From: thepipeline_xyz
The Need for Decentralized Finance
The inspiration for getting into the blockchain space, particularly Decentralized Finance (DeFi), stemmed from real-world financial crises. During the massive financial crisis in Greece, it became nearly impossible to send remittances or withdraw money from banks [01:18:18]. This experience underscored the importance of a censorship-resistant financial system where anyone can seamlessly transact globally using just a cell phone, especially given that many people have cell phones but lack bank accounts [01:35:00].
Challenges and Solutions in Building Decentralized Applications for DeFi
Centralized Bridge Vulnerabilities
Historically, a major challenge in DeFi has been the centralization of bridging solutions. Early centralized bridges, such as Ren Protocol and Multi-chain, were susceptible to hacks because centralized entities held all funds in a single key [03:47:00]. Once this key was compromised, all funds were lost, as evidenced by major hacks like Harmony, Ronin, and Multi-chain, which collectively resulted in billions of dollars in losses [04:14:00]. Multi-chain, for instance, recently lost all its funds [03:52:00].
Axelar’s Decentralized Interoperability Solution
Axelar offers a different approach to cross-chain problems by acting as an interoperability network structured as a blockchain, rather than a bridge [04:26:00]. It connects 56 blockchains and counting [03:33:00].
Key differentiators include:
- Many-to-Many Connectivity Axelar’s blockchain architecture allows for many-to-many connectivity, enabling a single connection to the Axelar blockchain to route messages to any other connected blockchain [05:22:00]. This contrasts with pairwise connectivity offered by competitors, which makes adding new chains significantly harder [05:43:00].
- Enhanced Security Through Decentralization Built on the Cosmos SDK, Axelar has a fully decentralized validator set, comprising 75 validators [06:07:00]. To attack the network and steal funds, a majority of these validators would need to be corrupted [06:26:00]. Axelar is considered almost as secure as the largest chains it connects to, being five times more decentralized than solutions like Wormhole, which has 19 validators [06:55:00].
Onboarding Users and Developers
A significant challenge in DeFi has been onboarding users and developers to new blockchains, especially those with new virtual machines [07:54:00]. For example, during Algorand’s launch, liquidity was primarily on Ethereum, making it difficult for users to bridge assets [08:10:00].
Axelar addresses this by:
- General Message Passing (GMP) Providing a general message passing platform on which various cross-chain applications can be built, including DEXes, money markets, and NFT marketplaces [04:38:00]. This abstracts away the complexities of Web3, focusing on user experience [08:40:00].
- Streamlined Development Developers can deploy the “brain” of their application on a fast EVM chain like Monad, allowing users from other networks to interact seamlessly [10:06:00]. For example, users can open positions on a perps DEX built on Monad directly from chains like Arbitrum or Solana by effectively connecting a small piece of code on the origin chain to Axelar’s endpoint [10:32:00]. This process means no intermediate bridging step, enhancing user experience [11:31:00]. Sending a first message through Axelar can take as little as 10 minutes [11:52:00].
- Reducing Fragmentation This approach centralizes application logic on one chain, preventing fragmentation and simplifying development [12:17:00].
Cross-Chain Gas Fees and Latency
Cross-chain transactions currently incur high gas fees as users must pay for gas on the source chain, destination chain, and relay costs [13:44:00]. This remains a prohibitive factor, even for L2s, with transactions costing from a few dollars to nearly $10 [13:57:00].
However, the proliferation of new scaling solutions and chains like Monad, which offer lower gas costs and instant finality, is expected to make cross-chain transactions cheaper and more accessible [14:05:00]. Instant finality is crucial because it reduces the time for a cross-chain command to pass from 15-20 minutes (on Ethereum) to 60-90 seconds (on chains like Monad), significantly improving user experience [16:57:00].
Liquidity Fragmentation
Decentralized Finance also faces liquidity fragmentation across multiple stablecoins and assets, often siloed on specific chains and requiring wrapping [17:56:00].
Axelar’s Interchain Token Service (ITS), currently in beta, aims to solve this by providing a code-free, permissionless tokenization and bridging solution [18:28:00]. This enables anyone to launch a token that is cross-chain from day one with robust security, supporting future scalability to any chain Axelar connects to [19:07:00]. This service allows projects, such as Frax, to issue assets on new chains without needing to build and maintain their own native bridges [19:37:00].
Mitigating Interoperability Risk
Regardless of whether assets are native or wrapped, security hinges on the underlying bridging infrastructure [22:26:00]. If insecure infrastructure is used, a loss can be catastrophic for any asset type [22:39:00].
Axelar mitigates risk through:
- Decentralization: As the first and only decentralized network to secure cross-chain assets, it eliminates the most common attack vector that has caused billions in losses [23:16:00].
- Rate Limiting: A simple code check at the end of every transaction can minimize damage during a hack [23:46:00]. Axelar’s many-to-many connectivity architecture allows for customizable rate limits on the Axelar blockchain itself, containing damage even if a connected chain breaks [24:24:00].
- Multi-layered Security: For maximum security, solutions like Lido have opted for a joint approval model, requiring verification from both Axelar’s and Wormhole’s validator sets before an asset is minted on a new chain [24:49:00]. This combines two independent implementations with stacked rate limits, creating three layers of security [25:29:00]. While rate limits might not perfectly align with extremely high throughput blockchains, they significantly minimize potential damage relative to the total value locked [26:19:00].
Future of Interoperability in DeFi
Interoperability is not a “killer use case” itself, but rather an enabler for a seamless user experience in Web3, making it as easy to use as Web2 [31:10:00]. The goal is to abstract away the underlying blockchain complexities, so users only need to think about assets and applications [31:35:00]. For example, a user’s wallet should aggregate total USDC balances across different chains and present a unified balance, using interoperability infrastructure to pass messages across networks without the user needing to know which chain an asset or application resides on [31:50:00].
In the next four years, interoperability is expected to be integrated into virtually every application in the space, including DeFi, gaming, real-world asset tokenization, and NFTs [32:08:00].