Developers that want to allow cross-chain capabilities across protocols that are built on blockchains with various consensus processes now have a limited number of options to choose from due to the current state of the market. Blockchain networks such as Cosmos and Polkadot have constructed ecosystems consisting of individual blockchains that have a similar consensus and are capable of interoperating with one another. Nevertheless, the industry does not offer comprehensive solutions for developers that wish to enable one-click interoperability for their users across numerous ecosystems. This is because the market is currently lacking such solutions. Axelar, a Web3 overlay network that offers extensive tools to developers who want to accomplish exactly that, fills the need left by the absence of this product on the market. The Axelar project provides developers with a safe cross-chain communication network that can be accessed using application programming interfaces (APIs) and software development kits (SDKs). These developer tools mostly consist of easy-to-use integrated solutions that plug and play, which makes the protocol an excellent choice for decentralized applications (dApps) that wish to build up speedy cross-chain capabilities.

Axelar makes it possible to go forward

Because it is not tied to any particular consensus, the Axelar project has the ability to promote itself as "Stripe for Web3 applications." The goal of the technology developed by Axelar is to enable more complex cross-chain functionalities than the straightforward transfer of wrapped assets to various blockchains. Generic Message Passing (GMP), which is at the heart of Axelar's protocol, facilitates the cross-chain exchange of arbitrary data. This opens the door for composable liquidity, cross-chain governance, and the transfer of assets that cannot be wrapped across chains, such as NFTs.

General Message Passing (GMP)

The GMP protocol gives developers working on the source chain the ability to securely transmit any payload from one chain to another. An application, for instance, may communicate with any function present on any other connected chain. Any function in this context refers to functions on the application layer as well as the protocol layer, which enables a broad variety of different development options. A function is called from the source chain, the call is confirmed by Axelar's DPoS network, and the function is then run via a Gateway on the destination chain. This is the highest level.

Composable liquidity

Composable liquidity is Axelar's capacity to enable dApps running on connected chains to share liquidity with one another across chains. This functionality would have important repercussions for a wide variety of protocols relating to decentralized finance (DeFi). Transactions that cross chains and just need one click are a good starting point. Imagine, for a moment, that multi-chain DEXs could rebalance the liquidity pools on one of their chains by borrowing asset liquidity from chains on which they are not present. Slippage and other types of impermanent loss could be reduced with such a capability. Composable liquidity may also open the way for future DeFi inventions that gradually take on greater risk when protocols believe that they have "backup" or "additional" liquidity on other chains. These new inventions may be possible because of the possibility that composable liquidity will pave the way.

Composable Liquidity is Provided by Axelar in Partnership with Circle Finance

Circle's Cross-chain Transfer Protocol (CCTP) for Composable USDC will now be supported by Axelar's GMP, which Circle has decided to use. Circle's CCTP will issue and burn native USDC in order to "transfer" tokens between chains. Moreover, General Message Passing will be implemented in order to couple those transactions with arbitrary data, such as a function call. Because of this partnership, developers will be able to easily integrate cross-chain, native USDC into their decentralized applications. Through the use of USDC, users will be able to move and swap assets across several blockchains with just a single click, without having to wrap their assets in a third-party layer.

The USDC is an essential component of a wide variety of DeFi protocols. The token can be used in the pegging methods of other stablecoins, it is frequently used in crypto-derivatives, and it is present in the most popular liquidity pools. Composable USDC will increase competition for other native stablecoins while also empowering blockchain ecosystems that do not currently have a dependable native stablecoin.

Providers of Gas

Users are required to keep gas tokens on both the source chain and the destination chain by a significant number of multi-chain interoperability networks. Axelar, on the other hand, enables users to pay gas fees only once, on the destination chain, and using the destination token. Because Axelar is a blockchain that connects other blockchains, it is able to manage the logic of smart contracts, and the gas services that Axelar provides make it easier to handle any conversions that are necessary for the flow of cross-chain transactions:

The fees that are paid to Axelar's validators are denominated in AXL tokens.
AXL tokens are swapped for the source-chain token, which is then used to purchase gas.
The gas pays for the action on the destination chain, such as the minting of tokens or the calling of functions.

Axelar transaction flow

Source: Axelar

Axelar's Common Usage Cases

Governing Across Multiple Chains

With cross-chain governance, a multi-chain Web3 protocol can submit a single governance proposal on one chain, and the result of that proposal will apply to the project's governance on other chains. This is possible thanks to cross-chain governance. For instance, a decentralized autonomous organization (DAO) can use Axelar to construct on-chain governance that coordinates investments and activities across many chains. This is preferable to restricting such decentralized governance to activities that take place within a single ecosystem.

Cross-chain NFT

Cross-chain non-fungible tokens have consequences that extend further than the simple act of documenting ownership of an NFT across various blockchain networks. Cross-chain NFTs, for instance, give players the ability to use their in-game NFT items across various blockchains. This could result in more complicated gaming on multi-chain GameFi platforms. In addition, with the rise of "NFTFi," which refers to the growing popularity of NFT lending/borrowing and derivatives, cross-chain NFTs could make it possible for NFTs to be used as collateral for DeFi activities on another chain. This is because "NFTFi" refers to the growing popularity of NFT lending/borrowing and derivatives.

Token Transfers

Cross-chain token transfer is now the use case that sees the largest adoption of Axelar's Gateway smart contracts, which enable users to transfer tokens between chains. Axelar is capable of much more than just transferring tokens, however, the primary factor driving demand for cross-chain bridges in the current market is the ability to transfer token assets.

Axelar architecture

Axelar tech stack

Source: Axelar

The explanation of how Axelar operates is summed up in the following paragraphs.

Cosmos SDK

The Cosmos Software Development Kit (SDK), which is an open-source toolkit with prebuilt modules that enable cross-chain interoperability, is used to construct the Axelar blockchain, which uses the Delegated Proof-of-Stake consensus mechanism. The Tendermint consensus is the model that Axelar uses to validate requests on the source chain and confirm changes on the destination chain. Cosmos SDK has adopted this model, and it is also the model that Axelar uses. Instant finality and Byzantine fault tolerance are both benefits that come with using Tendermint consensus. Although this particular consensus method is utilized to validate cross-chain communication, Axelar is able to connect several consensus models. As an illustration, Axelar is only one of a handful of cross-chain protocols that can connect the EVM and Cosmos chains.

>>> Read more: A deep dive into Cosmos 2.0

Gateway Protocol for Cross-Chain Exchange (CGP)

The Cross-chain Gateway Protocol (CGP) that Axelar uses functions similarly to the Border Gateway Protocol that the internet uses (BGP). A BGP, or Border Gateway Protocol, is essentially a relay center that functions similarly to a post office in that it organizes and delivers data between different internet networks in a secure manner. The Central Governance Protocol (CGP) of Axelar serves two very important purposes: state synchronization and asset transfers.

State synchronization is exactly what it sounds like various blockchains that are in different "states," each of which contains information that is distinct from the other blockchains. The information would be synchronized via CGP in such a way that both blockchains would reflect the same information.

Asset transfers are the process of moving assets between different supply networks. In either case, a user will make a request over the API, and assets will be deposited in an Axelar Gateway that is connected to a source chain. The deposit is considered to be valid until a predetermined number of validators have come to a consensus, at which point the destination blockchain will begin minting tokens that are equivalent to the deposit.

A protocol for cross-chain data transfers (CTP)

An application-level file-sharing mechanism that sits atop the CGP, the Cross-Chain Transfer Protocol (CTP) is analogous to the Hypertext Transfer Protocol (HTTP) for Web2 and is known as the Cross-Chain Transfer Protocol (CTP). CTP enables decentralized applications, or dApps, to connect with other blockchains, which in turn enables the movement of assets and arbitrary messages between blockchains.

Axelar security

Consensus Security Provided by Axelar

The Delegated Proof-of-Stake (DPoS) algorithm serves as the consensus mechanism for the Axelar network. The particular flavor of Delegated Proof-of-Stake consensus used by Axelar achieves Byzantine Fault Tolerance (BFT), which enables the network to tolerate the failure of as much as one-third of its validators without jeopardizing its integrity. Token holders of Axelar's AXL delegate their stake to validators, and the active set includes the top validators in terms of the delegation. On-chain governance has established a cap of 70 active validators as of the time of this writing. The number of validators in the active set is defined by that number. Axelar maintains minimal entry hurdles for validators, encouraging different software installations (such as Ubuntu and Debian, amongst others), and permitting any institution or individual to take part in the validation process. Each validator would be given a weighted voting power based on their stake in the protocol, which they would use to confirm the accuracy of cross-chain messages (along with other transaction requests) and produce blocks in the chain. This would be done so that the protocol could continue to function as intended. In exchange for their efforts, the validators are given newly minted AXL tokens and a portion of the transaction fees that are paid in AXL.

Every proof-of-stake (PoS) consensus system bears the risk of concentrating voting power among a small number of dominant stakers. The use of quadratic voting as the decentralized proof-of-stake consensus mechanism by Axelar helps to reduce the risk of stake concentration. Voting power does not rise proportionally with a stake under a system that uses quadratic voting. Axelar validators need to make a significant increase in their delegated stake if they want their voting power to rise proportionally.

The chosen consensus mechanism for Axelar allows validators the ability to solicit delegations from Axelar stakers and then deposit these delegations as collateral. Validators on Delegated Proof-of-Stake chains, such as Axelar, are less likely to engage in malicious behavior as a result of this design feature. In the event that a validator engaged in malicious behavior by intentionally misleading the network, the collateral would be reduced, and any funds that were lost would be compensated through the stake. To put it another way, the design of Axelar's DPoS is fundamentally based on an economic concept that makes it unprofitable to launch harmful attacks.

However, if the hacked funds and the collateral both represent different assets with varying price discrepancies, the malicious actor may still be able to earn a profit from the attack. This is the situation when the collateral is held in AXL. In addition, users may not get the entire amount of any funds lost if there is a considerable discrepancy between the value of the collateral asset and the value of the funds that were hacked. This is because the value of the hacked funds is more than the value of the collateral asset. These malicious individuals may come to the realization that working together, they are capable of orchestrating an attack that will undermine the vote on external events. This will provide a sizeable disparity between the value of the collateral and the value of the money that is to be hacked. After that, they were able to move on to the next stage of security, which was the insurance checkpoint. On the other hand, such a coordinated assault is extremely unlikely because it would be detrimental to the validator's reputation. Axelar validators are responsible for maintaining nodes on connected chains; in addition, a large number of their stake and validate on such chains. Damage of this magnitude to one's reputation would have repercussions well beyond those felt within the Axelar ecosystem.

Ways to Increase Safety and Security

Axelar employs rate limits to regulate the number of assets that can be accessed during specified time periods in order to defend itself from losses caused by attacks. This ensures that the value of the hack can never exceed the exact level that has been established. In the event that a particular chain is hacked or used for bad purposes, the protocol is designed to automatically halt all transactions coming from that chain. In the case that there is a complete halt to transfer activity, neither incoming nor outgoing requests can be processed.

Validator security policies (such as obligatory key rotations), audits, and bug bounties are all incorporated into the Axelar security approach in order to further strengthen the level of security that is provided.

Axelar Token

The distribution of Axelar's native AXL tokens will render the Axelar network permissionless. This will enable any member to amass delegated stake and take part in the process of keeping the network secure. The fundamental purpose of the token is to act as an incentive for holders of the token to delegate a stake on the Axelar chain, which in turn promotes greater distributions of staking and voting power and improves network security. The Axelarscan block explorer and data dashboard detects the network validators and presents the real-time voting power distributions of the Axelar blockchain. As of the time this article was written, there are a total of seventy validators in the active set. A data dashboard for Metrika is available on Axelar as well. This dashboard displays a variety of statistics, including block production, block creation, cross-chain operations, and more.

Transaction fees are paid to validators and stakers in AXL, and conversion and payment are managed by Axelar's Gas Services. Validators and stakers are rewarded in AXL. Token validators are rewarded with freshly generated AXL tokens, which leads to a rise in the overall supply and makes AXL an inflationary asset. But nevertheless, if "change" from Axelar Gas Services is utilized for buybacks or burns, the mechanisms underlying AXL tokens have the potential to become deflationary in certain circumstances.

Axelar tokenomics

Source: Axelar medium

During the Genesis Block held by Axelar, one billion AXL were distributed.

Investors that participated in the seed, Series A, and Series B rounds get around 30% of the total token supply each.
17% of the total quantity of AXL tokens is reserved for the core team.
The remaining 12.5% is allocated to corporate operations.
The community sale accounts for 5% of the overall token supply.
Community programs get roughly 36% of the total token supply.

Three months after the initial introduction of the token, the release schedules for the team, business, supporters, and community programs started; however, the delivery of tokens for the community sale began sooner and on an expedited timeline.

Current traction within the ecosystem of Axelar

The capacity of Axelar to link Cosmos networks with EVM chains is one of the company's most appealing selling points. Nonetheless, it also has the capacity to interact with blockchains that do not use EVMs. Recent news includes the announcement that Axelar would collaborate with Mysten Labs to provide GMP functionality to the Sui blockchain. At the time of this writing, there are a total of 30 active and current integrations of mainnet chains into the protocol. These chains include Avalanche, BNB Chain, Ethereum, Polkadot, Polygon, and a variety of Cosmos-based networks.

Axelar had processed more than 300,000 separate transactions. The most important 30-day source and destination chains are Ethereum, Kujira, Osmosis, and Polygon; the most important assets are AXL, ETH, and USDC.

According to Crunchbase, Axelar was able to secure funding from a total of 28 investors in the amount of $63.8 million. According to a report published by Coindesk on February 15, 2022, Axelar successfully secured a total of $35 million during its Series B funding round, bringing the company's value to $1 billion. The bulk of investors in each of the three rounds were crypto-native venture capital firms. These funds included Dragonfly Capital, Polychain, Blockchange, Node Capital, North Island Ventures, and a number of others. Axelar's Series A financing, which totaled $25 million and was headed by Polychain Capital, was successfully completed. It seems that the protocol has been effective in accomplishing its strategic goals since Axelar has been able to keep its investors through many investment rounds (at greater valuations in more matured rounds), notably at the onset of a market downturn.

AXL holders also have the ability to vote on proposals that recommend different protocol improvements. These alterations may range from product upgrades to changes in the parameters for reward distribution and validation. The algorithm for establishing gas fees is one of the metrics that is managed by decentralized governance. Other metrics that fall under this category include the AXL gas fee pricing per transaction. Axelar also gives its users the opportunity to vote on the platform's technical criteria, such as the minimum number of validators that a blockchain must have in order to be compatible with Axelar.

Conclusion

As a result of the great demand in the industry for fully functioning cross-chain capabilities, the vast majority of Axelar's cross-chain communications allow token transfers. A new partnership between Axelar and Circle has enabled USDC composability. This has opened the door for potential prospects for protocols to transfer liquidity across chains and build original DeFi applications. Beyond token transfers or composability, the capabilities of Axelar's cross-chain arbitrary message-passing could pave the way for new innovations in the blockchain market, ranging from cross-chain governance to institutional-grade blockchain solutions. Composability is the ability to combine multiple blockchains into a single blockchain. Axelar provides a dependable solution, and its team is in a strong position (and has the funding) to seek additional collaborations and applications for cross-chain infrastructure.

Disclaimer:
This article is intended for and only to be used for reference purposes only. No such information provided constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific name.

Axelar: USDC's crosschain bridge partner