Original Title: "Metrics Ventures Research Report | Layout of the Entire Chain Narrative: Why Axelar is the Most Market-Needed Full-Chain Protocol?"

Original Author: Charlotte, Kevin, Metrics Ventures

TL;DR:

1. Axelar belongs to the two major narratives of the entire chain and Cosmos ecology. The entire chain track will gain more growth space and market attention as trading volume and the number of public chains increase with the bull market conditions. A more direct catalyst may come from the issuance of Layerzero and Wormhole. The Cosmos ecology is developing healthily, and the widespread ecology by the end of 2023 has also attracted market attention to the Cosmos ecology.

2. Axelar has a strong technological advantage in the entire chain track and will become a core target in the narrative of the entire chain. Axelar has achieved interoperability between 56 chains, surpassing competitors such as Layerzero; GMP and AVM simplify the process of multi-chain development for developers, helping them achieve full-chain contract deployment and liquidity integration.

3. In this cycle, the cross-chain protocol that can achieve full-chain cross-chain deployment is basically only an external verification bridge. Compared with similar cross-chain protocols, Axelar has satisfactory performance in terms of security, number of cross-chains, and number of integrated dApps. Compared with direct competitors Layerzero and Wormhole, Axelar is far below their first-level valuations.

4. Axelar is the main channel connecting the Cosmos ecosystem with EVM chains, especially the connection between Osmosis and EVM chains. As a liquidity gateway between the Cosmos ecosystem and EVM chains, it will directly benefit from the growth of the Cosmos ecosystem.

1 Fundamental Analysis: Axelar unlocks more cross-chain possibilities

1.1 Axelar Cross-Chain 101

Axelar is developed based on Cosmos SDK and is compatible with all EVM chains. It is an application chain aimed at connecting all blockchains and achieving true interoperability, supporting bridging of any information/assets. In terms of implementation, Axelar belongs to the external verification-based cross-chain protocol and is itself a complete PoS public chain with an independent decentralized network and validators.

Axelar adopts a central radiation topology architecture, similar to the Hub-Zone topology relationship in the Cosmos ecosystem. Each public chain is directly connected to Axelar (the hub) to achieve indirect connection instead of connecting point-to-point, reducing the number and complexity of connections and improving the scalability of the number of connections.

Regarding the specific implementation of Axelar, its technology stack mainly includes three key components: decentralized network/gateway smart contracts/APIs and developer tools. The decentralized network serves as the trust and transport layer for Axelar's cross-chain solution, consisting of a dynamic and decentralized group of validators responsible for verifying on-chain events and executing read/write operations on gateway smart contracts deployed on connected public chains. The gateway smart contracts, together with the decentralized network, form the core infrastructure layer above the connected blockchains. Validators monitor the gateway smart contracts on the source chain, read transactions, and then reach consensus on the validity of the transaction before writing it to the gateway on the target chain for cross-chain transactions. APIs and developer tools are the application development layer, enabling developers to easily add universal interoperability to their blockchains and applications.

For cross-chain protocols, security is the most critical requirement. Axelar primarily ensures the security of the system through three mechanisms:

First, the equity proof consensus (PoS) guaranteed by $AXL is a mechanism for external validators to reach consensus on cross-chain transactions. The security of Axelar's cross-chain fundamentally depends on the security of the Axelar public chain under PoS consensus. It relies on a dynamic and permissionless validator set, which has higher security compared to external validation bridges that rely on PoA or multi-signature.

Second, Quadratic Voting further enhances the decentralization of consensus mechanisms. Quadratic Voting means that the cost of voting is equal to the square of the number of votes, which is used to alleviate the threat to network security caused by oligopoly and prevent monopolistic parties with the majority of tokens from censoring transactions. Axelar implemented Quadratic Voting to verify and process cross-chain transactions in the Maeve upgrade at the end of August 2022.

Third, in addition to the consensus mechanism, other security measures include rate limiting and network key rotation. The Axelar gateway has rate limiting functionality, which limits the amount of each asset that can be transferred within a given time interval. In addition, validators are encouraged to rotate their keys every two months to protect the network from persistent attackers. Furthermore, both the Axelar network and contracts are 100% open source, and a bug bounty program will incentivize inspection and submission of potential vulnerabilities.

1.2 General Message Passing (GMP)

Universal message passing goes beyond the concept of bridging assets, allowing developers to build native cross-chain applications and achieve chain abstraction for users to perform cross-chain function calls and state synchronization. The implementation process and working principle of Axelar GMP are as follows:

Users initiate a call on the source chain, which will enter the Axelar gateway contract from the source chain and be transmitted to Axelar's decentralized network. Axelar's validators confirm the call, deduct the usage fee, and prepare to initiate a transaction on the target chain. Once this call is approved, it will enter the target chain through the gateway on the target chain and eventually be executed. This Gateway-to-Gateway process takes only about 120 seconds to complete and is verified and secured by Axelar's PoS mechanism.

1.3 Axaler Virtual Machine (AVM)

On the basis of general message transmission, Axelar is becoming a cross-chain underlying protocol for Dapp development. To improve customization and simplify the process of multi-chain development, Axelar has developed AVM, which, with the support of Cosmwasm, transforms interoperability into a programmable layer, allowing developers to write smart contracts on Axelar. Smart contracts can abstract cross-chain tasks, thereby simplifying the user experience. Currently, three functions have been implemented based on AVM.

· Interchain Amplifier: Allows developers to connect to the Axelar network without permission, by paying the cost of establishing a connection, and connect to all chains in the Axelar ecosystem, thus "amplifying" resources. Unlicensed connections will promote rapid expansion of the ecosystem connected by Axelar.

· Interchain Maestro: If developers want to deploy contracts on multiple chains, they need to repeat the deployment process multiple times, which consumes a lot of time and cost. Interchain Maestro allows developers to build a contract once and run it on multiple chains, reducing the cost of developers extending or cloning contracts to other chains.

· Interchain Token Service: It is a component of Interchain Master and was released on the testnet in July 2023. It allows developers to easily deploy cross-chain tokens, reducing the cost of deploying tokens on multiple chains. These tokens can achieve interoperability, solving the problem of fragmented liquidity across multiple chains. Based on this, it can improve DeFi liquidity, simplify cross-chain liquidity mining and staking, allow cross-chain collateral, and create chain-agnostic wallets. Sushi is one of the earliest applications to adopt Interchain Token Service.

1.4 Token Economics: New Proposal Will Effectively Reduce Inflation Rate

The main purposes of AXL are threefold:

· Reward: Token holders can stake AXL by delegating it to the validator's staking pool to earn rewards. Network validators stake AXL to generate blocks and validate and vote on messages to earn commissions.

· Cost: Used to pay for cross-chain fees on the Axelar network.

· Governance: Allows token holders to participate in governance proposals such as parameter changes or protocol upgrades.

The AXL token was issued in September 2022 with an initial supply of 1 billion and no maximum supply. The token distribution and unlocking schedule are as follows. The current circulating supply is 535,564,229 and the total supply is 1,128,220,669 (according to Coingecko data). The staking amount is 761 million (according to Axelarscan data) and the token inflation rate is 6.1%.

In December 2023, the community passed a proposal to reduce the inflation rate of AXL. The inflation rate of AXL is mainly composed of three parts: TM (Tendermint) consensus, MSigs inflation, and external chain inflation. The first two constitute the basic inflation rate, while external chain inflation refers to the reward for verifying public chain information outside the Cosmos ecosystem. In the first year, each chain receives 1%, in the second year it is 0.75%, and in the third year it is 0.5%.

This time, there are two main ways to reduce inflation: reducing the external chain inflation rate and implementing the gas burning mechanism.

First of all, with the increasing demand for blockchain scalability and customization, more and more public chains are being developed. Many Dapps, including dYdX, are choosing to migrate to application chains. The growth of modular blockchains, universal rollups, and application chains is rapidly expanding the number and diversity of blockchains. In the era of multiple chains, blockchain operability is particularly important, and cross-chain protocols are the most important underlying infrastructure for achieving blockchain interoperability.

Secondly, according to L2beat's data, the TVL of the cross-chain bridge track is 6.7 billion US dollars, which is nearly 90% lower than the highest point of 56 billion US dollars in the previous round. The bull market will bring an increase in on-chain interaction and cross-chain demand, and the increase in the number of blockchains will also increase the dependence on cross-chain technology. With the emergence of new technologies and architectures for cross-chain bridges, the industry scale of the cross-chain track still has extremely high growth potential.

Thirdly, although blockchain interoperability and cross-chain protocols are crucial for the industry, the development of the cross-chain track is not satisfactory. On the one hand, cross-chain bridges are still one of the most vulnerable targets for hacker attacks and losses, and their security is worrying. On the other hand, cross-chain protocols in the market are still mainly asset cross-chain bridges, and cross-chain protocols that can seamlessly develop applications across chains are still in the early stages of development. Therefore, for such an important underlying technology, there is still a lot of room for improvement in cross-chain protocols technically.

What kind of cross-chain protocol do we need?

According to the cross-chain analysis framework proposed by Connext founder Arjun Bhuptani, cross-chain interoperability also faces the impossible triangle: security (Trustlessness), universality (Generalizability), and scalability (Extensibility). These three points precisely summarize the core requirements of the market for cross-chain protocols.

First of all, security is the most important issue. The highest level of security is achieved by not adding any trust assumptions outside of the underlying chain, and having the same level of security as the underlying chain. Security remains the most important issue for cross-chain protocols. Recently, a cross-chain bridge attack occurred on January 1st, which resulted in a hacker attack on Orbit Chain, causing damage of up to $81.5 million.

Next is universality, which means supporting the transfer of any message between different blockchains. Currently, the cross-chain track is still dominated by asset bridges, which support the transfer or exchange of cross-chain assets, but this is far from enough for cross-chain protocols. On the one hand, although cross-chain asset transfer or exchange can be carried out, the liquidity (funds, users, traffic, etc.) between different chains is still dispersed; on the other hand, this requires users to still need complex cross-chain behavior when transferring between different blockchains, which increases the user threshold. Therefore, cross-chain protocols are exploring arbitrary message cross-chain, based on which to achieve cross-chain contract invocation, liquidity aggregation, and build cross-chain applications.

The third is scalability, which can easily adapt to more blockchains, especially achieving cross-chain between heterogeneous chains with lower development time and cost. Connecting more blockchains will bring a wider user base, funds, and traffic.

With the evolution of cross-chain protocols, our expectations for cross-chain protocols have shifted from multi-chain to cross-chain, and then to omnichain, interchain, chain abstraction, or chain-agnostic.

Specifically, Multi-Chain refers to deploying Dapps on multiple blockchains, resulting in multiple instances or versions of the same Dapp in different blockchain ecosystems. The same Dapp is fragmented across different chains, and users achieve interaction on different chains through asset bridging, corresponding to the era of cross-chain assets. Cross-Chain represents any process of achieving communication and transactions between blockchains, consisting of multiple smart contracts deployed on multiple chains as a unified application. Smart contracts on different chains can perform different tasks and remain synchronized, forming a complete Dapp instance without developers having to redeploy the same function on different networks. Cross-Chain Dapps rely on the general information transmission of cross-chain protocols. Omnichain further enhances the scalability and breadth of cross-chain protocols, achieving interoperability between various heterogeneous chains. Inter-chain operations, chain abstraction, and chain independence further hide information such as cross-chain, gas, and native assets from users, further optimizing the user experience. Cross-chain protocols will be the core technology for implementing chain abstraction.

（Source: Chainlink）

Therefore, what the market is expecting is a cross-chain protocol that provides security guarantees, enables cross-chain deployment, and abstracts chains, while expanding the depth and breadth of cross-chain as much as possible.

What types of cross-chain protocols are currently available in the market?

Of course, ideals are lofty while reality is stark. Cross-chain technology is still in its early stages, and existing technologies cannot break through the impossible triangle of cross-chain interoperability protocols. Therefore, some features have to be sacrificed to achieve the best possible balance. What types of cross-chain protocols are available in the market now? Which cross-chain protocols are closest to our needs?

According to the division of trust layers, existing cross-chain protocols can be divided into three types: native validation, external validation, and local validation. Native validation refers to deploying the source chain's light node on the target chain to verify the source chain's messages. The relay only passes the source chain's block header to the light node contract on the target chain and is not responsible for verification. Native validation has the highest security and does not introduce new trust assumptions, but the verification cost is too high, and the development difficulty of establishing light nodes is also too high, resulting in weak scalability.

External verification refers to a group of external witnesses responsible for verifying cross-chain messages. The witnesses reach consensus internally through some mechanism. External verifiers may take various forms, including MPC networks, PoS/PoA networks, TEE networks, and multi-signature groups. External verification is highly scalable and can transmit any message, but its security is often criticized.

Local verification refers to the direct verification of transactions by counterparties. The typical paradigm is based on hash time-locked atomic swaps, but can only be used for cross-chain asset transactions.

In addition, there are also many cross-chain protocols that adopt new technologies under development. The most anticipated one is ZK Bridge, which is a cross-chain solution that uses ZK technology for lightweight node expansion. It generates block verification proofs off-chain and then submits them to the target chain, saving block verification costs. However, this technology is currently in the research and development stage, with high development difficulty and long development cycle. It is difficult to use directly in the short term, and still needs to deal with different consensus mechanisms and signature schemes, with limited scalability.

Overall, although bridges based on lightweight clients have higher security, they can currently only be developed for specific chains, and external validation is still the main solution for cross-chain protocols. In this cycle, cross-chain protocols that can achieve full-chain cross-chain deployment are basically external validation bridges. The more decentralized the external validator network and the stronger the consensus mechanism, the more it can meet the market's expectations for cross-chain protocols.

2.2 Comparative Analysis: Axelar is the best cross-chain solution that meets market demand

According to the analysis of the cross-chain track, the cross-chain protocol that adopts external verification and supports universal message transmission is still the main player in this round of cycle, and it is also a direct competitor of Axelar. Representative protocols include Wormhole, Layerzero, Chainlink CCIP, and Celer. After comparison, we believe that Axelar is the most competitive cross-chain solution in terms of security, universal message transmission, and ecosystem growth.

2.2.1 The Most Important Factor: Security

The security of cross-chain protocols first depends on the consensus mechanism of the trust layer, that is, the way information is verified. In the above projects, Axelar adopts the DPoS mechanism, Wormhole adopts the PoA mechanism, Layerzero adopts a dual protection mechanism of Oracle and Relayer separation, CCIP adopts its own oracle network verification, and Celer adopts a dual protection mechanism of DPoS and optimistic verification.

Wormhole：

The cross-chain protocol using PoA mechanism is the subject of theft incidents: In July 2023, the Multichain security incident caused a capital outflow of more than 265 million US dollars, and it has now lost its competitiveness. Wormhole was attacked by hackers in February 2022, with a loss of about 226 million US dollars. Under the PoA mechanism, inter-chain messages are verified by a group of trusted entities, but the number of validators is small and there is no need for staking, which lacks economic incentives. Many validation nodes are controlled by entities with strong interests, even the same entity, resulting in low security and high cost of malicious behavior.

Layerzero：

Layerzero V1 adopts a dual verification mechanism, and the protocol consists of three core components: Oracle, Relayer, and Endpoint. Relayer is responsible for delivering messages and message proofs, Oracle is responsible for obtaining and delivering block headers based on the block where the message is located, and the Endpoint of the target chain will verify the message based on the block header. The core design of Layerzero lies in the separation of Relayer and Oracle, which avoids collusion between the two. The security of Layerzero depends on the trust of Oracle and Relayer to ensure that they do not collude. However, Layerzero allows project parties to configure and run their own Relayer and Oracle, in which case they still need to trust the project entity, making the security of Layerzero always criticized.

Recently, Layerzero released the V2 technical whitepaper, with message verification completed by the Decentralized Verification Network (DVN), and the Executor responsible for delivering the verified message and triggering transactions on the target chain. Message verification is conducted using an X of Y of N mechanism, such as 1 of 3 of 5, which means selecting 5 DVNs for verification, with 1 DVN required to complete the verification and any 2 other DVNs needed to jointly complete the verification each time. Currently, the main entities that can run DVNs are industry entities, including Blockdaemon, Google Cloud, Animoca, Delegate, Gitcoin, Nethermind, P2P, StableLab, Switchboard, Tapioca, LayerZero Labs, and Polyhedra. However, trust in these entities is still required, especially in cases where the number of DVNs is small, which actually introduces more trust assumptions compared to the PoS mechanism. It is worth mentioning that Layerzero introduces Axelar and CCIP as DVN Adapters, which is also a proof of Axelar's security.

Chainlink CCIP：

The information transmission of Chainlink CCIP is monitored and signed by Chainlink DONs, and then passed to the target chain by Relayer to complete transaction execution. In addition, Chainlink CCIP also introduces a risk management system, which is independent of the oracle network and serves as a new validation layer. The risk management node will monitor all Merkle roots submitted on each target chain and independently reconstruct the Merkle tree of all messages on the source chain, checking whether the Merkle root submitted by DON matches the root of the reconstructed Merkle tree. If any anomalies are detected, the risk management node can vote to stop CCIP. The security of CCIP is mainly ensured by DON, which has already secured billions of dollars in assets and achieved trillions of dollars in on-chain transaction value, so its security is trustworthy. However, the overall development progress of CCIP is relatively slow. It was launched in 2021 and will not enter the early access stage of the mainnet until mid-2023.

Celer IM：Celer IM is monitored, routed, and validated by SGN (State Guardian Network), a PoS blockchain built on Cosmos SDK, which becomes a validator by staking $CELR. In addition, Celer also provides a second security model, optimistic verification. Before the transaction is executed, SGN submits the passed message to the chain and enters the "isolation zone". After a period of time, the message is confirmed and finally executed. During the isolation period, Dapp can run the App Guardian service to verify the authenticity of the submitted message.

However, it should be noted that Celer's validator network currently only has 22 validators, including industry authoritative entities such as IOSG, Hashkey, Binance, Ankr, and InfStones. Uniswap's cross-chain bridge evaluation expressed concerns about the same entity operating multiple validators, and the conditions for becoming a validator cannot be determined based on official documentation. The optimistic verification mechanism mainly relies on the Dapp itself to run the App Guardian to verify transactions, which requires the Dapp's spontaneous maintenance and relies on trust in the Dapp. In fact, trust is not assumed to be reduced to a level of 1/N.

Overall, in terms of security, we have reason to believe that Axelar stands out among the various solutions. Axelar's security was recognized by Uniswap in June, stating that it "has a sound cryptographic economic mechanism to ensure the security of the protocol."

From the perspective of mechanism design, relying on a dynamic, decentralized, and permissionless PoS network for verification is the solution with the lowest trust assumption.

2.2.2 Scalability and Ecosystem Development

2.2.3 Summary: Axelar is the most comprehensive and mature cross-chain solution

Axelar is another reason worth paying attention to in the encryption industry. We focus on two issues: first, why the Cosmos ecosystem is worth paying attention to; second, if you are laying out the Cosmos ecosystem, Axelar is an indispensable target.

First of all, the narrative of application chains will be an important narrative in this cycle. Cosmos itself is built around the topic of application chains, with each chain specifically designed to host applications, and all chains seamlessly connected through shared communication standards. Of course, the Cosmos ecosystem faces challenges from the Ethereum Rollup ecosystem, but the technical standards of Cosmos itself give it unique advantages: first, Cosmos allows developers to build a Layer1 with higher sovereignty, with higher autonomy in token economics and technology, rather than relying on Ethereum's L2/L3; second, Cosmos achieves interoperability between multiple chains through the inter-chain communication standard IBC protocol, realizing seamless transfer of assets and data between different blockchains, and has advantages in cross-chain that other ecosystems are difficult to reach. In addition, dYdX's move from the Ethereum ecosystem to the Cosmos ecosystem to build application chains has attracted enough attention to Cosmos in terms of both technology and market attention. Therefore, whether in terms of technology or market attention, Cosmos will occupy a place in the narrative of application chains.

Secondly, the recent upgrade of Cosmos will make the Cosmos ecosystem more healthy. Two important upgrades include: Replication Security, which will be launched on March 15, 2023, allowing blockchains in the Cosmos ecosystem to abandon their own validator set and adopt the validator of Cosmos Hub to ensure security, increase the empowerment of ATOM, and reduce the difficulty of developing application chains. Secondly, Noble announced a partnership with Circle to introduce native USDC in the Cosmos ecosystem. After the collapse of UST, the Cosmos ecosystem has been lacking native stablecoins and can only use stablecoins through cross-chain mapping, which increases systemic risk.

Finally, the Cosmos ecosystem is thriving. The Cosmos ecosystem is rapidly expanding, with multiple projects experiencing significant growth in 2023, including Celestia, Injective, Osmosis, Kujira, and Neutron. The widespread growth of the ecosystem has brought renewed market attention to Cosmos, and market sentiment towards Cosmos is generally positive.

Second question, the layout of the Cosmos ecosystem, why is Axelar one of the best targets?

Axelar is the main channel connecting the Cosmos ecosystem with EVM chains, especially the connection between Osmosis and EVM chains. In the past 30 days, the total amount of cross-chain transactions between Osmosis and Ethereum achieved through Axelar was 106.63M, making Axelar the primary path for Osmosis to cross-chain with the EVM ecosystem. As more applications are built on the Cosmos ecosystem, the demand for connecting the Cosmos ecosystem with other ecosystems will gradually increase. Axelar is the most important channel for connecting the Cosmos ecosystem with other ecosystems, and will directly capture the value of the expansion of the Cosmos ecosystem.

4 Conclusion: Solid fundamentals, appropriate timing for layout

Based on the analysis above, we believe that Axelar is a worthwhile target for investment. This is due to two main reasons: mature fundamentals and favorable timing.

First of all, from a fundamental perspective, Axelar has obvious technological advantages in the entire chain track, with deep technological accumulation, significant advantages in cross-chain quantity, message and data transmission, and full-chain application development. It is currently the most market-demand cross-chain protocol. As a general information cross-chain protocol, Axelar has satisfactory performance in security and scalability.

Regarding security, Axelar uses a dynamic and permissionless validator set for message passing verification, with a quadratic voting mechanism and sufficient validator quantity, token lockup value, and validator decentralization, making it one of the most secure solutions among external validation protocols.

Regarding scalability, Axelar currently has the highest number of integrated public chains, making it the most important channel connecting the Cosmos ecosystem and EVM chains. The Hub-Spoke architecture saves costs in connecting to more public chains, while AVM reduces the difficulty for developers to access the Axelar Network and build cross-chain Dapps. Recently, Axelar has established partnerships with multiple blue-chip projects and enterprises, demonstrating its ability and potential in ecosystem expansion.

Secondly, in terms of timing, the track and narrative that Axelar is in are expected to have significant growth potential and attention in the future.

Axelar belongs to the two major narratives of the entire chain and the Cosmos ecosystem. The entire chain track will gain more growth space and market attention with the increase in trading volume during the bull market and the increase in the number of public chains. A more direct catalyst may come from the issuance of Layerzero and Wormhole, bringing a market frenzy to the entire chain track. Layerzero has recently stated that it is expected to complete token distribution in the first half of 2024. As a direct competitor of the two, Axelar's FDV is significantly lower than that of the two's primary valuations, and may experience value discovery upon completion of this event. The Cosmos ecosystem is developing healthily, and the ecosystem-wide surge at the end of 2023 has attracted market attention to the Cosmos ecosystem. Axelar is the liquidity gateway between the Cosmos ecosystem and EVM chains, and will directly benefit from the growth of the Cosmos ecosystem.

This article is from a submission and does not represent the views of BlockBeats.

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