The MEV supply chain is critical to the future performance and business models of the Solana network. Solana is in a phase of actively searching for, and ultimately choosing its MEV supply chain. One approach is to replicate the model established on Ethereum, building a searching and block-building marketplace. This path has multiple downsides, such as artificially introducing a global mempool that would increase Solana’s latency, and may also increase the risk of centralization and censorship.
We’re happy to announce that Chorus One has released a whitepaper today where we contrast the most relevant characteristics of Ethereum and Solana; review some of the features of the block-building marketplace model, i.e “flashbots-like model”, and what retrofitting it onto Solana would entail.
Given the particularities of Solana, we also propose an alternative to the block-building marketplace: the solana-mev client. This model allows for decentralized extraction by validators, through a modified Solana validator client, capable of handling MEV opportunities directly in the banking stage of the validator. Along with the whitepaper, Chorus One is also releasing an open-source prototype implementation of the approach detailed inside the whitepaper itself.
The client can be run by any validator. Even small validators or those with no specific expertise can benefit from MEV rewards by choosing to run the solana-mev client. That means the validators will be able to execute MEV strategies as they appear in their slot, in contrast with the current competitive aspect of searching, which results in a few winner bots extracting the value.
The model shrinks the incentive for independent bots to spam the network which ultimately contributes to episodes of intense traffic, as most of them send transactions targeting the same MEV opportunities.
Given that not all MEV strategies can be implemented inside the validator, independent searchers will continue to play a relevant role in the MEV space on Solana. That is guaranteed by their advantage of quickly building and updating sophisticated strategies, as well as expanding their focus to newly deployed programs and pools. This includes long-tail MEV.
In summary, the MEV client enables permissionless and decentralized extraction that benefits the ecosystem through transparent and ethical strategies, as well as increased financial returns for network participants.
For a comprehensive overview of the motivations and the model, please refer to the whitepaper here.
Authors: Jennifer Parak, Maksym Kulish
One of the most important events of 2022 in the crypto community was The Merge upgrade of the Ethereum protocol, which switched Ethereum from a Proof-of-Work legacy chain implementation to a Proof-of-Stake Beacon chain. It has proved that principal innovation is possible for the oldest and largest decentralized systems, without any disruption to the protocol users.
At Chorus One, we worked on securing next-generation Ethereum since the Beacon Chain took off in 2020, and we operate multiple thousands of validators on the mainnet today. Our new product OPUS — an Ethereum Validation-as-a-Service API — is designed to enable any organization and individual to run staking validator clients on Ethereum Beacon Chain, with a non-custodial, permission-less approach where we require customers to specify their own withdrawal and fee recipient addresses, so they remain in possession of both their stake funds and rewards. This post focuses on the technology implementation of validator keys provision and storage approach within our Validation-as-a-Service API product and shows off some challenges we faced and solutions we created in the process.
The Merge has introduced two new types of keys involved in securing the Ethereum chain, in addition to legacy chain wallet keys that are remaining unchanged within Beacon Chain [1]. These keys are composed of the Signing (Validator) key pair and the Withdrawal key pair. In addition to new key functionality, the Signing key is also using a new cryptographic signature scheme, called BLS, which stands for Boneh–Lynn–Shacham. This means older key generation tools will not work for creating Signing keys. BLS signatures, specifically those over the BLS12–381 curve are used in Beacon chain block signatures and attestations. This makes it possible to aggregate multiple signatures and verify them in a single operation, which is an outstanding improvement in scalability [2].
Like most other Proof-Of-Stake blockchains, next-generation Ethereum depends on the functioning of validators for securing the transaction flow. Validators are members of the network who lock a portion of their Ethereum coins (with a minimum amount of 32 ETH) to become responsible for proposing new signed blocks of transactions, and verifying such signatures of other validators, which is called attesting. Normally, every Ethereum validator should attest signatures for a slot once per Ethereum epoch (around 6.4 minutes); and for every slot, in every epoch, one validator is pseudo-randomly chosen to produce a block of transactions to be attested by others. Validators are being rewarded for both block proposals and block attestations. The mechanism of signing the blocks and verifying the signatures of others relies on the Signing key pair. The verification mechanism works because every public part of a Signing key (Public Signing Key) is published on-chain, so every signature done with the private part of the Signing key (Private Signing Key) can be verified by every other validator. Despite having the power for creating blockchain content, the Signing keys can not be used to move any funds including staking funds, and they only listen for and sign the transaction content provided by the peering network of Ethereum nodes.
The Withdrawal key pair is neither used for blocks nor for attestations, but it has control over staked funds. After the Shanghai fork, withdrawals will be activated, which will enable the funds to be moved to an owner-controlled withdrawal address specified in the deposit contract. With EIP-4895 withdrawals will be enabled in a push-based fashion [3], such that funds that were previously locked on the consensus layer on depositing are automatically pushed to the execution layer as a system-level operation. This means users won’t have to pay any gas for a withdrawal transaction. For users who have specified a BLS withdrawal address in their deposit contract, they would need to broadcast a BLS_TO_EXECUTION_CHANGE message to the beacon chain to update their withdrawal address to an execution address.
Finally, when the validator successfully proposes a block, a special Fee Recipient address receives the accumulated gas fees from the block. Since the Fee Recipient is not directly involved in staking, we will largely omit it in this post.
More information about different types of keys involved in Ethereum staking can be found in the following resources: [4], [5]
As part of the OPUS Validation-as-a-Service API, we require customers to retain ownership of Withdrawal keys, so that staked funds can never be controlled or accessed by Chorus One. A Signing key, however, is different: since Chorus One is a responsible party for hosting and maintaining the Ethereum validator, the inner workings of the Validation-as-a-Service API require us to generate, load, and store Signing keys. Thus, a robust solution for key management is an essential part of our Validation-as-a-Service API.
Early into the project lifecycle, we used the staking deposit command line interface (CLI) provided by the Ethereum Foundation (https://github.com/ethereum/staking-deposit-cli). While the staking CLI is a great tool for solo/home stakers, we realized that it was not designed for our use case. First of all, staking-deposit-cli by default stores the newly generated keystore into a filesystem, posing a potential security threat from leaking key material. While it is possible to use infrastructure-specific workarounds like ramdisks to mitigate the threat, such workarounds would add complexity and failure points to the platform. The open-source nature of staking-deposit-cli allowed us to fork the source code and modify it to cater to our needs, but the lack of thoroughly automated test suites meant we had a hard time syncing our changes with upstream updates. Finally, all of our codebase is Rust, and having to support Python CLI within the infrastructure, including keeping a good security track record by timely patching all the Python dependencies, puts an additional burden on the development team. In the end, we decided to pursue an alternative approach to generating keys, which we describe in the next paragraph.
Having endured even more difficulties with staking-cli when generating Ethereum keys on a large scale, our Ethereum Team decided to tackle the problem during our company-wide engineering hackathon where we built an MVP for an Ethereum key generation tool written in Rust. This was the birth of the Eth-staking-smith project.
Eth-staking-smith can be used as a CLI tool or as a Rust library to generate Signing keys and deposit data derived from a new mnemonic or to regenerate deposit data from an existing mnemonic. These use cases were implemented, in order to provide the same functionality as the staking-deposit-cli whilst avoiding all problems mentioned above.
Example command to generate keys from a newly generated mnemonic:
Example command to generate keys from an existing mnemonic:
Private Signing keys
As mentioned above, the Private Signing key is the key used to provide a signature to any action taken by the validator. The Eth-staking-smith Signing key output is done without encryption because in our use case, we use remote API to store the key material immediately upon the generation. Remote API implements encryption for both data transfer and data at rest. We decided to make keystore use optional, but Eth-staking-smith can still generate encrypted keystores for the users who need that.
Example:
Keystores
The keystore is an encrypted version of the private Signing key in the specified format [6]. When generating keys with eth-staking smith, a keystore password can be specified and in that case, the keystore data will be output. Using a key derivation function (e.g. <code-text>scrypt<code-text>, or <code-text>pbkdf2<code-text>), a decryption-key is derived using the given passphrase and a set of strong built-in derivation arguments. The example below highlights the field <code-text>function<code-text> that shows the key derivation function used. The keystore is a useful alternative that is less vulnerable to an attacker than storing the private Signing keys in a plaintext file, since they would need the keystore file, as well as the passphrase to decrypt the file.
Example:
Mnemonic
The mnemonic, passed in by the user or the one generated, is returned as part of the output so that the user can store it safely. Further information on mnemonics can be found under the reference [7].
Example:
Deposit data
Finally, the deposit data is returned, which is used to make the deposit of 32ETH using the Ethereum deposit contract to activate the validator. One of the most important fields in the deposit data is the withdrawal credentials.
By default, withdrawal credentials are BLS addresses derived from the mnemonic, however, there exists a use case where a user might want to overwrite the derived withdrawal credentials with already existing ones.
The BLS address format is called <code-text>0x00<code-text> credentials, and is actually set to be deprecated sometime after withdrawals will be enabled. Another alternative way to provide withdrawal credentials is to use a legacy Ethereum wallet address, prefixed by <code-text>0x01<code-text>. Ethereum will be pivoting from using <code-text>0x00<code-text> (formerly eth2) to <code-text>0x01<code-text> execution (formerly eth1) addresses. To learn more about this, we recommend watching the panel from Devcon 2022 [8] and looking into the Ethereum specification [4]. Eth-staking-smith, therefore, allows the user to pass in a <code-text>0x00<code-text>, <code-text>0x01<code-text> execution withdrawal credentials, as well as an execution address to overwrite the withdrawal credentials.
Example deposit data with BLS credentials (<code-text>--withdrawal_credentials 0x0045b91b2f60b88e7392d49ae1364b55e713d06f30e563f9f99e10994b26221d<code-text>)
Below we present a full-fledged example output of the key material generated by Eth-staking-smith:
Command:
Output:
Since writing key material on disk was a major security vulnerability for us, Eth-staking-smith removes this issue entirely by not writing any files on disk.
To avoid heavy-lifting and re-creating crypto primitives from scratch, we’re re-using functionalities from the lighthouse client implementation [9] for key generation, which builds on top of blst — a BLS12–381 signature library [10], which is currently undergoing formal verification.
For entropy collection, one customization was made: Eth-staking-smith defers entropy collection to the operating system by using <code-text>getrandom()<code-text> on Linux and thereby making use of Linux’s state-of-the-art randomness approach.
Finally, since key generation at scale was notoriously slow for us with staking-deposit-cli, we took initiative to add additional arguments for our users to tweak performance <> security parameters depending on their specific use case.
As per our use case, our API does not require the keystore file, but only the private key in raw format. We, therefore, enable the user to opt-out of keystore generation in order to improve performance. This can be done by omitting the <code-text>--keystore_password<code-text> argument as follows:
We measured that omitting keystore speeds up the key generation process by 99%. The key generation performance we experience with Eth-staking-smith is consistently sub-second, with slight variability depending on hardware and platform.
In case the user requires the keystore file for redundancy, there’s another option to speed up the keystore generation process by choosing a different key-derivation function. By default, Eth-staking-smith will use <code-text>pbkdf2<code-text> to derive the decryption key to achieve better performance. There’s also the option to use <code-text>scrypt<code-text> which offers better security, however, consequently, worse performance. This can be done by choosing the key-derivation function using the <code-text>--kdf<code-text> argument as follows:
As mentioned above, users who had previously specified a BLS (0x00) withdrawal address, will need to make a request to the beacon chain to update their validators’ withdrawal address to point to an execution address. To perform this operation, the user will need to have the BLS withdrawal key mnemonic phrase. Once done, withdrawals will be automatically funded on the execution address.
Eth-staking-smith enables the user to generate a signed <code-text>BLS_TO_EXECUTION_CHANGE<code-text> message which they can send to the beacon chain to update their withdrawal address.
Users can use the response to make the request to the beacon node as follows:
Throughout this post, we explained the basics of Ethereum Beacon Chain block validation, the key material involved in the process, and walked through an automation tool we created at Chorus One for Proof-of-Stake key management.
We hope the tool can be useful to some of our readers, especially those who use Rust for their blockchain automation work. It is also open-source, and we will welcome bug reports and pull requests on Github.
If the reader is interested in using OPUS Validation-as-a-Service API which builds upon that automation, you are welcome to join the wait-list for private beta, contact via sales@chorus.one.
[1] https://kb.beaconcha.in/ethereum-2-keys
[2] https://eth2book.info/altair/part2/building_blocks/signatures#aggregation
[3] https://eips.ethereum.org/EIPS/eip-4895
[4] https://notes.ethereum.org/@GW1ZUbNKR5iRjjKYx6_dJQ/Skxf3tNcg_
[5] https://github.com/ethereum/consensus-specs/blob/dev/specs/capella/beacon-chain.md
[6] https://github.com/ethereum/EIPs/blob/master/EIPS/eip-2335.md
[7] https://github.com/bitcoin/bips/blob/master/bip-0039.mediawiki
[8] https://www.youtube.com/watch?v=zf7HJT_DMFw&feature=youtu.be
Will Ethereum become a deflationary cryptocurrency, now that The Merge has happened? The answer to this question, in short, can be given in two words: “it depends!” Its long form, however, would offer you a better understanding of whether Ethereum will indeed remain inflationary (albeit only slightly as miners have packed their bags) or become a deflationary asset as time goes on.
At 6:42 AM UTC (2:42 AM EDT / 8:42 AM CEST) on Thursday, September 15, 2022, Ethereum’s long-awaited transition from Proof-of-Work to Proof-of-Stake, dubbed “The Merge”, was finally completed. As Chorus One and the rest of the ecosystem could confirm, the operation — after years of blood, sweat, and delays — was successful.
Having started out as a network relying on Proof-of-Work, thus fast shaping into the “hub” of miners as Bitcoin’s biggest competitor, Ethereum soon encountered scalability issues with its Execution Layer. Too much energy consumption between competing miners to process transactions and not enough security for the network, after all.
The Beacon Chain was, therefore, introduced in December 2020 as the network’s Consensus Layer. This innovation could be seen as Ethereum’s spine, master coordinator, or watchful lighthouse tower, with its key functions set to store data, and manage the network’s validators. Functionalities also included scanning the network, validating transactions, collecting votes, distributing rewards to performing validators, deducting rewards of offline validators, and slashing the ETH of malicious actors.
This Proof-of-Stake blockchain ran alongside the PoW network with the objective to — one day — merge and transform Ethereum into a Proof-of-Stake only network. A win for decentralization and the environment!
That day happened on September 15th, 2022. But before that, Ethereum was inflating at roughly 3.67% — with a ~ 4.62% issuance inflation rate. We will break down the calculations behind this inflation rate, shortly. But first, let’s go back to the drawing board to remind ourselves about the definition of inflation and deflation, in the first place.
Inflation happens when more bills are printed (FIAT money) or more tokens are minted (cryptocurrency) for circulation in the system. The value of the currency then decreases. In FIAT, this means that more bills would be needed to afford things. In certain cryptocurrencies, this means that the price of the currency goes down.
Deflation, on the other hand, happens when tokens are removed or destroyed from the system through “burning”. By logic, the value of the currency is supposed to increase. There are, however, much more complicated dynamics to this. Those won’t be our point of focus, today.
Before The Merge, Ethereum rewarded the capital-intensive mining activity with up to 2.08 ETH approximately every ~ 13.3 seconds. This rounded up to roughly ~ 4,930,000 ETH/year in miners rewards. The network also had around ~ 119.3M ETH in total supply. (Source: Ethereum.org)
We can find the inflation rate by summing up the Executive Layer and Consensus Layer inflation rates.
Then, we move to the Consensus Layer issuance, based on the amount of ETH staked. We’ll round up that number to 13,000,000 of staked ETH presently.
That’s almost Net Zero!
Summing both figures, we had an issuance inflation rate of ~ 4.62%, pre-Merge. In other words, miners made approximately ~ 89.4% of issued ETH whilst stakers got ~ 10.6% of the pie as ETH’s issuance inflated at ~ 4.62%.
Goodbye miners. Stay on, stakers!
We’ll get to understand how not addressing high gas fees could actually be a plus for “Deflationary Assets” or “Ultra Sound Money” advocates.
As we go back to the drawing board for the second time in our walk-through, let’s revisit the difference between inflationary, deflationary, and disinflationary crypto assets.
Some cryptocurrencies’ tokenomics are set-up to increase token supply over time. From the start, they are “programmed” to be inflationary. Other cryptocurrency projects, which propose unlimited coin supply, are inflationary as well — as unlimited supply is bound to outweigh demand, decreasing the currency’s value over time. An example of a coin with unlimited supply is DOGECOIN.
With its halving mechanism until the last 21 millionth Bitcoin is minted, Bitcoin is a disinflationary cryptocurrency. It is set up for a chronological decrease in its issuance. A disinflationary cryptocurrency can, in other words, be described as “an inflationary cryptocurrency with disinflationary measures” in the sense that the demand may, over time, become greater than the diminishing issuance of new tokens.
A good example of a deflationary cryptocurrency is the Binance Coin. BNB’s initial supply saw 200,000,000 tokens in circulation. At the end of Q3, nearly 40 million BNBs had been burned as part of the plan to halve the initial supply from 200 million to 100 million.
Look at tokens in circulation as a balloon and issuance as air: BNB’s mechanism is to deflate the balloon till 50% of air in it remains whilst Bitcoin’s mechanism is to keep inflating its balloon with a set maximum air supply, but doing so with a little less air at every pump.
So what about Ethereum, now that The Merge has basically rendered a close to Net Zero inflation rate? Why is it touted as a potential deflationary coin?
Enter EIP-1559, the mechanism that burns a portion of ETH gas fees during transactions on the network. With the inflation rate already dropping to 0.49% as explained above, EIP-1559 has the potential to decrease ETH supply — but only on the condition that the gas prices are above 15 Gwei.
Consequently, it is no surprise that ultra sound money advocates would plead users to set their ETH transaction fees to a minimum 15.1 gwei.
Ultrasound.money tracks Ethereum’s supply in real time. A negative figure reflects how many ETHs have been burned since The Merge. In other words, a negative figure showcases deflation, whilst a positive figure showcases inflation.
32 hours into The Merge era, Ethereum had issued over 376 more ETH. Inflationary.
A month on and the figures keep rising…
Or maybe not… a wider perspective shows us that there has actually been a decrease since October 8th, when the issuance peaked at over 13,000 ETH.
Ethereum — Deflationary or not?
Ultrasound.Money projects gas fees to be above 70 Gwei, registering a -3.40% supply decrease across the next two years.
As we’ve witnessed now, four weeks since The Merge, we’re bound to see periods of a deflationary ETH and periods with a low but healthy inflation — both of which would be vital for an economic equilibrium.
Axelar is a universal interoperability network, secured by delegated Proof-of-Stake using AXL, the native token of Axelar: in short, Axelar is a blockchain that connects blockchains. With Axelar, users will be able to use any network with just one wallet (e.g., use MetaMask to make trades on Osmosis). Axelar facilitates many-to-many connectivity and programmability at the network layer for interoperability by connecting to any blockchain via a ‘Gateway’ installed on the connected chain. Users send messages to a Gateway on a source chain, and validators in Axelar’s network sign those messages on a destination chain. Axelar leverages threshold encryption in tandem with its Proof-of-Stake consensus to deliver secure cross-chain communication. Axelar solves the single point-of-failure risks and user-experience issues that are apparent in pairwise bridges and in other interoperability networks, alike. Axelar’s interoperability network unlocks more than just cross-chain transfers; General Message Passing allows developers to perform cross-chain calls of any kind that sync state securely between dApps on various ecosystems. Essentially, the enhanced functionality of cross-chain dApps enabled by Axelar’s network results in a better user experience for all users on all chains. Axelar is valuable for developers because of how inherently programmable, composable, and flexible the network is and for users given the new use-cases it will unlock across chains. Ultimately, Axelar provides permissionless transactions and validation, decentralised security, many-to-many connectivity, and programmability that other interoperability networks cannot duplicate.
Axelar is the first fully permissionless and decentralised interoperability network. Axelar is an interoperability Hub that facilitates many-to-many connectivity and acts as an adaptor for any dApp to leverage in order to communicate securely with any dApp on any other blockchain that has a ‘Gateway’ available for Axelar to plug into. The permissionless aspect of Axelar enables any validator to join the decentralised network; unlike other interoperability networks, it is not gated. Axelar reduces the amount of connections found in existing interoperability solutions by acting as a ‘Hub’, whereby each blockchain only needs to connect to Axelar in order to communicate with any other blockchain connected to it as opposed to opening many connections to many blockchains. The fact that Axelar is a blockchain, itself, enhances interoperability capabilities because programmability is possible at the network layer. To expand, actions such as address routing become much more efficient: new chains are immediately accessible to all connected chains, creating compounding network effects. User experience is also improved: Axelar is able to create one-time deposit addresses on connected blockchains, duplicating the user onramps used by centralized exchanges.
A user sends a payload to an Axelar Gateway, which is deployed by Axelar in the native language of the source blockchain (e.g. Solidity in Ethereum). The payload is recognised by a relayer in Axelar’s network, which notifies Axelar validators that there is a payload that is ready to be collectively signed (e.g. a cross-chain transfer from a user). At this point, validators come to consensus on what should be done with the payload sent by the user that has reached the Gateway on the source chain (e.g. Ethereum). Validators unwrap the payload and collectively sign on what should be done with it and where to route it (e.g. what network to send the payload to). Axelar network uses a weighted threshold signature scheme that validators abide by, whereby each validator has a % of the overall shares needed to produce a signature that correlates to the amount of AXL (token of Axelar network) staked with them. For example, a gateway might require a threshold percentage of signatures in order to sign a payload. If validators constituting that threshold percentage of the overall stake in Axelar’s network execute signing on a payload, then consensus is reached that approves the payload to be executed on a destination chain. In this case, if it is a cross-chain transfer, then a payload can be executed on a destination chain that mints tokens representing the tokens locked-up on the source chain. However, Axelar’s network can facilitate interoperability interactions that are far more intricate than this. More on this later.
Axelar has a simple but elegant design. The most important element in a bridge comes down to who the owners are of smart contracts that receive cross-chain intent payloads. These owners are given custodial or execution responsibility. If a bridge is centralised, a user would send a payload to a designated signer or group of signers, which would custody and approve the message on the user’s behalf. This approach is known as “proof of authority,” in contradistinction to “proof of stake.” The problem with Proof-of-Authority systems is that a user has to trust these designated signers to behave appropriately and not maliciously. If a centralised group of signers steals or cheats the user — or mismanages their private keys and is hacked — a user can do nothing about it. Therefore, Axelar has created a decentralised and dynamic set of validators to custody or sign payloads from users in a way that is trust-minimised (i.e. a permissionless protocol and incentives provided by the AXL token enforce that parties are responsible for signing or custodying payloads via mechanisms such as cryptography, consensus and economics). Axelar uses threshold encryption, a decentralised network and slashing economics to ensure that all validators behave honestly and user intent is executed across chains securely, safely and correctly.
In general, Proof-of-Authority setups have resulted in hundreds of millions in funds lost to security breaches. The Axie Infinity (Ronin Bridge) hack is a recent, costly example. More decentralised approaches can solve the problem of risks encountered by entrusting a designated group with our intent to move across chains. However, thoughtful approaches are still needed. Wormhole was hacked due to an operational error: a code vulnerability was exposed on their GitHub before it was patched. LayerZero, a well-known decentralised bridge network, leaves critical security decisions up to the application developer and user. Nomad, another well-known project, puts safety behind liveness (if the network halts, transactions are not safe). Nomad recently suffered a multimillion-dollar hack due to a vulnerability left unaddressed in its codebase. Axelar code is rigorously and regularly reviewed by auditors; audits are published here. Axelar code is open-source; a multi-million-dollar bug-bounty program encourages white-hat developers to search for vulnerabilities. Loss-prevention measures are also enabled, including mandatory key rotations, and the ability to disconnect compromised chains quickly, set rate limits and cap transaction amounts.
Axelar solves the security problems that are apparent in other interoperability networks by leveraging threshold encryption and a Proof-of-Stake network for security and consensus whilst simultaneously solving the usability problems presented by pairwise bridges. The user barely has to lift a finger when an application they are interacting with leverages Axelar.
There are other high-quality solutions that match Axelar in terms of security, safety and usability such as Inter Blockchain Communication (IBC). However, IBC is restricted in that it requires extensive integration work to connect to blockchains outside of the ecosystem it was built for (Cosmos). Ultimately, Axelar is the premier solution that solves all interoperability problems faced by other solutions and is unmatched when it comes to security, usability and interconnectivity as Axelar can seamlessly connect to any type of blockchain, regardless of the underlying technology.
As mentioned earlier, Axelar can facilitate interoperability interactions that are far more intricate than just cross-chain transfers. Axelar opens up a multitude of possibilities for users to engage with different chains without having to leave their source chain. This is powerful to comprehend, given users can take actions cross-chain using tools familiar to them such as native wallets and currencies. Let’s dig in.
One example of what is made possible with Axelar’s network is a Cosmos user instantly being able to receive USDC to use on Osmosis from a centralised exchange such as Coinbase without needing to use Ethereum. As it stands right now, if a user has USDC on a centralised exchange and wants to withdraw it to a decentralised exchange, it is highly likely that a user will only be able to withdraw USDC to a network such as Ethereum. This is a terrible user experience for Cosmos users, who will need to receive USDC on Ethereum first, before bridging it to Osmosis. Not only is this an unnecessary amount of steps but a user will also need to purchase ETH in order to pay gas costs to move across chains. With the advent of Axelar (as well as Interchain Accounts), if a user provides a centralised exchange with an address on Ethereum that is being observed by Axelar validators on Ethereum, it will arrive on Osmosis without a user needing to take any extra actions or pay any extra fees. This is possible because validators in Axelar’s network observe payloads incoming into a Gateway (in this case on Ethereum) and the Axelar network understands how to translate it and route it cross-chain. Once a payload arrives on Ethereum, Axelar can create an address for a user on Osmosis to receive the USDC. As a blockchain connecting blockchains, Axelar can execute logic that enables multiple steps to be assembled into 1 for users to take actions cross-chain. In this example, Osmosis users will be able to withdraw from centralised exchanges in 1-step, even if a centralised exchange does not provide the optionality. This will unleash a new wave of liquidity into deFi apps and other decentralized applications, like Osmosis.
The power of Axelar’s network can also be leveraged by users outside the Cosmos ecosystem. For example, an Ethereum user that does not want to leave the comfort of the network can utilise Axelar to take actions on applications that exist outside of Ethereum. To elaborate, let’s say that a user wants to swap ETH for AVAX and then borrow USDC on Avalanche with AVAX as collateral, in a decentralised manner. Right now, a user would probably send ETH to a centralised exchange using MetaMask and pay fees in ETH, sell ETH for USDT/USDC on an exchange, buy AVAX with USDT/USDC in another transaction on an exchange, send the AVAX to an Avalanche wallet and pay fees in AVAX, navigate to a lending protocol front-end, deposit AVAX and pay AVAX fees with an Avalanche wallet and then borrow USDT on a lending protocol with an Avalanche wallet (paying another AVAX fee).
Axelar completely abstracts away these extra steps and payments by creating a sequence of instructions for the network to execute cross-chain on behalf of a user.
In this scenario, if a user was on Ethereum as a source chain, the user would use MetaMask to send intent to a Gateway connected to Axelar, alongside a payment of ETH that is requested by network services in order to execute the intent cross-chain. Axelar network then abstracts the payment flow: ETH is converted into AXL to pay validators and then into AVAX to pay fees on Avalanche. A user does not have to leave MetaMask, or Ethereum, or purchase any other currencies in order to transact on other chains. (Notably, this process may create deflationary effects in Axelar, as “change” from these conversions is either refunded to the user, or applied toward potential buyback-and-burn programs. More on this from Axelar Foundation, here). At this point, Axelar has done all of the work on behalf of the user and a user has successfully borrowed USDC on a lending protocol in Avalanche. Axelar opens up new possibilities for users to take cross-chain actions without needing to learn new tools or purchase new currencies to pay fees.
Axelar is a Proof-of-Stake network built with Cosmos SDK and Tendermint consensus. The AXL token is used to secure the decentralised network. For a refresher, stake is the value of a token that has been delegated to validators to secure a Byzantine system. The more stake (value) that has been delegated, and the more diverse the pool of token-holders and validators, the harder it is to attack the system. At this point, it is extremely unlikely for a validator to be malicious in any case given it would be explicitly risking a large sum of its own stake and implicitly risking its reputation in the cryptocurrency ecosystem. Even in a scenario where the value at stake in AXL is less than the amount being transferred, validator collusion toward a malicious outcome is unlikely, given the explicit reward for doing so would likely be very low and reputation risk extremely high.
Holders of AXL have a strong incentive to delegate their AXL to a validator(s) to secure the network. Validators earn block rewards for successfully proposing new blocks that are verified by other validators in the network. A validator has more opportunity to propose blocks (and hence earn more rewards) if it has more stake delegated to it. Delegators are the ones that stand to benefit the most from block rewards because delegators earn the majority of it (often >90%), whilst validators take a commission for securing the network on behalf of them (i.e for. running the node that participates in the Axelar’s network consensus). If an AXL holder does not delegate, they risk being diluted as they will miss out on block rewards being received by other AXL stakers and validators.
Token-holders also have an incentive in the form of their long exposure to AXL, to delegate AXL to validators that they believe will secure the network in the best possible fashion. Delegators can review data on the full list of validators via the Axelar block explorer, Axelarscan, at axelarscan.io/validators. The more AXL that is staked with a validator, the more voting power a validator has (i.e. more chance of a validator being chosen to produce the next block) — but this does not lead to concentration of voting power, because Axelar has implemented quadratic voting. In short, quadratic voting means validators’ voting power is equivalent to the square root of their delegated stake. E.g., to get one vote, a validator would need 1 token; but to get 2 votes they would need 4; to get 3 votes, 9 tokens would be needed, and so on. The validator set of Axelar is limited, so AXL token-holders can play a direct role in ensuring the active validator set is performant and available by delegating to high-quality validators. Ideally, Axelar’s network is very decentralised whereby it would take not just a lot of stake to break liveness guarantees of the network but also a lot of validators (e.g. validator diversification).
Aside from securing Axelar’s network, AXL is also used for token-holders to participate in governance. Due to the fact that Axelar is built with Cosmos SDK, this means that all governance proposals are created and voted upon on-chain. The more AXL that a token-holder holds in the network, the more votes a token-holder has on governance proposals. For example, governance proposals might cover connecting new chains or a proposed upgrade that improves the features of Axelar’s network. However, it is not a requirement for AXL token-holders to participate in governance in Axelar. In networks built using Cosmos SDK, token-holders inherit the vote of the validators they delegate to if they do not vote themselves. If a user does not agree with the vote of a validator, the user always has the optionality to change the vote that was inherited from their validator. All in all, on-chain governance in Cosmos SDK chains runs smoother than most and is a great way for token-holders to actively participate and contribute to decentralised networks.
Finally, AXL is used to pay transaction fees to validators in Axelar’s network. For example, a user active on source-chain Ethereum that signals intent to take actions on destination-chain Avalanche would pay fees in ETH to Axelar’s Gateway on Ethereum. Axelar’s SDK provides services that observe the Gateways and then convert the ETH fee into AXL to pay Axelar validators and AVAX to pay Avalanche validators (all-the-while taking a cut for doing so). In essence, AXL is the fuel for validators to come to consensus on cross-chain intent. Demand for AXL comes from services such as Axelar SDK, which convert other currencies into AXL in order to pay validators for their work. Anyone can provide these services; they can even be handled manually by the user, if desired. The more usage Axelar’s network gets, the more currencies that are converted into AXL to pay validators, the more demand for AXL.
There are many reasons why Axelar is a valuable network. The network is valuable for developers, users and token-holders.
For developers, Axelar is useful due to the Turing-complete programmability the network facilitates, as well as the ability to compose functions cross-chain. Starting with composability, developers that build on top of Axelar can build one-click user experiences consisting of multiple components that interact with each other cross-chain. (Read more for an introduction to architecture approaches, when composing cross-chain.) For example, a developer might choose to build a yield optimiser, whereby a financial strategy reads yield of a certain asset across multiple chains and deploys more or less capital (rebalancing) on a connected chain in order to optimise yield for the next block. Axelar is also entirely programmable, which means that validators in Axelar’s network can take any action on behalf of a user cross-chain, no matter what it is. For example, a developer could choose to build a governance aggregator application whereby a validator set can vote on behalf of a user in a DAO, cross-chain, in the same direction as the majority vote (e.g. vote YES if majority vote is already YES). Related to programmability, Axelar network is Turing-complete, meaning any program that is created by developers can be run by the network, given enough memory and time. These features are possible because Axelar is a blockchain that connects blockchains, and cannot be duplicated by other interoperability networks. All in all, Axelar is the most customisable, flexible, programmable and composable interoperability network.
Users of Axelar can look forward to greater liquidity in their respective ecosystems, a better user experience, less transaction costs and new use-cases. Greater liquidity will be able to freely flow across blockchains that are connected to Axelar and as a result, users will have new assets to trade that were not available previously on their blockchains. There will be a better experience for users moving cross-chain as users will not need to hold multiple tokens across chains to take actions and not need to make separate transactions for each transaction. Any cross-chain transaction can be paid for with one token and instructions can be bundled by validators to execute atomically. Users will also be able to access new types of applications that exist on chains that are not native to the chain they currently interact with. For example, a user on Ethereum might be able to utilise a cross-chain AMM built on Axelar to swap Ethereum assets with assets on Avalanche. Axelar and its partners are already working with the largest dexes on multiple chains (Osmosis, a Cosmos project, is a notable example), who are building these cross-chain liquidity networks. Moreover, many of these projects are using Axelar’s unique functionality to build user onramps (such as one-time deposit addresses) that can rival centralised exchanges for ease-of-use, and welcome users seamlessly, regardless of what tokens they hold.
AXL is the fuel to the Axelar economy. The value of AXL comes from how it is used to secure the network, govern the network and pay node operators in the network to execute cross-chain intent. Holding AXL gives users a way to directly contribute to the sustainability and security of the network.
To conclude, Axelar is a decentralised and permissionless interoperability network built with Cosmos SDK that has a mixture of properties such as many-to-many connectivity, programmability, composability and Proof-of-Stake security that constitutes the most robust interoperability network available for users. Axelar will be secured by AXL, which is used to secure the Proof-of-Stake network, as well as for governance and payment for validators to execute cross-chain intent. Axelar will unlock a variety of use-cases that have not yet been seen, such as interacting cross-chain with other blockchains that might not speak the same language as the user’s source blockchain. For the first time, cross-chain user experience will be seamless as a flux of applications are being built on top of Axelar currently to leverage the profound properties of the interoperability network. Users who enter Web3 via one blockchain will easily access applications and assets on other blockchains, perhaps without even knowing they are doing so. Axelar solves problems of centralised bridges and interoperability networks to produce what can ultimately be argued as the safest, most secure and best cross-chain user experience that is available for users.
Acknowledgements: Thanks to Galen Moore from Axelar for his review of this article.
Xavier Meegan is Research and Ventures Lead at Chorus One.
Medium: https://medium.com/@xave.meegan
Twitter: https://twitter.com/0xave
Chorus One is one of the largest staking providers globally. We provide node infrastructure and closely work with over 30 Proof-of-Stake networks.
Website: https://chorus.one
Twitter: https://twitter.com/chorusone
Telegram: https://t.me/chorusone
Newsletter: https://substack.chorusone.com
YouTube: https://www.youtube.com/c/ChorusOne
Axelar delivers secure cross-chain communication for Web3, enabling dApp users to interact with any asset or application, on any chain, with 1 click.
Website: https://axelar.network/
Twitter: https://twitter.com/axelarcore
Discord: https://discord.com/invite/aRZ3Ra6f7D
Blog: https://axelar.network/blog
YouTube: https://www.youtube.com/c/Axelarcore
.png)
