share exponentially.

In addition, Axelar applies network features that can pause traffic to malicious interchains and limit the amount of traffic that can be transmitted for a period of time. Axelar's hub-and-spoke network topology improves the efficiency of these features. During the Multichain crash, cross-chain swap services built with Axelar were able to remain secure and liquid by isolating compromised connections.

Axelar Virtual Machine

The launch of the Axelar Virtual Machine (AVM) expands Axelar's offering 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 can help reduce developer overhead and simplify the user experience by abstracting away cross-chain tasks such as token conversions. Developers can deploy contracts on the AVM written in any language that compiles to WebAssembly (Wasm). In addition, the AVM is expected to play a key role in the tokenomics of AXL, Axelar's native token. Axelar’s token is designed to scale the network with the expected surge in Ethereum-based L2 blockchains (see the AXL Token section below for more information).

Because the AVM is permissionless, any developer can leverage it. The Axelar Foundation supports development teams in expanding the ecosystem, improving 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 Interchain Amplifiers and Interchain Masters.

Interchain Token Service (ITS)

ITS is a service designed to preserve fungibility and custom functionality for native tokens on multiple blockchains. These reserved tokens are called interchain tokens. This will be a familiar feature to those familiar with LayerZero’s fully-chain fungible tokens and IBC-connected networks using Interchain Accounts (ICA) and Interchain Queries (ICQ).

Unlike these alternatives, Axelar ITS supports canonical wrappers and standardized tokens; these features enable one-click deployment across multiple chains. ITS also provides native support for arbitrary data and fast finality gadgets.

With ITS, developers can deploy interchain tokens on multiple chains simultaneously and automate tasks, such as managing supply. Interchain tokens are backed by the Axelar Network’s security protocol and can run on any EVM-compatible chain connected to Axelar’s network.

Interchain Amplifiers

The launch of Interchain Amplifiers will enable developers to permissionlessly connect new blockchains to the Axelar Network. This benefits new ecosystems, such as modular blockchains built on Ethereum, and dApps that want to customize cross-chain flows.

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.

Axelar is an overlay network

The Internet, like the crypto space, is made up of disparate networks. The BGP and HTTP protocols enable these disparate networks to communicate on a best-effort basis: no guarantees, improvements, or added features are required. An overlay network is a network built on top of an existing network to provide a richer, more seamless level of service. Examples of overlay networks include Akamai and Cloudflare.

Axelar can be thought of as an overlay network for blockchains. It employs a variety of cross-chain communication protocols and smart contract logic to facilitate their connectivity and interoperability.

Generalized Messaging

Since its mainnet launch in May 2022, Generalized Messaging (GMP) allows Axelar-connected applications to move any payload across chains, including function calls and other logic. GMP uses Axelar’s validator set for security and a decentralized protocol for routing and translation. Unlike basic cross-chain bridges, it supports the secure transfer of arbitrary data, including function calls that enable composable liquidity and cross-blockchain computation. For example, an application can bridge a token with instructions to deposit it into a contract or exchange it on a DEX, regardless of blockchain boundaries, providing a one-click user experience.

Cross-Chain Gateway Protocol

The Cross-Chain Gateway Protocol (CGP) is similar to the Internet’s Border Gateway Protocol (BGP). BGP is essentially a relay hub designed to securely pass data between Internet networks, just like 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 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 and achieve cross-chain transfer of assets and arbitrary messages.

AXL Token

The AXL token provides the following functions for the Axelar network:

1. Pay transaction fees on Axelar. This includes fees for services built on Axelar's programmable interoperability layer, such as developer automation, cross-chain gas conversion, and fast finality gadgets.

2. Pay transaction fees on connected networks. AXL tokens can be automatically converted into gas tokens required to connect chains.

3. Stake or delegate to participate in consensus and reward consensus participants.

4. Vote on governance proposals.

The token was launched in 2022 and aims to make Axelar's network permissionless. The initial supply of AXL is 1 billion, which will be fully unlocked in 2026. Unlocks for teams, companies, supporters, and community projects begin three months after token launch; community sale token unlocks begin early and at an accelerated pace.

AXL is inflationary due to the issuance of staking rewards. However, this may change with the proposed new token economics model.

New Token Economics

The proposed new AXL token economics introduces a series of changes to increase the utility and value capture of AXL as the Axelar network scales. In the long run, these changes may make AXL overall deflationary as activity on the new chain increases. The changes include adding a step in the process where gas is burned between the Gas Receiver and the network.

Flow: Gas Receiver converts native tokens to AXL

Lower inflation

Not long ago, Axelar validators were also incentivized to support more chain connections by linearly increasing rewards by 0.75% for each externally supported chain (such as the EVM chain). This means a total inflation of 11.5% (1% base inflation + 14 externally supported chains at 0.75% each).

In October, a new AXL token economics was proposed that would gradually reduce rewards from 0.75% to 0.3% per chain. The proposal was approved via an on-chain vote and is gradually effective, with the final stage locked on December 8, 2023. This would reduce the annual inflation rate from 11.5% to 5.2%, based on an equal number of chains. Since the proposal was published, two new chains have been added (Scroll, then Centrifuge), bringing Axelar's current inflation rate to 5.8%.

Gas Burning Mechanism

Currently, gas fees paid in AXL are distributed between validators and stakeholders. The Axelar Foundation’s proposal would instead burn these fees, exerting deflationary pressure on the total supply. This variable supply pressure could potentially deflate the network if there is enough on-chain activity.

Increased Demand for New Chains to Connect

Currently, connecting a new chain to the Axelar network is a complex process. It requires the support of Axelar developers and the votes of Axelar validators. Axelar is developing a more permissionless and non-inflationary path that could give buying momentum to AXL tokens.

Once fully developed, the 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 bootstrap validator incentives by establishing AXL-funded reward pools for early validator rewards. These AXL-funded reward pools are necessary for new chains, with the exception of those that already have significant transaction volume, where fees generated by their large volumes of transactions can be given to validators in lieu of rewards.

With Ethereum's infrastructure, such as the dAppchain ecosystem and tools like Rollups-a-Service, it will be easier to launch new L2 blockchains on Ethereum. Axelar is positioning itself as a permissionless connection component to achieve the expected growth in this category. If the L2 category expands and the strategy is successful, it may become a significant driver of AXL demand.

Axelar Ecosystem Overview

Connected Ecosystems

Axelar is known for its connectivity within and between the Cosmos and Ethereum ecosystems. However, it also has the ability to connect with unique virtual machines and consensus mechanisms. At the time of writing, Axelar has 55 connected chains, including Arbitrum, Avalanche, Base, BNB Chain, Ethereum, Optimism, Polkadot, Polygon, Scroll, Sui, and various Cosmos-based chains. In addition, connecting to one chain in a multi-chain ecosystem gives users access to the entire ecosystem, albeit not directly. For example, a connection to Avalanche provides a secure path to a subnet, while a connection to Polkadot provides a secure path to a parachain, and so on.

As of press time, Polygon, Avalanche, and Osmosis are the largest source and destination chains in the past 30 days; Axelarscan data shows that AXL, ETH, and USDC are the largest assets. EVM users are particularly active on Axelar, with 10 of the top 15 chains in terms of activity being EVM-based.

Ethereum Ecosystem

Ethereum’s rollups-centric roadmap is still in its early stages, with new rollups and rollups development kits being released regularly. Ethereum modularization could lead to hundreds of L2 and L3 networks. Without full-stack interoperability between L2s, user experience and developer capabilities will suffer from liquidity and user fragmentation. 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 source of most cross-chain activity for Osmosis, the largest Cosmos DEX by volume. Due to the symbiotic relationship of the two networks, community members have even explored forms of shared security between them. One idea is mesh security, a two-way security that leverages the validator sets of both networks. While this may only be a concept, other ecosystem collaborations are already underway. A portion of AXL tokens were airdropped to Osmosis users in early 2023.

Axelar Applications

Axelar is already integrated and used by a range of different applications and services:

DeFi: dYdX, Frax Finance, Lido, PancakeSwap, Uniswap

Enterprises: Mastercard, Microsoft, Onyx by J.P. Morgan

RWAs: Centrifuge, Circle, Ondo Finance, Provenance

Wallets: Blockchain.com, Ledger, MetaMask, TrustWallet

Cross-chain Use Cases

Axelar’s Gateway Smart Contract (GMP) allows for cross-chain token transfers, i.e. bridging using wrapped tokens. Until recently, this was the main use case for Axelar. 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 cross-chain usage ever since.

As of press time, Axelar has executed over 1 million transactions with a cumulative transaction value of nearly $7 billion.

Intent: Squid and MetaMask

Squid is an Axelar-based liquidity router that uses GMP to enable cross-chain swaps and bridges. Recently, it implemented a feature called GMP Boost that enables fast finality. Normal cross-chain transactions usually take several minutes because the bridge waits for the finality of the transaction on one chain before performing an action (such as minting a wrapped token) in another chain. Essentially, GMP Boost allows dApps like Squid to deliver the assets they need in seconds, assuming the risk of chain reorganization in exchange for a small fee.

Using an off-chain path to achieve an on-chain outcome is an innovative application of intent. Unlike standard transactions, which are mandatory and explicitly outline all steps, intent is declarative and instead focuses on the outcome 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 the two interoperable platforms eligible to support cross-chain upgrades, Uniswap was deployed on Filecoin’s smart contract blockchain, the Filecoin Virtual Machine (FVM), using Axelar.

RWAs: J.P. Morgan and Provenance

JPMorgan’s Onyx recently announced a proof-of-concept where 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 Deposits: dYdX and Squid

At the time of writing, dYdX is in the process of launching its V4, which is built on a dedicated application chain. dYdX, the largest perpetual DEX by volume, is using Axelar and Squid to facilitate deposits to any connected chain.

Connecting Legacy Technologies

Axelar and Microsoft announced a partnership in 2023 to integrate Axelar as an interoperability provider for Microsoft Azure Marketplace. Doing so enables companies using Azure to seamlessly connect with crypto applications, protocols, and blockchains.

Roadmap

It is proposed to scale Axelar’s chains from dozens to hundreds or even thousands. L2 and modular Ethereum networks are the focus of this strategy. The proposal proposes a short-, mid-, and long-term scaling strategy.

The short-term strategy is explored in the AXL token section above. It aims to reduce inflation by adding new ex-chains and increase deflationary pressure by burning transaction fees.

The medium-term strategy is based on the Axelar VM. The AVM will allow permissionless connection of new chains. AVM-enabled features, such as inter-chain amplifiers, can automate much of the technical overhead required for new chain connections. Unlike the current system of increasing inflation to incentivize validators to support new chains, third-party sources can pool AXL to directly fund supporting validators.

The long-term strategy lies in light clients. Light clients will eliminate the need for external validators, given that they also connect to interchain amplifiers. Only relayers need to be incentivized, as data packets still need to be relayed.

Competitive Landscape

Many protocols and teams are focusing on interoperability, but most of them are looking at it in a more limited scope. Axelar's full-stack interoperability connects any information/asset, arbitrary data (GMP), and permissionless overlay messaging (programmability). Most interoperability solutions are essentially bridges that can only transfer wrapped assets. There are other interoperability solutions that can transfer arbitrary data. However, few, except Axelar, have features like overlay networks, which provide the ability to program cross-chain logic into a cross-chain environment.

LayerZero and Chainlink are two prominent competing cross-chain networks. LayerZero’s All-Chain 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. That said, one of the main differences between Axelar and these two solutions is Axelar’s permissionless validator set. Instead of multi-staking, it uses this set to facilitate inter-chain messaging.

In other interoperability solutions that use decentralized validator sets, Axelar validators can choose which chains they support. This allows for a more diverse validator set to support Axelar’s security model, as different ideological niches can form to support certain networks. Enforcing validation from the entire validator set is not inherently good or bad, but it may reduce participation from opinionated operators with their own agendas, potentially limiting scalability. Axelar has more validators than any other cross-chain network (75 at the time of this article).

LayerZero

LayerZero allows for flexible and custom configurations with oracles and relayers, but ultimately runs on a 2-out-of-2 multi-ig of these two off-chain entities (oracles and relayers). Axelar, on the other hand, has built a full set of validators to sit between chains and secure inter-chain messages. LayerZero's default configuration relies on oracles managed by Google and relayers operated by LayerZeroLabs. Protocols can specify custom validation libraries, oracles, and relayers, which makes decentralization dependent on specific implementations. People have more trust in these standard configurations of oracles and relayers than a single Axelar validator, as a two-thirds voting majority is required to verify Axelar messages.

Chainlink

Chainlink is an established provider of DeFi price feed oracles, but Chainlink CCIP is a new, independent product that has not yet been launched. Like LayerZero, CCIP relies on multisig to verify, order, and deliver interchain messages. CCIP relies on Chainlink oracles, which are not allowed to run, but are allowed to include data in Chainlink's price reference feed. In contrast, Axelar's permissionless validator set lets validators serve all roles instead of separating node roles (i.e. oracle nodes, execution nodes, and risk management nodes).

Summary

Axelar continues to distance itself from classic bridging, adding new features for cross-chain programmability. The upcoming Axelar Virtual Machine will be at the core of many new features, such as inter-chain token services. Other features and connections will be built at will by chains that wish to take advantage of cross-chain capabilities.

The development of the Axelar VM and interchain services will complement Axelar’s existing general purpose messaging and transport protocols, but another upcoming change concerns the economics of the ecosystem. There are several proposed changes to the AXL token to economically position the network to accommodate dozens, hundreds, or even thousands of new networks. Modular roadmaps, like Ethereum’s, are presenting the need for this scale of connectivity.

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