Use Case

Axelar is a blockchain network that connects dozens of previously siloed and separate blockchains, enabling increased interoperability for the multi-chain future.

The Axelar network consists of a decentralized group of validators, secure gateway contracts, uniform translation and routing architecture, as well as a suite of software development kits (SDKs) and application programming interfaces (APIs) that facilitate cross-chain composability. This helps developers to build applications on the best platform for their use case, while also being able to access users, assets, and applications across all ecosystems.

Axelar's primary objective is to build the underlying infrastructure necessary to onboard the next billion people onto Web3. To achieve this goal, Axelar intends to:

Provide a straightforward and user-friendly way for blockchain developers to connect with other chains
Enable decentralized application (dApp) developers with cross-chain composability
Allow users to interact seamlessly with applications across multiple ecosystems

Technology

The Axelar network has a two-layer system consisting of three main components. The first component is a decentralized network supported by validators, which execute transactions and maintain the network. The validators are responsible for running the cross-chain gateway protocol, which is an overlay that sits on top of Layer 1 blockchains. This protocol allows the validators to perform read and write operations to gateway smart contracts deployed on connected external chains, as well as vote and attest to events on those chains.

The second component consists of gateways, which are smart contracts that provide connectivity between the Axelar network and interconnected Layer 1 blockchains. Validators monitor gateways for incoming transactions, which they read and then come to consensus on the transaction’s validity. Once agreed, they write to the destination chain's gateway to execute the cross-chain transaction. The validators and gateways form the core infrastructure layer.

Sitting on top of the validators and gateways are the APIs and SDKs, which enable developers to easily access the Axelar network. This application-development layer allows developers to compose across any two chains in a single hop, adding universal interoperability to their blockchains and applications. With Axelar, developers can transfer assets between any two addresses on any two blockchain platforms, execute cross-chain application triggers, and handle any cross-chain requests.

In essence, Axelar distills cross-chain interoperability down to a simple set of API requests. This is a critical aspect of adoption as the developer experience around deploying Web3 applications must be as simple as possible, similar to the experience Web2 developers have, where the underlying networking and ecosystem-specific deployment considerations are largely abstracted away.

Two-layer Approach

Axelar is a two-layer system comprised of an API layer and an underlying network. The core of Axelar's infrastructure is a permissionless overlay network built on a Proof of Stake (PoS) consensus algorithm and permissionless protocols, which enable Turing-complete cross-chain communication. Axelar validators are responsible for monitoring gateways on interconnected chains, using a decentralized protocol to process cross-chain messages.

Above the network lies a layer of APIs and protocols, which provides an application development layer for developers to compose applications across any number of chains. This means that developers can achieve cross-chain interoperability without the need for new programming languages or complicated infrastructure management. Instead, they can focus on building the specific functionality of their dApp. As new interconnected blockchains are integrated, they automatically become interoperable with the application, leading to limitless network effects.

Two Protocol “Stack”

Axelar enables dApps to leverage its cross-chain communication layer and protocol “stack easily.” The Axelar network comprises two main protocols:

The cross-chain gateway protocol (CGP) that connects the separate blockchain by routing messages between them
The cross-chain transfer protocol (CTP) that encompasses the application stack on top of CGP, enabling dApps to work across multiple blockchains

For Axelar-bridged chains, a gateway smart contract is deployed on both chains. Axelar validators are responsible for monitoring the gateway smart contract on each blockchain, ensuring the transaction is valid (on the source chain) and then forwarding it to the proper (destination) blockchain while also monitoring finality/trust assumptions on each chain.

Nodes on Axelar run the software of other EMV-compatible and Cosmos-based chains. The external validator set monitors the connected chains and nodes sync to query their local blockchain clients and agree on the state.

To ensure security, Axelar uses a gateway contract controlled by a key that is divided into key shares held jointly by all validators. The number of key shares held by each validator is proportional to the amount of AXL tokens staked with the validator. The validators are required to rotate key shares every two months to increase security further.

To achieve cross-chain consensus, 80% of validator vote power must approve and co-sign any transaction, and 90% of validator vote power must collude to withdraw funds or forge state proofs. Axelar's implementation of rate limiting and quadratic voting reduces the risk of large-scale hacks by requiring a high threshold for validator collusion.

However, there are still vulnerabilities to consider. The gateway contracts are currently upgradable solidity contracts administered by an anonymous 4-of-8 multisig. This means that the contracts can be upgraded without validator approval, potentially putting all locked funds at risk at any time. Although this security decision was made to address catastrophic bugs in the earlier days of Axelar, the team plans to implement a change requiring all validators to co-sign any gateway contract upgrade in the future.

March 2023 Virtual Machine Announcement

Axelar introduced the Axelar Virtual Machine, which enables developers to write smart contracts on Axelar, while scaling their interchain deployments and programming the cross-chain networking layer. The Axelar Virtual Machine underpins two additional products: Interchain Amplifier and Interchain Maestro. Interchain Amplifier is a permissionless model that allows anyone to easily create a connection to the Axelar network and all its interconnected chains, while Interchain Maestro is an orchestrator that developers can use to deploy and manage their multi-chain dApp instantiations. It allows developers to build once and run everywhere. With these products, developers can enhance security at the application layer and build scalable interchain technologies while adapting to future improvements in the cross-chain networking layer.

General Messaging Capabilities

Just like Wormhole, Layer Zero, and other bridging solutions, Axelar supports generalized messaging, allowing various forms of data and information, including those described tokens, to be moved across ecosystems. General messaging is more complex than simple connections that enable token transfers but can be far more powerful, as well.

With two blockchains that can communicate via general messaging, dApps can make contract calls across chains, allowing them to launch their product simply on one chain and communicate with others rather than needing to launch on every chain. This gives dApps access to more users than just on that one siloed blockchain network.

A contract call is different from a token transfer in that it's initiated by a user to execute a specific function of a smart contract and is not recorded on-chain. Enabling contract calls from the source chain to a destination chain allows for more cross-chain optionality for dApps and eliminates their need to deploy their dApp on multiple chains.

General Message Passing enables secure cross-chain communication, which opens up new possibilities for developers in the decentralized finance (DeFi), gaming, and non-fungible token (NFT) spaces. One potential use case is creating platforms that host NFTs from multiple chains, which would allow users from one chain to buy NFTs minted on another chain without having to move assets from one chain to another. Another potential use case is allowing NFT holders to collateralize their NFTs, using them in borrow-lend apps on any chain. Developers can also index derivatives from one chain to another using dApps or allow users to pool liquidity in multiple assets, on multiple chains, via a single aggregator on a single chain. With secure cross-chain communication, developers can build applications that use the unique features of multiple blockchains, creating new possibilities for innovation in the decentralized web.

Axelar's General Message Passing feature is a secure cross-chain communication protocol that allows developers to bring their applications to the asset rather than the other way around. This opens up new possibilities for composability in DeFi, gaming, NFTs, and other decentralized web applications. The security of General Message Passing is ensured by a permissionless validator set that operates on a Delegated Proof of Stake consensus mechanism and a decentralized protocol that handles routing and translation.

To use General Message Passing, an application developer must implement the Axelar Executable interface in the destination contract. Then, they initiate a call function or a call function plus tokens from the source chain. The call enters the Axelar Gateway from the source chain, and the Axelar network confirms the call, subtracts the usage fee in native source chain tokens, and prepares an outgoing transaction on the destination chain. The call is approved and emerges from the Axelar Gateway on the destination chain, where the call function executes as if it had been made on the source chain.

This method of cross-chain communication expands the definition of secure interoperability, allowing developers to build new applications that can function across multiple chains. By eliminating the need to move assets from one chain to another, General Message Passing opens up new possibilities for the use of NFTs in borrow-lend apps, the creation of platforms that host NFTs from multiple chains, indexing derivatives from one chain to another, and allowing users to pool liquidity in multiple assets on multiple chains via a single aggregator on a single chain.

PoS, Validators, and Incentives

Axelar's Delegated Proof of Stake (DPoS) blockchain is built on the Cosmos SDK, an open-source toolkit designed for cross-chain interoperability. Using the Tendermint consensus mechanism, Axelar can validate requests on the source chain and confirm changes on the destination chain. This consensus model provides instant finality and Byzantine fault tolerance, which are critical for secure cross-chain communication. However, Axelar can also connect diverse forms of consensus, including EVM and Cosmos chains. This makes Axelar one of the few cross-chain protocols that can support interoperability between these different consensus mechanisms, enabling a more seamless and integrated decentralized web.

Each chain Axelar connects has a Gateway smart contract that receives and sends messages between Axelar and the external blockchain. Validators hold the key that controls this contract together (proportionate to the staked AXL token), and messages/transactions only get passed once the validators' vote is completed and approved. There are 70 validators as of Q2 2023.

Top-10 validators on Axelar, February 2023, Source: Axelarscan

Axelar controls the routing and execution. However, the relayer aspect is permissionless, meaning developers can build their own version of relayer services rather than using Axelar’s default relayer if they choose.

Axelar Network has implemented rewards slashing to motivate validators to avoid undesirable behavior, such as double signing, loss of liveness, and incorrect voting on external chains' events. Rewards are earned and released at the end of each block, and Axelar Network’s slashing mechanism is unique for each inflation component.

The slashing rules for TM consensus rewards are standard and validators lose rewards if they lose liveness. Validators must sign at least 50% of blocks in a 35,000-block window, which is equivalent to maintaining total liveness for at least one day in a two-day window. A downtime of a validator will result in the loss of 0.01% of rewards per block, and double-signing of blocks will result in a 2% loss of rewards. If a validator loses liveness for over 50% of the window, they're locked for two hours and must unlock themselves to rejoin the validator set. The Axelar Network has implemented a seven-day unbonding period.

In the multi-party signing protocol (MSig) protocol, the broadcaster account’s liveness is signaled through "heartbeat" messages that are sent every 50 blocks by validators. Validators are considered "active" if their last heartbeat message was received within the last 50 blocks and have missed signing less than 5% of blocks in the last signed block window for consensus. If an "active" validator fails to participate in MSigs, they're suspended from further MSig participation for 8,500 blocks, losing their accrued rewards. If a validator fails to submit a heartbeat message, they stop accruing MSig rewards until their next heartbeat.

For external chain voting, validators who have registered as chain maintainers can vote on events. Voting power corresponds to the fraction of the total stake delegated to them. Validators who submitted the majority vote have their accrued rewards released. To incentivize liveness and good behavior, validators who fail to vote or who submitted the minority vote lose their accrued rewards.

Axelar vs LayerZero and Other Competitors

Critical to Axelar's functionality, Axelar nodes contribute to the security of one another. The platform employs an intermediate consensus layer, which establishes a baseline standard for consensus applicable to all message transfers on Axelar. This approach contrasts with LayerZero, which provides the infrastructure but delegates the responsibility for defining rules and consensus to individual dApps. Axelar sets well-defined standards and practices for messaging within their system while LayerZero offers more modularity for the dApp and developers.

Because of LayerZero's approach, security assumptions from dApp to dApp may vary significantly. While some dApps might utilize LayerZero to implement higher security measures, others could suffer from poor design or vulnerabilities.

Modularity itself carries security implications. A monolithic security structure like Axelar's could potentially offer more robust security, as resources are consolidated into a single, universal security architecture. However, if the intermediate consensus chain were to fail, it might result in a catastrophic loss of assets secured by Axelar nodes. Conversely, LayerZero's modular messaging infrastructure means that the compromise of a single dApp using LayerZero does not affect the security of assets managed by other dApps on the same platform.

Gas

Axelar's approach to gas fees is distinct from many other multi-chain interoperability networks, which require users to maintain gas tokens on both the source and destination chains. Instead, Axelar lets users pay gas fees once on the destination chain using the destination token. This is possible because Axelar is a blockchain that connects blockchains and can handle smart-contract logic. As part of the cross-chain transaction flow, Axelar's gas services conveniently handle all conversions required:

AXL tokens are paid as fees to Axelar's validators.
AXL tokens are then converted into the source-chain token for gas.
The gas covers actions, such as token mints or function calls, on the destination chain.
This approach streamlines the user experience by reducing the need for users to maintain multiple gas tokens and instead allows them to use the destination chain’s token.

Axelar Network Transaction Flow, Source: Axelar

Economics and Token

At its core, the AXL token is designed to motivate token holders to delegate their stake to the Axelar chain, encouraging a wider distribution of staking and voting power for the network's security. The platform provides a block explorer and data dashboard called Axelarscan, which displays information on the network's validators, including real-time voting power distribution. At present, there are 70 validators in the active set. Axelar also offers a data dashboard through Metrika that shows data on block production, block generation, cross-chain activities, and other important metrics for monitoring the network's health and performance.

AXL is the Axelar network’s native token and is designed to:

Pay for transaction fees on the network (users pay validators that run the network).
Align economic incentives in a DPoS system and reward validators for securing the network.
Stake and use in governance decisions.

Initial Distribution

Axelar's AXL tokens are a critical part of the network's decentralized and permissionless structure, enabling any participant to accumulate delegated stake and secure the network. In total, 1 billion AXL tokens were issued and allocated to various stakeholders and programs at the genesis block.

29.5% of the tokens were allocated to the company, with 17% of those going to the core team and 12.5% to company operations. Backers received 29.54% of the tokens, with seed investors receiving 13.4%, Series A investors receiving 12.64%, and Series B investors receiving 3.5%. A community sale was also held, with 5% of the tokens being distributed to multiple community members.

The remaining 36% of AXL tokens were allocated to community programs, including testnet, dashboard, wallet, and developer grants, as well as liquidity rewards and other incentive programs managed by the Axelar Foundation. At least 5% of the total supply was set aside for an insurance fund and insurance programs.

Release schedules for the team, company, backers, and community programs began three months after the token launch, with the community sale token release starting on an accelerated schedule.

Fundraisers

Token Unlocks and Issuance

Current Distribution

Axelar Holders Statistics, Source: CoinCarp

Staking, Rewards, and Token Inflation

Axelar's inflation and transaction fee structures are designed to achieve several key outcomes, including network security, decentralization, and longevity. The inflation system is based on three operations: rewards from participating in the underlying Tendermint consensus, rewards from participating in MSigs, and rewards from verifying events on external chains.

The base inflation rate is a function of the amount of stake delegated in the system, split 50-50 between the underlying TM consensus and participation in MSigs. Additionally, for each chain interconnected through the Axelar Network, there's an external chain inflation rate introduced into the system, which declines over time according to a set schedule. This rate is set for each additional chain and is distributed among the validators who maintain nodes for those external chains and vote correctly on the events from those chains.

The commission rate taken by validators depends on the number of nodes they run, the overall complexity of their operation, and the resulting operational costs. The network implements a minimum validator commission rate of 5%, which can later be upgraded via governance.

Rewards as Proportion of Total Inflation

Overall, Axelar's inflation and transaction fee structures aim to provide healthy staking rewards to achieve sufficient network security and market stability, encourage decentralization by incentivizing validators to run nodes on supported external chains, and encourage general maintenance of all critical Axelar-related processes to ensure network longevity.

Transaction Fees

The Axelar Network operates on a transaction fee model similar to other blockchain networks. Each cross-chain request incurs a base fee, which is listed in the Axelar documentation. It's noteworthy that the transaction fees can be paid by anyone through EVM contracts. However, broadcaster accounts registered by validators are exempted from transaction fees. Since messages from these accounts are critical to the consensus process, they're automatically refunded for the gas fees incurred. A fee collector account is established on the network level to collect fees for processing network requests. The Axelar Foundation manages this account and uses it to pay transaction fees for relaying transactions across different chains and supporting other community-driven initiatives.

The AXL token is inflationary as new tokens are minted to reward validators, who are then paid transaction fees in AXL. The Axelar network token could become deflationary if the fees collected for cross-chain transactions are higher than the network processing cost, potential foundation token buy-backs, and burn mechanisms. AXL token mechanics may become deflationary in some cases, such as when Axelar Gas Services use "change" to fund buybacks or burns.

axlUSDC

As a prominent solution in the realm of decentralized finance, Axelar's axlUSDC functions as a wrapped representation of USDC, facilitating seamless cross-chain transactions between Ethereum and multiple blockchains supported by the Axelar network. This innovative approach empowers users to engage in USDC transactions across a diverse range of blockchain ecosystems. USDC, a stablecoin pegged to the US dollar, is issued by Circle, a reputable US-based company, and primarily operates on the Ethereum blockchain. With the introduction of axlUSDC, the utility of USDC expands to encompass multiple blockchain networks.

The underlying mechanism of Axelar's cross-chain bridges enables the creation of axlUSDC. This process commences with the deposit of USDC at an Axelar Gateway on the Ethereum network, followed by the minting of an equivalent amount of axlUSDC on the target chain. Each unit of axlUSDC symbolizes a unit of USDC securely locked within an Axelar Gateway on the Ethereum network. A dynamic validator set, which presently comprises 70 validators, fortifies the integrity of axlUSDC.

Users can obtain axlUSDC through three distinct avenues:

Engaging in swaps via axlUSDC trading pairs available on various decentralized exchange (DEX) liquidity pools.
Utilizing Squid, a sophisticated cross-chain liquidity router developed on the Axelar platform, which furnishes users with liquid cross-chain swaps by employing axlUSDC as a routing asset.
Resorting to Satellite, a cutting-edge cross-chain bridge engineered by Axelar, to mint axlUSDC.

This graduate-level analysis showcases the versatility and ingenuity of Axelar's axlUSDC in addressing the challenges of cross-chain transactions, paving the way for seamless interaction between multiple blockchain ecosystems.

Circle has recently announced a partnership with Axelar to use Axelar’s General Message Passing (GMP) to enable Circle’s Cross-chain Transfer Protocol (CCTP) for Composable USDC. Circle's CCTP uses GMP to facilitate the minting and burning of USDC tokens across various chains and couple these transactions with additional arbitrary data, such as function calls. This partnership will enable developers to incorporate cross-chain, native USDC into their dApps, letting users easily move and swap assets across multiple blockchains with USDC, all with a single click, without requiring them to wrap their assets.

The USDC token plays a crucial role in many DeFi protocols, being used in popular liquidity pools, crypto-derivatives, and serving as a pegging mechanism for other stablecoins. The addition of Composable USDC to blockchain ecosystems that lack a reliable native stablecoin will increase competition for other native stablecoins.

Governance and Development

The Axelar Network is a cross-chain solution that places a strong emphasis on security. Axelar's security approach is discussed in detail in the "Security at Axelar Core" article on the Axelar blog. Axelar provides various tools for AXL stakers to choose validators and participate in governance, such as the Axelar forum, the Axelarscan block explorer, and a dashboard provided by Metrika.

Axelar governance covers several key network parameters, including base inflation rates, rewards for validators and stakers, network gas fees, validator thresholds, rate limits, upgrades to the network and smart contracts, disconnecting compromised chains, and adding new EVM chains. Most of these parameters are established through decentralized on-chain governance, while some are governed via multisig, which will be shifted to decentralized governance over time.

Axelar also provides a gas fee calculator to assist with estimating gas on connected chains. Additionally, the network includes various security features, such as rate limits, to prevent malicious behavior.

Overall, Axelar is designed to be a secure cross-chain solution that provides stakers with governance tools to participate in decision-making and ensures that key network parameters are set via decentralized on-chain governance.

Inflation rate, chain rewards, and gas fees.

Development

Good activity levels in Axelar core GitHub repo. Predominantly maintained by roughly five core contributors.

Activity in the Axelar GitHub repo, Source: GitHub

Team and Investors

Axelar has assembled a team of experienced professionals in distributed systems, cryptography, and blockchain technology, with key members having worked for prominent institutions such as MIT, Google, and Consensys. The co-founders, Sergey Gorbunov and Georgios Vlachos, previously worked as founding members of Algorand.

Axelar has successfully raised funds from prominent investors, including Binance, Coinbase, Polychain Capital, and Dragonfly Capital. Additionally, Axelar has established partnerships with leading Proof of Stake blockchains, such as Avalanche, Cosmos, Ethereum, Polkadot, and more.

Backers, Source: twitter.com\bmv_explorer

Since its incorporation in Canada in June 2020, Axelar has achieved several significant milestones. In November of the same year, it raised $3.75 million in a seed funding round that included participation from Binance X, DCVC, and Naval Ravikant, among others. This was followed by a Series A funding round in June 2021, which raised $25 million led by Polychain Capital and involving Blockchain Capital and Divergence Ventures.

Axelar continued its impressive fundraising trajectory with a strategic venture round in November 2021, raising an undisclosed amount of funding from six investors, with Crypto.com Capital leading the way. In February 2022, Axelar released its cross-chain communication protocol suite, tools, and APIs to the public, while simultaneously raising $35 million in a Series B funding round led by Polychain and Dragonfly Capital. The funding round valued the company at $1 billion, making it a unicorn.

In March 2023, Axelar launched the Axelar Virtual Machine, which enables developers to build decentralized applications once and run them on all chains, including EVM, Cairo VM, Cosmos, and other ecosystems. With over 50 employees working on the project, Axelar is quickly becoming a force to be reckoned with in the blockchain space.

Security and Trust Assumptions

Axelar is a Cosmos SDK blockchain running Tendermint consensus with DPoS security, where validators are elected by token holders. The security of a Tendermint PoS blockchain is based on the blockchain token’s economic value. If the token price rapidly decreases over a short period, this represents a significant threat to the network.

Axelar is an externally-verified bridge design with a PoS chain and validator set running full nodes or light clients of the connected chains. This design means Axelar’s weak point is the robustness and censorship resistance of its own validator set. Light clients, full nodes, and multisig are governed by a permissionless validator set, providing excellent read-and-write security.

The Axelar Network is constructed to avoid validator collusion i.e., designed to inhibit validators from conspiring and jeopardizing the network's integrity. This security threshold is calculated based on the number of validators needed to authenticate a block, with the requirement set at two-thirds of the aggregate validator count, adjusted by their respective stakes.

Following the Meave Upgrade in September 2022, the Axelar Network implemented quadratic voting, which significantly bolstered the network's security and decentralized nature. Presently, 70 active validators secure the network, and the collusion threshold is established at two-thirds of validators, with a quadratic weighting determined by their stake. At the time of analysis, a successful collusion would necessitate the collaboration of 35 validators to attain a supermajority. Consequently, it is vital to scrutinize the presented metrics in light of these considerations.

Currently, the Axelar validator set comprises ~90 nodes scattered across various regions. The Americas host 21 nodes with a 23% stake, while Europe contains ~60 nodes with a 63% stake. The Asia Pacific region maintains two nodes with a ~2% stake, and 13 nodes, representing a ~15% stake, have an unspecified region.

Because the Axelar chain acts as a “hub” between bridged blockchains, the natural risk associated with a hub bridge model is that when a hub is compromised, all of the chains it's attached to are also compromised. However, there are risk mitigations that can be implemented. Axelar lets the community set hub-wide rate limitations per asset and chain, preventing a hacker from minting an endless amount of axlBTC on each chain.

Point-to-Point, Hub and Spoke, Source: medium.com\0xpostman

Upgradeable Smart Contracts

However, despite the PoS consensus and decent validator set (~70), Axelar introduces another added user trust assumption: upgradeable smart contracts. Since Axelar uses an upgradable Solidity contract, a multisig can replace the contract and change the rules at any time. So, four of eight members of the anonymous multisig directly control all funds.

The 4-of-8 multi-sig oversees contract upgrades, effectively granting it custody of funds locked in Axelar. Additionally, it possesses the authority to enforce transfer rate limits. Axelar intends to further decentralize the network by allowing the validator set to collectively approve smart contract upgrades. This is a vital step toward attaining heightened decentralization and obviating the need for a governed multi-sig. The outcome will be a more decentralized network, providing enhanced transparency and security for users. Ultimately, Axelar seeks to establish a fully autonomous network that operates without centralized authority or governance.

The Axelar documentation does not mention the multi-sig, and the team refrained from commenting on member composition due to security reasons. It is likely that all members are Axelar employees, who, according to Axelar, are geographically distributed with no central office or storage facility. Nevertheless, a recent blog post offers a synopsis of governance-controlled parameters and explicitly identifies the "governed multisig" authority, as well as parameters managed by on-chain governance.

Decentralization

Internet Service Providers (ISPs) The three leading Internet Service Providers (ISPs), ranked by stake and node count, are Hetzner Online GmbH, OVH SAS, and Amazon.com, Inc. OVH SAS possesses the highest stake at 27.81% with 16 nodes, succeeded by Hetzner Online GmbH at 19.80% with 22 nodes, and Amazon.com, Inc. at 9.98% with 12 nodes.

The consolidation of stake and nodes within these top three ISPs epitomizes a centralizing propensity that warrants close surveillance. Centralization-related challenges primarily emanate from regulatory risks, including node service prohibition and contract termination. Additionally, if a data center were to cease operations, the network might temporarily incur a significant node loss, exacerbating centralization. It is crucial to recognize that the distribution of nodes and stakes among distinct ISPs can fluctuate over time, and Axelar remains a developing project. Moreover, the ISP concentration does not markedly deviate from prevailing industry standards.

Client diversity pertains to the existence of numerous software implementations of a blockchain network protocol. In general-purpose blockchains such as Ethereum, this is crucial for enhancing network security, reliability, and decentralization, as client-related failures can potentially disrupt the entire network. The Axelar-core client can be found here. Due to its app-specific nature (unlike general-purpose blockchains such as Ethereum), the Axelar team posits that a multi-client model offers limited advantages akin to other Cosmos-based chains. Client diversity may be less significant due to the network's specialization and focus, as well as its capacity to leverage the underlying security of the Cosmos Hub, which features multiple client implementations.

Audits

Axelar has undergone several audits and maintains a bug bounty program of up to $1 million.

Axelar’s Consensus/Economic Security

Interoperability protocols can be divided into two categories based on how they incentivize honest behavior from participants: economic security and game theory.

The economic security approach requires multiple external participants, such as validators, to reach a consensus on the updated state of the source chain. Validators are required to stake a certain amount of tokens, and their stakes can be slashed if malicious activity is detected. Block rewards serve as economic incentives when validators follow the protocol, and anyone can accumulate stakes and become a validator in permissionless setups. However, if the potential amount that can be stolen is much higher than the amount staked, then participants may collude to steal funds, undermining the system's security.

Axelar's network employs a DPoS consensus mechanism that achieves Byzantine Fault Tolerance (BFT) by allowing up to one-third of validators to fail without compromising the network's security. In this scenario, holders of AXL tokens delegate their stake to validators and the top validators are included in the active set. The active set's size is determined by on-chain governance and is currently set at 70 validators. Axelar encourages a diverse set of software deployments and allows any entity or individual to participate as a validator. Validators are rewarded with newly-minted AXL tokens and transaction fees paid in AXL for their services.

To prevent the concentration of voting power among a few dominant stakers, Axelar has implemented quadratic voting in addition to economic incentives. In quadratic voting, voting power does not increase linearly with stake, but validators must exponentially increase their delegated stake to increase their voting power. Axelar believes that other proofs of humanity, reputation, and identity could complement setup and permission mechanisms to further promote decentralization.

Axelar's consensus mechanism is a DPoS system, which allows validators to attract delegations from stakers and deposit them as collateral, thus discouraging malicious behavior. If a validator were to behave maliciously by providing false information to the network, its collateral would be confiscated, and any lost funds would be paid from the stake. This DPoS design is an economic model that disincentivizes malicious attacks.

However, in cases where the collateral and the hacked funds are different assets with varying price differences, a malicious actor may still be able to profit from the attack. Additionally, users may not receive the full amount of lost funds in cases where there's a significant difference between the value of the collateral and the hacked funds. Nevertheless, such an organized attack is unlikely, as it would cause reputational damage to the validator. Axelar validators maintain nodes on connected chains and are validating and staking on those chains, making reputational damage costly beyond the Axelar ecosystem.

To protect against losses from attacks, Axelar has implemented rate limits to cap the volume of assets that can be accessed during specified time periods. This helps ensure that the value of the hack can never exceed that specific threshold. The protocol can also freeze transfers from any particular chain in the event of malicious behavior, preventing any incoming or outgoing requests.

Axelar's security approach also includes validator security policies, such as mandatory key rotations, audits, and bug bounties to further enhance security.

Usage and Network Effects

Notably, Axelar has been voted as the canonical bridge for non-IBC assets on Osmosis, which positions it as the default front-end for bridging to and from Osmosis from ecosystems outside of the IBC network. As such, all incentivized non-IBC pools on Osmosis are now Axelar assets, underscoring the network's importance as a leading cross-chain communication solution.

Axelar is also IBC-enabled by default, which allows it to seamlessly connect to other chains within the IBC network. Moreover, given its status as the canonical bridge for non-IBC assets, Axelar is poised to become the primary issuer of non-IBC-based assets within the entire ecosystem. This makes it the leading candidate to serve as the "hub for non-IBC assets."

As of now, Axelar supports 32 chains and its usage is increasing rapidly, with over 340,000 transfers and a cumulative trading volume of approximately $1.8 billion. With its cutting-edge technology and strong positioning, Axelar is poised to transform cross-chain communication and fuel the growth of DeFi in the future.

Axelar Cross-Chain Activities, Source: Axelarscan

Squid Router is the first significant application of this technology, enabling one-click cross-chain swaps. Unlike Sushiswap, which integrates LayerZero's Stargate Finance as an omnichain bridge to tap into Sushi liquidity pools on other chains, Squid Router is liquidity pool agnostic. It aggregates quotes and performs smart order routing from all liquidity pools on a given chain to offer the best price to users. Axelar further improves the cross-chain experience by removing the need for users to have gas tokens for both a source and destination chain.

Axelar's Squid Router offers an efficient cross-chain swap experience, providing a better price than other liquidity pools for the same swap. While the Squid Router and other applications utilizing GMP are only live for EVM chains at present, EVM-to-IBC is set to launch later this year. Axelar's innovative approach to cross-chain communication offers an exciting possibility for further development and integration of blockchain networks.

Over the course of 2022 and present-day 2023, Axelar has become one of the most prominent blockchains in the Cosmos ecosystem (as measured by trailing 30-day IBC transaction volume).

IBC Volume (30 Days), Source: MapofZones

Axelar’s top “peers” as measured by 30-day volume. Osmosis is the overwhelming leading peer with ~10x the volume of second place, Kujira. Source: MapofZones

Axelar Daily Active Addresses by Chain, Source: Dune

Wallets

Keplr, Leap, and Cosmostation are all cryptocurrency wallets that offer various features.

Leap is a multi-purpose wallet that lets users access dApps, staking, DeFi, NFTs, and more all in one place. It aims to provide a simple and secure way to store, send, stake, and transfer different tokens.

Keplr is specifically designed for inter-blockchain ecosystems, with a focus on compatibility with Cosmos's Inter-Blockchain Communication (IBC) protocol. It lets users move digital assets across multiple chains and is available as a web app, mobile app, and browser extension. Learn more about Keplr here.

Cosmostation is a non-custodial wallet designed for PoS blockchains. It supports tokens on various chains, including Cosmos and Axelar, and is available in a mobile version, desktop web version, and browser extension.

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