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Can Bridges Make for Good Investments? A Case Study with Axelar and AXL

By Michael @ CryptoEQ | CryptoEQ | 14 Mar 2023

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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.

Initial Distribution Initial Distribution

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.



AXL backers' deal terms AXL backers' deal terms

Token Unlocks and Issuance

Token Unlock Schedule Token Unlock Schedule

Current Distribution 

Axelar Holders Statistics 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 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.

Inflation Inflation, Source: Axelarscan

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.


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. Inflation rate, chain rewards, and gas fees.

Source: Axelar Source: Axelar


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

Activity in the Axelar GitHub repo, Source: GitHub 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.

Team Team

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:\bmv_explorer Backers, Source:\bmv_explorer

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.

Source: Jump Source: Jump

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. 

Currently, the Axelar network has a maximum of 70 validators and a >66% voting majority is required to approve transactions. In practice, there are 70 validators on Axelar's current validator list. However, only ~20 enjoy meaningful voting power. Since validators are not forced to operate nodes for every supported chain, voting power across the network is lopsided towards the top-20.

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


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.

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Michael @ CryptoEQ
Michael @ CryptoEQ

I am a Co-Founder and Lead Analyst at CryptoEQ. Gain the market insights you need to grow your cryptocurrency portfolio. Our team's supportive and interactive approach helps you refine your crypto investing and trading strategies.


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