Preparing Axelar network’s technical infrastructure for an explosion in new-chain connections: short-term [reducing inflation], medium-term [external validation via AVM], and long-term [light clients via AVM] solutions
The Axelar network currently offers inflationary rewards to motivate validators to support external chain connections. This approach has served the community effectively, enabling the network to handle over $6 billion in cross-chain volume and hundreds of thousands of requests. This article proposes for consideration short-term, medium-term and long-term scalability plans in furtherance of maintaining robust and decentralized technical infrastructure. For further context, please read “Streamlining L2 Integrations,” recently posted to this forum.
- Short-term: Modify the network’s inflation parameters. In parallel, introduce a gas-burning mechanism to counterbalance inflation, in furtherance of maintaining robust decentralization on the network.
- Medium-term: Transition to establishing connections within Virtual Machine smart contracts and replace inflationary rewards with explicit reward pools for each new chain.
- Long-term: Expand the use of more light-client connections where suitable.
A. Short-term: Incentivizing decentralized security by adapting network inflation parameters & implementing a gas-burning mechanism
The current inflation rate stands at 0.75% per externally verified chain, culminating in a total inflation of 11.5% [1% base inflation, + 14 externally supported chains * 0.75% = 11.5%; see the previous inflation adjustment post] and an AXL staking APR of approximately 14.5%.
To accommodate more Ethereum Virtual Machine-compatible [EVM] chains [estimated at five to seven chains for this plan; medium- & long-term plans below will aim to accommodate many more chains] on the network without compromising incentives, current parameters may need adjustments. Taking into account the approximate technical costs associated with maintaining an external remote procedure call (RPC) node for a standard EVM stack are ~$100-$300/month [the costs vary greatly depending on a chain / deployment model] and the need for the Axelar network to incentivize a minimum of 75 validators to maintain robust technical infrastructure and security in furtherance of decentralization, an added network reward of ~260K-780K AXL [~$90K-$270K at the current exchange rate] per year for each chain should be distributed to such validators in furtherance of such aims. Given Axelar network validators set an average of ~10% commission rate, this suggests a minimum inflation of ~0.26% for each external chain added to the Axelar network to continue incentivizing validators to support external chains [the current total supply is ~1.1B AXL, so 0.26% inflation adds ~2.86M AXL in rewards per chain per year].
We recommend reducing the inflation to 0.3% per external chain. This should bring the current total inflation down to 5.2% and, with the addition of another five chains, result in a 6.7% inflation. This helps ensure that validator incentives are covered while also decreasing the network’s supply.
This short-term modification to the network’s inflationary rewards would help the Axelar network ensure it maintains a high-quality validator set, which would help with the ecosystem’s transitions to the medium- and long-term items proposed below. The medium- & long-term plans would allow Axelar network to onboard many more chains without inflationary rewards.
The inflation-reward adjustment can be initiated by anyone through submission of a governance proposal on the network, and would subsequently be applied automatically by the protocol once a community vote to move forward takes place.
If more chains need to be added to the network, it can transition to a model where a certain amount of rewards goes solely to validators that support an external chain [with no commission], and a smaller inflation reward is applied on top to continue incentivizing users to stake with validators that support more chains.
Currently, when users conduct a cross-chain transaction, they pay gas to the Axelar network, which then redistributes it to stakers. It costs about 0.2 AXL [parametrized] in gas to process a message via Axelar today [plus gas on the source and destination chains]; we suggest removing these gas fees from the supply.
Over time, this mechanism should counterbalance inflation. For example, with a fixed gas fee of the AXL equivalent of $0.5 and 5 bps for selected asset volume transfers, assuming the network processes 100K transactions/day and a daily volume of $100M [a 20-fold increase from current figures], around ~104M AXL [~$36.5M at the current exchange rate] in gas fees would be collected and removed from the supply annually. This would effectively counteract an inflation rate of up to 10%, leading to a deflationary state of the network.
Switching to a gas-burning mechanism as described above would necessitate implementation work from the community, a community governance vote and a network upgrade.
There is a base 1% inflation on the network [for all validators that just run the Axelar consensus], which we do not believe needs adjustment.
The Axelar Virtual Machine [AVM], a fusion of Cosmwasm consensus logic and Axelar network interoperability, is being developed to help transform the Axelar network’s connectivity approach. Interchain Amplifier, a service on top of the AVM, is a set of smart-contract templates that developers will be able to instantiate to plug into the Axelar network and route their packets to all other interconnected chains. Multiple validation methods and customization features will be supported. Its key features include:
- Permissionless network connection setup.
- Customizable connections for application-specific preferences.
- No added inflation for new connections. Validator rewards will come from dedicated treasuries, projects or gas fees collected across the connection paths.
To integrate a new chain, a developer would need to do the following:
- Instantiate an Axelar Gateway on the newly connected chain.
- Instantiate a Gateway on the Axelar network, specifying the validator set they want to utilize [which would be outside the core consensus validator set].
- Get a reward pool funded with AXL to incentivize the validators to support the new connection during the bootstrapping phase. [If the number of transactions is high along the new connection, the developer may choose to channel some part of those to the validators versus explicitly funding a reward pool.]
- Submit a governance proposal for a community vote to add the new chain to the Axelar Router.
- Upon approval, the traffic from the new chain can be routed to all other Axelar interconnected chains.
To elucidate, Interchain Amplifier would cease adding inflation and would instead use AXL rewards that teams or treasuries deposit into chain-connection pools. The AVM and Interchain Amplifier service are presently being developed and are in the devnet phase, with plans to finalize development in the upcoming quarters.
Existing connections would remain following the existing model; selected new connections should still be considered via the existing model, as they will rely on the full Axelar validator set. Some existing connections [e.g., the connection to Ethereum] could potentially be augmented with additional light-client validation logic for potentially stronger security.
Several initiatives in the ecosystem are in progress to employ light clients [including those based on zero-knowledge proofs (ZK)] for connections with the Amplifier. This is particularly apt for L2s as validity proofs gain traction. With light clients, external validator incentives should be unnecessary – only the relayer would need incentives. This is because a light client of chain A gives a compact program P that can be run on chain B to verify transactions from chain A. No external validation support is needed in this model and packets simply need to be relayed by someone. [The Axelar network supports a permissionless relay model, so anyone can transmit these packets.]
The result is that the Axelar network would morph into an overlay featuring a blend of connections, some supported by external validators [at consensus level as today, or at Interchain Amplifier smart-contracts level], others by light clients.
As the Axelar network continues expanding, making more connections and supporting more applications, its compounding effects increase exponentially. To support more chains in the short-term, the Axelar network should reduce the inflation parameters and add a gas-burning mechanism. With the instantiation of the Axelar Virtual Machine and Interchain Amplifier services, new types of connections would be possible. Those connections could help eliminate the need to add external inflation to support more chains. Instead, AXL would obtain further utility: it can be used to explicitly fund the reward pools for validators that require external validator support and to fund relayers. A combination of the inflation reduction and increased utility for AXL to fund reward pools would help ensure that the community can help scale the Axelar network to support all the connectivity needs of Web3 ecosystems.