Reopen Axelar IBC Channels to Terra

Governance and Grants
1

Proposal Summary:

This proposal seeks to reopen the IBC channels between the Axelar network and the Terra blockchain. Following the exploit on July 30, 2024, which resulted in the loss of Axelar assets on Terra, substantial recovery efforts have been made. Terra has acquired sufficient assets to cover the exploit and is committed to restoring the integrity of the ecosystem. Re-enabling the channels is critical for the functionality of existing protocols and liquidity on Terra, ensuring the ecosystem can thrive.

Background:

On July 30, 2024, the Terra blockchain was exploited through an IBC-Hooks vulnerability (ASA-2024-007). This attack led to the unauthorized creation of tokens, including:

  • 2,192,476 axlUSDC
  • 353,069 axlUSDT
  • 2.047 axlWBTC
  • 53,769,000 Astro (of which 14,769,000 were sold, the rest were frozen).

The Terra ecosystem suffered significant setbacks as a result. Since then, the following actions have been taken:

  1. Vulnerability Addressed: The exploit has been patched in Terra Core v2.11.6, ensuring the security of the ecosystem.

  2. Fully Funded Recovery Proposal: Approved by Terra Governance.

  1. Asset Recovery To Date: Terra has acquired the following assets to fully cover the exploit. Terra Finder
  • 910,706 axlUSDC
  • 281,784 axlUSDT
  • 0.943 axlWBTC
  • 1,496,429 nobleUSDC
  • 1.699 wbtc.osmo
  1. Sufficient Funding for Program Completion: Funds available to resolve the remaining asset imbalance exceed $3million. DAO DAO

Summary

Terra has successfully mitigated the exploit’s impact.

An OTC arbitrage protocol, purpose built to accumulate needed Axelar assets has achieved the recovery of the funds noted above [3. Asset Recovery]
https://www.erisprotocol.com/terra/phoenix-directive?tab=axelar-otc

However, even with OTC discounts exceeding 50–100%, further accumulation of Axelar assets is limited due to inactivity in impacted wallets.

With Axelar channels reopened, the remaining assets can be acquired via traders and arbitrageurs, who currently are unable to take advantage of the trade discounts offered.

Rationale for Reopening the Channels:

  1. Restoration of Liquidity and Ecosystem Functionality:
  • AxlUSDC and other Axelar assets remain integral to liquidity pools and dApps on Terra.
  • Creating new channels instead of restoring existing ones would disrupt protocols and render current Axelar liquidity ineffective (approximately $1 million).
  1. Commitment to Recovery:
  • Terra plans to burn the recovered Axelar assets in the recovery contract, ensuring parity across both chains.
  • Non-Axelar assets will be converted into Axelar assets via new transfers to further stabilize the ecosystem.
  1. Reestablishing Frontend Integrations:
  • Reopening Axelar and Squid frontends for routing to Terra will bolster usability and support ecosystem participants.

Action Plan:

  1. Reopen the IBC Channels (Axelar - Text Proposal):
  • Direct the Axelar rate limit multi-sig to re-enable channels to the Terra blockchain.
  1. Burn Recovered Assets (Terra - Chain Upgrade Proposal):
  • As part of a Terra chain upgrade proposal, burn recovered Axelar assets to restore balance in the IBC equation.
  1. Support Ecosystem Recovery:
  • Facilitate frontend integrations (e.g., Axelar and Squid) to route assets and transactions seamlessly.

Conclusion:

The reopening of IBC channels between Axelar and Terra is essential for restoring a fully functional ecosystem. Terra has demonstrated its commitment to asset recovery and ecosystem integrity. By approving this proposal, the Axelar rate limit multi-sig will enable Terra to continue its recovery journey, safeguarding the interests of all stakeholders.

For: Reopen IBC channels to Terra.
Against: Do not reopen IBC channels to Terra.

We urge the Axelar community to approve this proposal for the collective benefit of both networks and help restore the Axelar-Terra bridge parity.

About Phoenix Directive

Phoenix Directive and Phoenix Foundation were recently established by the Terra community with the responsibility to take over chain management & development responsibilities from TFL. Central to this is continuing to maintain and enhance Terra’s core chain operations, system stability, and quality engineering development. This transition, along with the establishment and funding of the Phoenix Treasury is now complete. Phoenix Directive is also leading development and support initiatives with Terra’s communities & projects. Our current focus is building out an ecosystem of DeFi applications, growing our active user community, and establishing strong partnerships and integrations throughout Cosmos.

14 Likes
2

I’m all for this, opening back up the IBC channels to Terra is great news!

13 Likes
3

This will bring more infrastructure for axl. Go for it.

13 Likes
4

Yes please get this bridge re-opened! Will be greatly appreciated, especially by the @galacticminingclub to add axlWBTC-WBTC liquidity to Terra :muscle:

12 Likes
5

Enthusiastic supporter of this proposal. This is a solid plan to restore what has been a mutually beneficial partnership. Let’s get that bridge re-opened ASAP.

12 Likes
6

As part of Phoenix Directive, I fully support this proposal. It is time to get the Axelar asset exploit behind Terra and this is the right way to do it, to allow the ecosystem recover full backing and opening channels for axl assets.

13 Likes
7

I’m all for this, opening back up the IBC channels to Terra is good news! A large number of users are asking about it in discord

13 Likes
8

It’s time. We can’t rely on every single wallet that holds the Axelar assets on Terra to OTC their assets to Phoenix Foundation to burn as there are always going to be some inactive wallets. There is still an unfilled OTC for LUNA at $0.35 for axlUSDT - over 100% discount:

image
image2329×487 35.2 KB

This has resulted in axlUSDT trading at $2! So it is not possible to arbitrage while the IBC client is disabled.

Let’s get this done so people can bring in new axlUSDT/axlUSDC to finish off those OTCs, and Terra will burn them in the next chain upgrade.

12 Likes
9

I am all in favour of this proposal. By voting in favor of this proposal, we’re not just restoring a connection; we’re reaffirming our belief in the power of decentralization and interoperability. Let’s move forward with this initiative to foster a stronger, more integrated blockchain ecosystem.

12 Likes
10

Thank you for your proposal, the detail provided is very much appreciated and the enthusiasm from Terra ecosystem participants is understandable. However, there needs to be a thorough discussion covering the pros and cons of following this proposed plan versus the standard recovery path of migrating to new bridged assets before coming to a conclusion.

The presence of bridged assets on Terra not collateralized by assets on Axelar does present a real risk. It would be sensible to get an objective assessment of any probability that users could lose more funds upon re-opening the bridge before moving to a vote.

6 Likes
11

Thank you for this post Mike and for raising your concerns as an Axelar community member.

To clarify, we have held discussions with Axelar team contributors over recent months. This governance proposal has been posted at their suggestion because the preferred protocol for reopening of IBC channels with Terra is through Axelar governance approval.

I cannot speak for the Axelar team of course, but would expect that if there were any concerns related to our proposal that these would have already been considered and raised in our own discussions with them.

Again, very much appreciate your thoughtful post.

10 Likes
12

Thanks everyone for engaging. I’d like to clarify Axelar Foundation’s position with respect to this proposal.

Axelar Foundation spoke with the Phoenix team, and advised that Phoenix posts their proposal on the forum for the Axelar community to discuss and evaluate.

We raised concerns with this proposal in our discussions with the Phoenix team, and believe the community needs to consider the technical aspects of this complex proposal. These concerns include:

  • When a user bridges an asset through a lock/mint bridge, the expectation is that they will be able to bridge back and claim the corresponding assets from the bridge at any point in time. But there are no corresponding amounts of assets on the bridge, because of the situation which unfolded in connection with the publicly reported Terra IBC hooks vulnerability.
  • The alternative path of migrating to new assets (as @Mike-LunaNova references) is industry standard. The trade-offs between following the proposal vs the standard migration path, should be considered by the community.

We urge the Axelar community to engage in a technical conversation and consider the pros and cons of this proposal. This is an open process and the decision is up to the community.

5 Likes
13

As a validator operating on both Axelar and Terra, Encapsulate supports the restoration of IBC channels between the two networks. However, it is crucial to proceed in a way that ensures the safety and stability of the ecosystem to avoid any further incidents.

We appreciate the proposals put forward by Phoenix Directive, but some critical concerns must be addressed before moving ahead:

  1. Collateralization Risks: As highlighted by @Mike-LunaNova and @Georgios_Vlachos , bridged assets on Terra remain uncollateralized due to the exploit, posing risks to user funds. A clear and robust plan addressing these uncollateralized assets and ensuring parity is essential before reopening the channels.

  2. Reopening vs. Migration: It would be helpful to weigh the pros and cons of reopening the existing IBC channels versus migrating to new bridged assets. A detailed analysis of the factors influencing both options would guide the community in making an informed decision.

  3. Incident Prevention Measures: We would love to hear more about the safeguards or SOPs now in place to prevent incidents like the July 30, 2024 exploit. Understanding these measures would bolster confidence in the proposal.

We are optimistic about the potential for stronger collaboration between Axelar and Terra and are confident that, with the right approach, both ecosystems can thrive.

8 Likes
14

This issue was caused by TFL incompetence. Phoenix Directive are not TFL. Terra users are not TFL. Hopefully the Axelar community will agree that Terra users have been punished enough.

10 Likes
15

I support the proposal to re-open an IBS channel for Terra. This will help expand Accelar’s infrastructure and help restore liquidity.

11 Likes
16

As a Terra user i am patiently looking forward for IBC channel to Terra reopen. This will help Axelar to expand to well know places for them. Mistakes were done in past, but the proposal from Phoenix Directive is very complex and discussed in advance with the Axelar team. It´s green light for me!

11 Likes
17

I certainly would like to see the bridge reopened. There is a lot of liquidity building on Terra and would like to see more assets introduced. Looks like PD has raised funds to square things up and if we can safely reopen the bridge we absolutely should. I think large amounts of money movibg safely back and forth will benefit both sides.

12 Likes
18

As part of Phoenix Directive I support this proposal, Terra has a great community & they deserve some love :slight_smile:

10 Likes
19

Some of us are waiting for these channels to be reopened. Let crypto flow back and forth into Terra with Axelar’s help.

Lunatics are built differently and have not stopped building over the bear market.

8 Likes
20

Hello Axelar Community

I’m a member of the Terra community who holds some axelar assets in the Liquidity Alliance Curve model on Terra (currently generating way above typical yield and already at $6.5 million TVL in the first months of operation). There are assets that I want to bring into Terra that are currently blocked due to the closure of the channels. I am keen to see the channel reopened so we can commence importing Axl assets to Terra, and potentially add more to the Liquidity Alliance.

I note some concerns above that the exploited assets require backing in order to safely migrate out of Terra. This problem is well understood on Terra. It was created by TFL incompetence, left behind by the TFL bankruptcy and taken on by the community, through Phoenix Directive as a challenge to make victims whole.

The exploit itself has been patched and is being maintained. The chain could have followed the suggestions being made in this forum to move to new bridged assets. However the view has been that would have abandoned the victims of the exploit. Instead the chain has undertaken to fund the accounting deficit as proposed and passed per:
https://commonwealth.im/terra/discussion/24504-phoenix-directive-terra-recovery-proposal
This proposal, overfunded, will lead to Terra absorbing the bad debt and then burning it, resulting in a rectification of the accounting imbalance.

In order for us to complete the process, in large part done, we need to enable those same assets to come into Terra to be bought back. Not all people in chain are wanting to sell their axl assets (eg using it still, or even zombies) but people will bring the necessary assets in because the arb opportunity is large, burging on enormous in some cases.

I can see the reasoning for creating new assets but I see it as overengineering in this instance where a practical and sensible solution to the primary ledger problem is already being implemented.

There are also negative implications for AXL wherein the new assets would have no automatic adoption or utility on Terra where other forms of assets are already growing in adoption, due to implementation in LPs on Astroport/WhiteWhale Dexes and earning yield in Liquidity Alliance. For eg osmosis-BTC is currently able to flow into Terra where axl-BTC is not. This is not the only example, certain other Cosmos natives are enjoying competitive advantage right now too. I think it would be wise to work with Phoenix Directive to encourage future utility for AXL assets on Terra.

10 Likes