Key Insights
- The Axelar network’s number of connected chains increased from 30 to 55 throughout 2023. The Interchain Amplifier is being built to increase this number via permissionless connections to new networks.
- Interchain transactions and active addresses increased 478% and 430% YoY, respectively, with help from services such as the Squid liquidity router. Squid is frequently the most active contract by interchain transactions and volume.
- AXL’s price increased 131% YoY. Inflation via per-chain rewards gradually decreased in Q4, reducing inflationary pressure on AXL. Gas burning will also contribute to reducing supply increases.
- The introduction of the Axelar Virtual Machine and Interchain Token Service will expand the Axelar network from message passing to a fully programmable cross-chain layer, such as maintaining the fungibility and customized functionality of tokens across chains.
Primer
The Axelar network (AXL) is a Layer-1 (L1) network that enables cross-chain interoperability between various crypto ecosystems, i.e., a crypto overlay network. Axelar consists of a decentralized network; a set of Gateway smart contracts that connect the Axelar network and its interconnected external chains; and a software development kit (SDK) of developer tools and APIs.
The Axelar network began as a project in 2020, built with various Cosmos technologies to provide interoperability across Ethereum and other networks. The Axelar network is much more than just a Cosmos interoperability hub or a cross-chain bridge: it supports the ability to program cross-chain logic and pass arbitrary data.
The Axelar network’s technology aims to allow cross-chain functions that are more complex than simply transferring wrapped assets to different networks. To avoid cross-network friction, Axelar focuses on full-stack interoperability — not only supporting the bridging of any information/asset but also permissionless overlay programmability, executing smart contracts and dapps across networks. The Axelar community has a three-pronged approach to ultimately scaling to hundreds of connected networks: adjusting the network’s economic structure, releasing the Axelar Virtual Machine to support permissionless connections, and exploring more efficient solutions like light clients. For a full primer on the Axelar network, refer to our Initiation of Coverage report.
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Key Metrics
Analysis
In Q4 2023, the total crypto market cap experienced a sharp increase, largely driven by anticipation surrounding spot BTC ETFs. AXL’s circulating market cap increased 344% QoQ to $621 million, outpacing the overall crypto market’s growth of 54%. Thanks to this Q4 growth, AXL’s market cap grew 1,076% YoY. Its market cap rank among all cryptocurrencies moved up from 170th to 96th through Q4. As with other networks, Axelar’s higher market cap creates a higher limit for the economic security provided by its validators.
While AXL’s market cap grew 344% QoQ and 1,076% YoY, AXL’s price only grew 252% QoQ and 131% YoY. While this price growth considerably outpaced the overall market, the difference was due to AXL’s circulating supply increasing 25% QoQ and 385% YoY. AXL did not have anywhere near a 385% annual inflation rate in 2023, but a large number of tokens unlocked from the initial supply and entered circulation. AXL’s initial supply of 1 billion tokens is halfway through a four-year vesting schedule.
AXL’s inflation rate was 11.5% as of the end of Q3’23. However in October, new AXL tokenomics were proposed to gradually reduce the per-chain reward from 0.75% to 0.3%. The per-chain reward is only relevant for non-natively connected chains, such as EVM networks. The proposal was approved via an onchain vote and effected incrementally, with the final leg locked in on Dec. 8, 2023. This would bring annual inflation down from 11.5% to 5.2%, based on an equivalent number of chains (14). However, three chains have since been added (Scroll, Centrifuge, and ImmutableX). Axelar’s new inflation rate with the decrease to 0.3% per EVM chain is now 6.1% (1% base inflation plus 0.3% for each of the 17 EVM chains).
Revenue generated by the Axelar network (in AXL) increased 5% QoQ and 511% YoY, due to increased transaction fees. Denominated in USD, it increased 78% over Q4, driven by AXL’s price appreciation. Fees generated on the Axelar network are paid to validators and stakers, but a current proposal would replace that system with a gas-burning mechanism.
Interchain network activity, i.e., transactions and active addresses, increased steadily throughout Q4. General Message Passing (GMP) activity, which involves more complex logic than simple asset transfers, dominated in terms of network activity, making up 75% and 74% of the total transactions and active addresses in 2023, respectively. Overall, interchain transactions increased 5% QoQ and 478% YoY. Interchain active addresses increased 3% QoQ and 430% YoY.
In Q3, the ability to include a refund for GMP events was enabled via an upgrade to V0.34. This release also included a new call-contracts proposal type and smart contract governance.
Interchain volume and fees also saw both quarterly and yearly growth. Volume increased 50% QoQ and 171% YoY. Fees increased 103% QoQ and 546% YoY, having the greatest Q4 and 2023 increase of any interchain metric. Part of this increase is due to AXL’s 2023 price appreciation, which drives the fee metric upward as fees are ultimately paid in AXL. Fees can be paid in any currency from a user perspective, but the Axelar Gas Receiver converts those native tokens to AXL in the backend.
The Axelar ecosystem continued to grow in Q4’23 and 2023 as a whole. As of the end of Q4, Axelar had 55 connected chains, up from 30 at the start of the year.
Notable ecosystem developments and integrations include:
- Connections to several Ethereum L2s (including Base, Scroll, Mantle, Optimism, and Arbitrum) and other networks (including Sei and Polygon).
- The Onyx collaboration with J.P. Morgan and Apollo. This platform is focused on real-world assets (RWAs).
- The launch of Squid Router, a liquidity router that uses GMP to enable cross-chain swaps and bridging. Already, Squid Router is frequently the most active contract by transactions and volume, with more integrations on the way — such as dYdX’s plan to use Squid for its V4.
- An integration with Vertex to support cross-chain deposits on Vertex's orderbook DEX on Arbitrum. The integration will initially support cross-chain deposits from Ethereum, Optimism, BSC, Polygon PoS, Base, Avalanche, Fantom, and Mantle. It will eventually support more chains that are accessible through Squid Router.
- The announcement that Frax Finance will use Axelar as the cross-chain infrastructure to scale securely beyond native bridges. This partnership aims to support the issuance of Frax-assets on Osmosis, Mantle, Linea, Kujira, Manta, and Scroll.
- Enterprise and institutional integrations, such as those with Microsoft and Mastercard.
- DeFi integrations, such as those with Uniswap, Circle, and Lido.
- Crypto infrastructure integrations, such as those with Filecoin, Metamask, and Celestia.
Other network and ecosystem developments are detailed in the 2024 roadmap, including:
- A gas-burning mechanism similar to EIP-1559, which would burn fees rather than pay them to validators and stakers.
- The Axelar Virtual Machine (AVM), which would expand the Axelar network’s capabilities from bridging and message passing to a fully programmable cross-chain layer. It enables developers to deploy smart contracts on Axelar and build natively cross-chain logic and developer tooling.
- The Interchain Token Service (ITS), which is designed to preserve the fungibility and custom functionality of native tokens across multiple networks. These preserved tokens are known as Interchain Tokens. The ITS would be a similar feature to LayerZero's Omnichain Fungible Tokens and IBC-connected networks that use Interchain Accounts (ICA) and Interchain Queries (ICQ). However, the ITS would also support canonical wrappers, standardized tokens, and arbitrary data — as well as a no-code portal for token creation and registration.
- The Interchain Amplifier, which will enable developers to permissionlessly connect new blockchains to the Axelar network. This would make Axelar available as a solution to potentially hundreds of Ethereum L2s (and L3s).
- The Interchain Maestro, which is a set of orchestration contracts and templates to assist in designing, deploying, and managing dApps across multiple chains – like a Kubernetes for Web3. ITS is a single component of the broader Interchain Maestro.
- Integrating additional networks with unique consensus architectures, including Aptos, Sui, and Solana.
Closing Summary
In Q4, the Axelar network began its expansion from message passing to a fully programmable cross-chain layer, such as maintaining the fungibility and customized functionality of tokens across chains. The Axelar Virtual Machine, Interchain Token Service, and Interchain Amplifier are the key technologies enabling this growth.
Even without these technologies being fully rolled out, the Axelar network has been growing. AXL’s price increased 131% YoY, with inflation rates decreasing ~5% QoQ. Interchain transactions and active addresses increased 478% and 430% YoY, respectively, with help from services such as the Squid liquidity router. This activity growth and these tokenomics changes, along with the upcoming releases/updates, will likely position Axelar well in the cross-chain programmability space.
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