In this interconnected world, blockchain interoperability is more than an advantage – it is the channel through which the blockchain economy will experience “globalization across the chain”.
Just as globalization has brought new types of commerce to local and global economies, cross-chain globalization will stimulate new applications and use cases for Web3. The underlying infrastructure for this new growth cycle will be spread across cross-chain messaging networks.
Bank bridges are equal
Blockchain interoperability is an important concept. There are two types of interoperability worth distinguishing between them.
The first form of interoperability is two-way asset bridges. The term “bridge” conjures up images of helmets and civil engineers, but two-way bridges are actually banks.
Banks receive assets on the one hand and issue liabilities on the other. For a bank to be fully solvent, its assets must match its liabilities. The main mission of this bank is to remain fully secured and to process deposits and refunds on an ongoing basis.
Almost all major bridges today are two-way bridges of this type. In particular, most of these bridges are “state-sponsored”, which means that the blockchain that is connected to the construction and support of the bridge itself. Think the Polygon Bridge, the Avalanche Bridge, or the NEAR Rainbow Bridge – all of these bridges were created or sponsored by the blockchain nation-state on which they are built. Almost all of these bridges lead directly to Ethereum.
This is not surprising. For emerging blockchains, bridging is essential for the flow of assets and users. Railroads to the real world were often nationalized and subsidized because the benefits of infrastructure were too scattered for private investors to get. So, although bridges are expensive to develop and maintain – many are not even profitable – it is in the state’s interest to support and support them.
We recently saw this phenomenon with Wormhole Bridge, which was hacked for $325 million. Jump Capital, a major backer of Solana and Tira, filled the hole, playing the role of a pseudo-state backer. A month later, the Axie Infinity Bridge was hacked for approximately $625 million by the Ronin multisig hack – the largest on-chain hack in crypto history. The Axie team also ensured that all victims are compensated.
So, if two-way bridges are the banks, how do these banks compete?
It’s simple: they compete for the size of their balance sheets (including the government’s implicit balance sheet).
The largest and best capitalized bank will be the most trustworthy and will eventually win the trust of its users.
UX and efficiency are important, of course, but when the competition is about trust, balance sheet depth is the ultimate trump card.
Many of these bridges are quite central. But for now, users don’t care. The main question they ask is not whether this bridge is decentralized, but rather whether they will be rescued in the event of a hack.
This dynamic makes the success of third-party bridges very difficult. State-sponsored bridges have much larger implicit budgets to back them up, so private players cannot compete on an equal footing. Indeed, you find that almost all TVLs today are in “state-sponsored” bridges.
Beyond bridges: messages circulated across borders
What is the goal then? Will the state-sponsored bridges to Ethereum be the long-term winner?
This is where the problem lies: a group of bridges can enable the free flow of capital, but two-way bridges alone cannot create a global interoperability system. In fact, most of these bridges do not allow for complex interactions – they can only make simple money transfers.
The real purpose is public messaging across channels. Cross-chain messaging is the ability to summon a nodes in another chain – imagine being able to use the Ethereum pool from an avalanche, or being able to place Yearn deposits on Solana’s farm. Cross-chain messaging also allows for the transfer of assets, but it allows more. Today, this type of cross-chain installation is not really possible; Most cross-threading activities are bundled together using multisigs and trusted third parties. When any blockchain can speak with confidence to any other country, it will enable more cross-chain trade and activity than we see today.
Initially, Cosmos and Polkadot had ambitions to become the “interstate highway system” of the blockchain. But they have instead turned to specialized ecosystems that often build bridges between them, with the connection outside the ecosystems remaining an exercise for the reader. But the only way to achieve true cross-chain compatibility is to directly solve the difficult problem of cross-chain messaging.
That’s why I’m so excited about Axlar.
What is axlar?
Axelar is a global interoperability layer that connects L1 blockchains via a decentralized network. Using the Axelar SDK, any smart contract developer can call a contract on another supported chain with a simple asynchronous call.
The simplest form of calls between contracts is bridging. But since there were already so many formations, this would likely not be where Axlar would shine. Instead, Axelar’s strength lies in enabling more complex forms of synthesis and cross-chain trading.
Axelar SDKs are designed to do three things:
- Enable blockchain developers to easily connect and communicate with applications on other blockchains.
- Allow Dapps to easily scale into multiple channels with minimal development costs.
- Allow Dapps to easily scale into multiple channels with minimal development costs.
Ultimately, the goal will be that, from the user’s point of view, they don’t necessarily need to know which strings are included in back end of its application. This is how people have long tested the Internet: when a website makes API calls to third-party servers, the user is simply faced with one seamless application.
Today it is clear whether you are using Solana, Ethereum or Avalanche. In the future, Web3 may be like the Internet: there is only the application you interact with, the rest is just an abstract application.
If you’ve been following this space, you’re probably familiar with LayerZero and Stargate Finance. LayerZero sits in the same place in the stack as Axelar.
So what are the differences between the two, and why am I optimistic about Axlar here?
Axelar is a complete PoS network with its own native token. All Axelar nodes run software from other blockchains (Ethereum, Avalanche, Cosmos, etc.). When Axelar asks about the status of any underlying blockchain it connects to, the Axelar nodes synchronize with each other to poll local blockchain clients and agree on the current state of other channels. If you wish to conduct cross-chain transactions, all Axelar nodes collectively maintain minimal signature accounts in each chain which can be used to perform actions or hold funds on Axelar’s behalf. Axelar cares about routing and implementation, and Axelar’s security is backed by the robustness of the PoS validation toolkit. The project was founded by the former heads of cryptography and mathematics at Algorand, so their expertise in cryptography and distributed systems is world-class.
LayerZero is built completely differently. Unlike Axelar, LayerZero doesn’t attempt to be a complete interoperability package – instead, it’s just a set of contracts that define two roles, ‘Relays’ and ‘Oracles’. Oracles are responsible for reporting the actual state of the underlying blockchain, while relays are responsible for passing messages through the chain and validating messages. The user is free to choose the third-party oracle they wish to use. LayerZero itself is a neutral message carrier and a set of standards; LayerZero itself is not supposed to be responsible for the migration or oracle.
In the white paper, LayerZero claims that it will discontinue Chainlink as an oracle tool, but LayerZero’s Stargate Finance currently uses a triple-signature consisting of FTX, Sequoia, and Polygon as an oracle, and is currently migrated by LayerZero Labs.
Correct transmission of messages across threads and correct communication of the state of multiple threads are among the main reasons why cross-threading interoperability is difficult. Axlar addresses this issue head-on, with a comprehensive solution.
LayerZero, Wormhole, Synapse, and many others are making great efforts to solve cross-chain interoperability. This has always been one of the holy grails of blockchain technology, but I think Axelar is taking a more aggressive approach and has a chance to make it happen.
Potential network effects in a generic cross-chain messaging network may be stronger than the effective cycles seen in the rise of L1 alts. be really cross chain Allows greater diversity of applications, assets, and composability across all DApps.
In the end, almost everything in technology is about user experience. Building seamless and intuitive user experiences is key to preparing the next 100 million people. A mixture of simple central gates was a necessary starting point. We couldn’t get here without them. But if we are to deliver end-user experiences like the ones we’ve come to expect from Web2, developers need an infrastructure and tools that allow them to eliminate friction in the cross-channel world.
In the 1990s, the growth of foreign direct investment allowed the emergence of multinational corporations all over the world. I think with cross-threading interoperability, Web3 is about to experience a similar inflection point. You will no longer be limited by the applications on your channel – the entire world of Web3 will be available all over the world.
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I am convinced that the next few years will be those of cryptocurrency and metaverse. Passionate about the Tendermint Cosmos ecosystem and NFTs, I will share my knowledge. Co-founder of Stakelab.fr