A Comprehensive Guide to Axelar Tokenomics

Axelar Tokenomics is built around a unique token distribution model, where 70% of the total supply is allocated to liquidity providers and validators.

The Axelar network uses a proof-of-stake consensus algorithm, which incentivizes validators to participate in the network by offering a portion of the transaction fees.

The token distribution model is designed to create a self-sustaining ecosystem, where validators and liquidity providers are rewarded for their contributions to the network's growth and stability.

Axelar's tokenomics is centered around the concept of community-driven governance, where token holders have a say in the development and decision-making process of the network.

Recommended read: What Is Tokenomics and Why Does It Matter

Axelar is the universal overlay network, securely connecting all blockchain ecosystems, applications, assets, and users to deliver Web3 interoperability.

It has three main components: a decentralized network, a set of gateway smart contracts, and a software development kit (SDK) of protocols and APIs.

The decentralized network is the backbone of Axelar, providing a secure and reliable connection between different blockchain ecosystems.

The set of gateway smart contracts enables connectivity between Axelar and external chains, allowing for seamless interactions between different blockchains.

The SDK of protocols and APIs provides developers with the tools they need to build applications that can operate across multiple blockchain networks.

The Axelar network is designed to provide an ecosystem with services that are otherwise unavailable, expensive, or inefficient, sitting on top of other networks and providing better quality of service.

Here are the four critical functions of the AXL token:

By providing a platform for cross-chain logic and arbitrary data transfer, Axelar enables developers to build decentralized applications that can operate across many blockchain networks without being constrained by the limitations of any single chain.

The Axelar tokenomics is designed to support the network's growth and decentralization. The token is used to pay fees for every cross-chain call, and the fees flow back to validators and stakers.

The total supply of AXL tokens is 1 billion, and the token supply could eventually become deflationary with excess fee burn mechanisms. The base inflation rate is set at 8%, plus an additional 1% per chain connected to the network during the first year.

The inflation rate is driven by a function of three congruent components: participation in the Tendermint consensus, multi-party signing protocols, and verification of events on external chains. The base token inflation rate is split equally between the first two types of participation a validator performs, Tendermint consensus and MSigs.

Here's a breakdown of the external chain inflation rate:

The inflation rate will follow a schedule and is subject to governance changes to ensure higher early inflation and gradually decrease the inflation to be replaced by a steady rate of transaction fees.

At the Axelar genesis block, 1 billion AXL tokens will be issued and allocated to various stakeholders and programs.

The team will receive a significant portion of the tokens, with the core team getting 17% of the total supply.

AXL tokens will also be allocated to the company for operational treasury and future employee incentives, making up 29.5% of the total supply.

Seed, Series A, and Series B investors will receive 13.4%, 12.64%, and 3.5% of the total supply, respectively.

A public sale, known as the community sale, will happen after mainnet launch, with the objective of distributing tokens to multiple members of the community, accounting for 5% of the total supply.

The community programs, including an insurance fund, will receive at least 5% of the total supply.

Here is a breakdown of the AXL genesis token allocations:

The genesis release schedule is a crucial aspect of the AXL tokenomics, and it's essential to understand how tokens are unlocked and released into the circulating supply.

The release schedule start date is targeted for September 27th, but may be adjusted due to technical or other constraints.

Tokens are locked at genesis, but can be staked and will eventually be released according to their designated schedule. Each stakeholder category has its own release schedule, determining when tokens enter the circulating supply.

Backers and core team members' release schedule begins three months after Day 1, while community-sale participants receive 5 months worth of tokens upon the token generation event (TGE).

Here's a breakdown of the release schedule for AXL genesis tokens:

The token supply of AXL at genesis is 1 billion, and the base inflation rate is set at 8%, plus additional external inflation of 1% per chain connected to the network during the first year.

Tokenomics is a crucial aspect of Axelar's ecosystem, and it's designed to support the network's growth and security. The AXL token has three primary functions: paying fees for network usage, incentivizing staking and governance, and facilitating governance as stake-weighted voting.

The token economics for AXL are geared towards creating a token economy that supports Axelar's network in achieving key outcomes. These outcomes include security, decentralization, longevity, and ecosystem growth.

The AXL token has a base inflation rate of 8%, which is split equally between Tendermint consensus and multi-party signing protocols (MSigs). There's also an external chain inflation rate that gradually descends over three years, starting at 1% per chain during the first year, then decreasing to 0.75% per chain during the second year, and finally to 0.5% per chain during the third year.

Axelar's new tokenomics model aims to reduce the inflation rate per added chain, which was previously linear. This change is significant because it aligns the network's economic incentives with its growth, making it more attractive to long-term investors and validators.

The circulating supply of AXL tokens is defined by the amount of tokens available to be spent, and it's equivalent to the number of released genesis tokens plus the number of tokens minted as rewards. The total supply will be greater than the circulating supply until all genesis tokens are released.

Here's a breakdown of the current inflation rate and how it's changing:

The new tokenomics model also introduces a gas-burning mechanism where fees paid in AXL are burned instead of being distributed to validators, further improving the market dynamics. This change is expected to reduce overall inflation and make the AXL token more attractive to long-term investors and validators.

Axelar's native decentralized interoperability is a game-changer for the blockchain space. It enables arbitrary data transfer, smart contract execution, and permissionless overlay programmability across networks.

Axelar's Interchain Token Service (ITS) preserves the fungibility and custom functionality of native tokens, allowing for one-click deployments across multiple chains. This is a huge advantage over traditional wrapped tokens, which often lose their original features and are subject to additional security risks.

With ITS, developers can safeguard that their tokens behave consistently across all blockchains, regardless of the underlying consensus mechanism or virtual machine. This is achieved through a canonical wrapper model, where each token retains its native properties and functionality across all connected chains.

Axelar's ITS is highly customizable, allowing developers to define custom token properties, such as governance rules, yield generation, and access controls. These customizations are preserved across all chains, making ITS a solid tool for managing complex token economies in a multi-chain environment.

The Axelar network has a symbiotic relationship with the Cosmos ecosystem, with the majority of cross-chain activity on Osmosis, the largest Cosmos DEX by volume, originating from Axelar. This collaboration has even led to the exploration of shared security between the two networks, such as Mesh Security, a bi-directional security leveraging both networks' validator sets.

Axelar's network uses a Delegated Proof-of-Stake (DPoS) consensus mechanism, where validators produce new blocks and participate in multiparty signing.

This consensus mechanism runs the risk of concentrating voting power among a few dominant stakers, but Axelar mitigates this risk with quadratic voting, where voting power increases at a diminishing rate with an additional stake.

Only the top 75 validators are in the active set, a parameter that can be adjusted through onchain governance, making the validator set permissionless and dynamic.

Axelar's use of quadratic voting ensures a more equitable distribution of power among validators, preventing dominance by a few large holders.

The network has implemented threshold cryptography, where multiple parties collaboratively generate a cryptographic key and must cooperate to perform cryptographic operations, such as signing a transaction.

This consensus mechanism increases security by making it difficult for a small number of validators to collude and compromise the network.

Axelar's threshold cryptography uses the Elliptic Curve Digital Signature Algorithm (ECDSA), which is also employed by Bitcoin and other major blockchains.

The use of threshold cryptography reduces the overhead associated with managing multi-signature transactions and improves efficiency by producing a single, compact signature that represents the collective agreement of the validators.

The economics and distribution of Axelar tokens are designed to support the network's growth and longevity. The total supply of AXL at genesis will be 1 billion.

The token distribution is divided into several sections, including the team, company operations, investors, community sales, and community programs. The community programs, managed by the Axelar Foundation, will fund grants and rewards for projects that contribute to the network's growth.

The token distribution is as follows:

A fee collector account governed by the Axelar Foundation will collect fees for processing requests on the network, used to pay transaction fees for relaying transactions across various chains, and to perform token buybacks and burns. The collected network fees will be used to maintain the network's health and growth.

The inflation rate on Axelar is driven by a function of three congruent components: participation in the Tendermint consensus, multi-party signing protocols (MSigs), and verification of events on external chains. The base token inflation rate is 8% and is split equally between the first two types of participation.

The inflation rate for each external chain is as follows:

The inflation rate will gradually decrease over time, allowing the network to become more deflationary as it scales.

Axelar's Gateway smart contracts have enabled cross-chain token transfer, allowing for bridging using wrapped tokens. This was once the top use case for Axelar, but GMP usage has surpassed basic bridging in both transaction count and notional volume since September 2023.

Axelar has executed over 1 million transactions with a cumulative volume nearing $7 billion.

Axelar's Gateway smart contracts have been a game-changer for cross-chain token transfer, allowing for bridging using wrapped tokens.

One of the top use cases for Axelar has been basic bridging, but recently, GMP usage has taken the lead. In September 2023, GMP surpassed basic bridging in both transaction count and notional volume, and it has remained ahead ever since.

Axelar has executed over 1 million transactions, with a cumulative volume nearing $7 billion.

Filecoin & Uniswap have partnered up to make decentralized finance more accessible. Uniswap was initially built on Ethereum but has since expanded to multiple chains.

Uniswap's cross-chain governance was a challenge until they selected Axelar as one of two interoperability platforms. Axelar helped Uniswap deploy updates on Filecoin's smart contract blockchain, Filecoin Virtual Machine (FVM).

This partnership is a great example of how different blockchain platforms can work together. By using Axelar, Uniswap was able to deploy updates on Filecoin, making it easier for users to access decentralized finance.

In the competitive space of blockchain interoperability, Axelar's approach to full-stack interoperability stands out. Axelar operates in a highly competitive space, with several other protocols also focused on blockchain interoperability.

Axelar's unique approach is a key differentiator from other solutions like LayerZero and Chainlink. Axelar’s approach to full-stack interoperability sets it apart from other solutions like LayerZero and Chainlink.

Axelar's focus on full-stack interoperability means it can handle more complex transactions than some other protocols.

The competitive landscape of blockchain interoperability is complex, with multiple protocols vying for market share.

As Axelar continues to grow, one of the primary challenges is ensuring the network remains secure and decentralized. This will require continuous improvements to the validator selection process.

Axelar must also navigate the competitive landscape, where new interoperability solutions are constantly emerging. To maintain its edge, Axelar must continue innovating in areas such as cross-chain governance.

The growing demand for cross-chain solutions is a significant opportunity for Axelar. As the blockchain ecosystem evolves, Axelar's commitment to full-stack interoperability will enable developers to build dApps that transcend the limitations of individual blockchains.

Axelar will need to address the challenge of scaling while maintaining security and decentralization. This will involve ongoing improvements to cryptographic protocols and network governance.

To stay ahead in the competitive landscape, Axelar must prioritize innovation in areas like smart contract execution and developer tooling.