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Axelar, bridges and the globalization of the blockchain

In this interconnected world, blockchain interoperability is more than a feature – it is the conduit through which the blockchain economy will experience “cross-chain globalization.”

ethereum-brige-tvl-over-time

Just as globalization has brought new types of commerce to local and global economies, cross-chain globalization will catalyze new applications and use cases for Web3. And the basic infrastructure of this new cycle of growth will be pervasive cross-chain messaging networks.

Bridges equal banks

Blockchain interoperability is an important concept. There are two forms of interoperability that deserve to be differentiated.

The first form of interoperability is that of two-way asset bridges. The term “bridge” conjures up images of helmets and civil engineers, but two-way bridges are actually banks.

Banks receive assets on one side and issue liabilities on the other. For a bank to be fully solvent, its assets must match its liabilities. The main task of this bank is to remain fully collateralized and continuously process deposits and redemptions.

Almost all major bridges today are two-way bridges of this type. In particular, most of these bridges are “state-sponsored,” meaning that the blockchain they are connected to built and subsidized the bridge itself. Think of the Polygon Bridge, the Avalanche Bridge, or the NEAR Rainbow Bridge – all of these bridges are created or sponsored by the blockchain nation-state on which they are built. And almost all of these bridges lead directly to Ethereum.

blockhain-schema

This is not surprising. For emerging blockchains, bridges are essential for the influx of assets and users. It was the railroads to the real world, which were often nationalized and subsidized because the benefits of infrastructure were too dispersed to be captured by private investors. So even though bridges are expensive to develop and maintain – many of them are not even profitable – it is nevertheless in the interest of the state to subsidize and support them.

We saw this phenomenon recently with the Wormhole Bridge, which was hacked for $325 million. Jump Capital, one of the main backers of Solana and Terra, filled the hole, playing the role of pseudo-state backer. Then, a month later, the Axie Infinity bridge was hacked for almost $625 million by compromising the Ronin multisig – the largest on-chain hack in crypto history. The Axie team also guaranteed that all victims would be reimbursed.

So if two-way bridges are banks, how do those banks compete?
It’s simple: they compete on the size of their balance sheets (including the government’s implicit balance sheet).
The biggest and best capitalized bank will be the most trustworthy and will eventually earn the trust of its users.
UX and efficiency matter of course, but when the competition is about trust, balance sheet depth is the ultimate trump card.

Many of these bridges are quite centralized. But for now, users don’t care. The key question they are asking is not whether this bridge is decentralized, but rather whether, in the event of a hack, they will be spared.

This dynamic makes the success of third-party bridges very difficult. State-sponsored bridges have much larger implicit balance sheets supporting them, so private players are unable to compete on equal footing. And indeed, you find that almost all of today’s TVL is in “state-sponsored” bridges.

Beyond the Bridges: Generalized Cross-Border Messaging

What is the purpose then? Will state-sponsored bridges to Ethereum be winners in the long run?

This is where the problem lies: a panoply of bridges can enable the free flow of capital, but two-way bridges alone cannot create a system of global interoperability. Indeed, most of these bridges do not allow complex interactions – they can only perform simple money transfers.

The real purpose is generalized cross-channel messaging. Cross-chain messaging is the ability to call a contract on another chain – imagine being able to use Ethereum’s Compound from Avalanche, or being able to put Yearn deposits into a Solana farm. Cross-chain messaging also allows assets to be transferred, but it allows so much more. Today, this kind of cross-chain composability is not really possible; most cross-chain activity is cobbled together using multisigs and trusted third parties. When any blockchain can talk confidently to any other, it will enable much more cross-chain commerce and activity than what we see today.

At first, Cosmos and Polkadot had ambitions to become this “interstate highway system” of blockchain. But they have instead morphed into specialized ecosystems that mostly build bridges between them, with connectivity outside of their ecosystems remaining an exercise for the reader. But the only way to achieve true cross-chain composability is to solve the difficult problem of cross-chain messaging head-on.

That’s why I’m so excited about Axelar.

What is Axelar?

Axelar is a universal interoperability layer that connects L1 blockchains through a decentralized network. Using Axelar’s SDKs, any smart contract developer can seamlessly call a contract on another supported chain with a simple asynchronous call.

The simplest form of calls between contracts is bridging. But since there are already so many decks out there, that’s probably not where Axelar will shine. Instead, the power of Axelar is to enable more complex forms of composability and cross-chain commerce.

axelar-blockchain

Axelar SDKs are designed to do three things:

  • Enable blockchain developers to easily connect and communicate with applications on other chains.
  • Allow Dapps to easily scale to multiple channels with minimal development costs.
  • Allow Dapps to easily scale to multiple channels with minimal development costs.

Eventually, the goal will be that, from the user’s point of view, he does not necessarily need to know which strings are involved in the back end of its application. This is how people have long experienced the Internet: when a website makes API calls to third-party servers, the user simply experiences a single, seamless application.

Today it is obvious whether you are using Solana, Ethereum or Avalanche. In the future, Web3 could be like the Internet: there is only the application you interact with, and the rest is abstract.

If you’ve been following this space, you’re probably familiar with LayerZero and its Stargate Finance. LayerZero sits in the same place in the stack as Axelar.

So what are the differences between the two, and why am I bullish on Axelar here?

axelar-technology-stack

Axelar is a full-fledged PoS network with its own native token. All Axelar nodes run software from other blockchains (Ethereum, Avalanche, Cosmos, etc). When you ask Axelar for the status of any underlying blockchain it connects to, Axelar nodes sync with each other to poll their local blockchain clients and agree on the current state of the other channels. If you wish to transact cross-chain, all Axelar nodes collectively maintain threshold signing accounts on each chain that can be used to perform actions or hold funds on behalf of Axelar. Axelar takes care of the routing and execution, and Axelar’s security is backed by the robustness of its set of PoS validators. The project was founded by the former heads of cryptography and mathematics at Algorand, so their experience in cryptography and distributed systems is world-class.

LayerZero is built very differently. Unlike Axelar, LayerZero doesn’t try to be the full interoperability stack – instead, it’s just a set of contracts that specifies two roles, “Relays” and “Oracles”. Oracles are responsible for reporting the actual state of the underlying blockchains, while relays are responsible for passing messages through the chain and proving the validity of messages. The user is free to choose the third-party relay or oracle he wishes to use. LayerZero itself is a neutral messaging bus and set of standards; LayerZero itself is not supposed to be responsible for relay or oracle.

In the whitepaper, LayerZero claims that it will default to using Chainlink as its oracle, but currently LayerZero’s Stargate Finance uses a tri-signature consisting of FTX, Sequoia, and Polygon as its oracle, and relaying is currently done by LayerZero Labs.

The correct transmission of cross-chain messages and the correct communication of the state of multiple chains are the key reasons why cross-chain interoperability is difficult. Axelar tackles this problem head-on, with a comprehensive solution.

LayerZero, Wormhole, Synapse, and many others are making fantastic efforts to solve cross-chain interoperability. This has long been one of the holy grails of blockchain technology, but I believe Axelar takes the more robust approach and has a chance of achieving it.

The potential network effects in a generalized cross-chain messaging network may be more powerful than the virtuous cycles we have seen in the rise of L1 alts. A truly universe cross chain enables greater diversity of applications, assets, and composability across all DApps.

Conclusion :

Ultimately, almost everything in technology is about UX. Building smooth and intuitive user experiences is key to onboarding the next 100 million people. A patchwork of simple centralized gateways was a necessary springboard. We couldn’t have gotten here without them. But if we’re going to deliver end-user experiences like those we’ve come to expect from Web2, developers need infrastructure and tools that allow them to eliminate friction in the cross-channel world.

In the 1990s, the growth of foreign direct investment enabled the rise of multinational corporations all over the world. I think with cross-chain interoperability, Web3 is about to experience a similar inflection point. You will no longer be limited to the apps that are on your channel – the whole world of Web3 will be accessible worldwide.

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Source: Cointribune

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