Interoperability Networks: Infrastructure for the Multi-chain Future- Commissioned by Axelar


Executive Summary 

Gone are the days when it was thought that there would be “one chain to rule them all”. Dozens of general-purpose layer-1 networks with material levels of adoption have emerged. Several layer-2 networks were recently launched into production and are rapidly onboarding users. Software development kits are making it easy for developers to deploy new application-specific blockchains tailored to one or few use cases. 

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To date, cross-chain user experiences have been far from seamless. Layer-1 bridges, which are constructed on an ad-hoc basis and typically employ primitive security mechanisms, have facilitated the bulk of cross-chain flows. While they have been a necessary stop gap solution, they have also placed additional burdens on users and resulted in heightened risk. 

Over $2 billion has been misappropriated in cross-chain exploits in the past 18 months. In many cases, interoperability development organizations and financial backers have stepped in to replenish user funds. But there is no guarantee that they will continue to do so in the future. Cross-chain security is already a critical consideration for application developers and users. Leading interoperability projects analyzed in this report are employing a range of security mechanisms, which all have different trade offs, to safeguard cross-chain value transfer. 

Universal interoperability networks are improving cross-chain experiences. Leading networks facilitate value and arbitrary data transfer between ~10 to ~60 blockchains across their respective ecosystems. They are enabling developers to deploy cross-chain native applications that give users easy access to more assets and applications across many blockchains.  

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On-chain data quantifies the state of the emerging cross-chain economy. In the face of broad-based crypto asset price declines in 2022, most fundamental metrics have declined meaningfully. However, the gross amount of value and information flowing cross-chain is already high. Individual interoperability networks, such as Cosmos IBC, have facilitated ~$12 billion of monthly cross-chain value transfer. 

Native tokens are expected to play an important role in decentralizing operation of interoperability networks. Given their relatively early stages of development, many interoperability networks are operated by a small number of independent entities. The impending launch of native tokens is poised to incentivize community participation, reduce development organizations’ influence in their networks, and decentralize network operation. 

Development organizations incubating interoperability networks have raised $400 million in funding in 2022.  Year to date funding in 2022 is already double total funding in 2021 (~$200 million) and forty times higher than funding in 2020 (~$10 million). Development organizations are well equipped to continue investing in developer talent to deploy their technology and expand the breadth of their networks. 

© 2022 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.


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