For anyone paying attention to interoperability in the last few weeks, it has not been a quiet market. Aside from the impending Wormhole airdrop ($W) and Axelar’s token ripping up 40% ($AXL), we had some piping hot drama hit the airwaves, that I simply must get into before we continue with this overview. Note: the author owns a position in $AXL and while I have received the $W airdrop, jurisdictions prevent me from claiming.
The D
During the first and second weeks of March, the founders at both Axelar and LayerZero partook in some spicy twitter drama, starting when LayerZero CEO/Co-founder Bryan Pellegrino capitalized on the trending “study” meme to take some shots at Axelar:
The tweet contains a few screenshots of Axelar CEO/Co-founder Sergey Gorbunov seemingling cherry-picking his attitudes towards intents, one of the hottest developments in interoperability over the last few months.
Digging a bit deeper you will find that Sergey ultimately is just calling out that a lot of intents protocols use off-chain workers which increases centralization risk – a fair call out. However, this set initial wheels in motion that led to an all out war on X.
Sergey’s co-founder, Georgios, quickly hit back with back to back tweets not 3 hours later:
Losing deals? Copying tech? What is going on?!?!
Well, losing deals is easy to explain. Just go read The Interop Part 1 and you can learn all about recent developments with LidoDAO.
As for copying tech - let’s dive deeper.
LayerZero v2
In late December 2023, LayerZero announced their v2, which will bring an end to their existing Relayer::Oracle model, and replace it with a more modular interoperability stack. As previously mentioned, LayerZero’s existing v1 model does invoke some levels of centralization risk, as the technical expertise and financial resources needed to be a relayer or oracle severely limits the amount of qualifying entities, despite its “permissionless” nature.
With their v2, LayerZero has taken some steps to rectify these issues:
Note: I have cut out a LOT of features LZ is bringing to v2…I didn’t want to screenshot a wall of text nor have you read someone else’s words. Plus, this serves my purpose. Read the rest here.
Quick TL;DR on the LayerZero v2 is that they are taking the modular approach to interoperability, dividing it into three fundamental parts:
Shown above, interoperability can be broken into three layers – application, transport, verification.
By removing their relayer service and opting for a Decentralized Verifier Network approach, LayerZero will now offer any app using LZ optionality for who ultimately secures their cross-chain transactions. Well, quickly glancing at that second bullet, who’s security do they ultimately offer up to their customers…Axelar’s!
Given all their history, Georgios clearly signal’s LayerZero is waving a white flag when it comes to their security decisions, opting to move away from the verification layer and just support cross-chain transport. Which is honestly, an interesting decision from a value accrual perspective.
Value Accrual in the Interop Stack
With LZ’s pivot to a modular approach, they are effectively passing the security (or verification layer) onerous on apps looking to leverage LZ for interoperability. In other words, as stated by Packy McCormick, LayerZero is “thinking about security by not thinking about security.”
At first glance, this seems like a smart decision, offering builders an near infinite design landscape to create the perfect interoperability experience; however, Axelar offers all the same features with embedded security!
More importantly, by owning their full stack ,Axelar opens itself up numerous opportunities for value capture at all layers of the interop stack, like network, services, and infrastructure (such as relay and gas services). In contrast, LayerZero doesn't control its underlying layers and is purposefully building a system where third partner DVNs and Executors will earn the base fees associated with general message passing. This means that if LZ were to earn fees in the future, it would be on top of the fees charged by DVNs, making interoperability more expensive in the long-run for the end user.
Ultimately, this seems like an interesting design decision and, personally, makes LayerZero’s path to interop dominance a bit more opaque.
All this to be said, this doesn’t simply hand the win to Axelar either, there are many more battles to be fought here. Which leads me to the original point of this article, the major players and their paths to victory.
Within the next section, I will do a quick take on Axelar (not to beat a dead horse…their roadmap just excites me) and then pivot to Wormhole.
Axelar
Given recent developments with LayerZero and their pivot out of the security/verification game, it does feel closer to a two horse race there than every before between Axelar and Wormhole. That being said, I know Axelar has its sights on dominating more than just cross-chain security, but the entire interop stack.
Two keys tailwinds I see for Axelar’s continued success are their 2024 roadmap and top-class BD/Enterprise partnerships.
2024 Roadmap
In January, the Axelar team laid out their extensive goals for 2024, all centered around making it easier and safer to develop cross-chain. A few key highlights:
- Interchain Token Service: a toolkit for developers to create and deploy tokens that live natively on multiple chains.
- Interchain Amplifier: a scalability solution that allows for permissionless deployment of Axelar router smart contracts onto new chains
- Axelar Virtual Machine: the complete interoperability framework, encompassing ITS and Amplifier, that provide developers a complete product suite to build cross-chain
For year’s Axelar has struggled with a branding narrative - being seen as just a bridge while also hampered down by being tagged as a Cosmos ecosystem project. That, coupled with their token launch in the depths of the most recent bear market (10/22) has prevented Axelar from hitting the mainstream.
I believe that 2024 is the year that Axelar sheds this history and makes a splash. In fact, those seeds have been planted for a while now.
Enterprise Partnerships
While some protocols have been fighting to add market share from existing onchain users, I think Axelar has smartly taken a “grow the pie” approach to their land grab campaign, favoring Web2/TradFi enterprise partnerships.
JP Morgan’s Onyx project leveraged Axelar in a successful experiment showing how smart contracts could be used to manage client portfolios at scale. In the proof-of-concept, Axelar was used to help execute trades and enable automated portfolio management of tokenized financial assets (RWAs).
Similarly, Axelar is also an early ecosystem partner for Ondo Finance, one of the fastest growing DeFi protocols out there aimed at bringing institutional finance onchain.
These types of relationships, although in their early stages, are not to be taken lightly. Major financial firms go through hundreds of hours of audits, testing and experiments before going to productionalization a service; thus, any service provider built into that stack will be extremely hard to rip out.
Wormhole
Interestingly enough, Wormhole also has TradFi roots, as they were incubated through Jump Trading, spinning out into their own entity this past November. Jump’s crypto team has certainly flexed its product muscle in the last few years, helping incubate Wormhole and oracle provider Pyth Network, as well as building new Solana client Firedance. Given their history working in the Solana ecosystem, it makes sense that Wormhole is the primary bridge into Solana for most users, making the interop provider a household name for many in Web3.
Similar to Axelar’s Interchain Token Service, in February Wormhole released their Native Token Transfer (NTT) Framework, enabling the transferring of native tokens across blockchains while preserving intrinsic properties…sound familiar?
I am careful to lose the plot here, as I originally intended this series to be about value accrual, so quick tangent:
I find it fascinating that Axelar’s ITS, Wormholes NTT and LayerZero’s Omnichain Fungible Token (OFT) are all in direct competition to become entrenched in the interoperability stack, and dominate marketshare. Further, I find it hard to believe once one protocol framework gains social consensus throughout a specific ecosystem that they will ever be usurped.
Ok, back to Wormhole, who’s long rumored and long awaited $W token has finally been announced. In true cross-chain fashion, Wormhole is distributing $W throughout the Web3 landscape, hitting as many wallets as possible.
My winning situation for Wormhole is, well, people support their bags. A fresh airdrop right at the start of a bull market combined with being the dominant gateway into Solana is as strong a starting position as any. I am interested to see what they do with it.
Who are the dark horses?
I can go on for a long time about the “Big 3” of interoperability, by this point you should realize that. I think each of them has a strong presence in the space, understands their strengths and weaknesses, and is gearing up for a development arms race that will make things very interesting over the next few years.
That being said, I would be remiss to not call out a few relative newcomers who I think can make waves moving forward — Across and Router.
Both Across and Router are positioning themselves in the market as intents-based interoperability networks, capitalizing on one of the many popular words-of-the-day in crypto. Admittedly, I need to do more digging into both providers before making a call, but wanted to flag that competition in interoperability is rapidly increasing, and the war is far from over.
