The Era of Avalanche Subnets
In the blockchain world, where the limited blockspace has quickly become one of the scarcest resources, Ethereum gets congested, and gas fees skyrocket as users compete to put their transactions into a block before anyone else.
We have witnessed hundreds and sometimes thousands of USD paid by NFT collectors, DeFi traders, and blockchain gamers to submit transactions independent of and unrelated to each other. Yet, they must try to beat each other for the next blockspace by paying expensive fees if they do not want to wait long or get front-run by others.
As the poor UX forces people to look for L1 alternatives, it also becomes clear that many future use cases could not be deployed on the existing monolithic, one-size-fits-all blockchains. One of the reasons is that many use cases necessitate validators to meet a set of requirements (e.g., KYC/AML, specific licenses, geolocation, specialized hardware, etc.). So, crypto researchers and engineers have quickly realized the need to scale the monolithic blockchain architecture by turning it into configurable application-specific blockchains.
The monolithic blockchain design has its merits: Unified liquidity; fewer bridges mean fewer attack vectors; co-location of dapps should serve a better UX, etc.
On the other hand, this design comes with significant drawbacks, too: Due to the need to support a broad range of applications, only large and expensive machines can serve as validators, which makes the network more centralized due to their high run costs; no modular design means any network halt would stop all the on-chain activity potentially resulting in substantial monetary losses; no horizontal scaling means each new dapp fights for the same blockspace crowding the chain more than necessary.
A better protocol design favors application-specific heterogeneous blockchains where each chain is validated and secured by a dynamic set of validators, which can adhere to various regulatory and hardware requirements.
Avalanche positions itself strategically to onboard the next wave of Web3 users and digitize the world’s $500T+ assets — thanks to its novel family of consensus protocols, first-in-class engineering, and scalable network design based on subnets.
Avalanche is a network of heterogeneous blockchains where each blockchain is validated precisely by a single subnet. A subnet is a collection of validators participating in consensus to decide on the state of an Avalanche blockchain. A subnet can validate multiple blockchains, but an Avalanche blockchain can be validated only by a single subnet.
Each subnet could have different levels of inclusiveness (e.g., permissioned, public, or private), and its virtual machine that runs smart contracts on a blockchain could be optimized for a specific set of applications. This unique design opens up the possibility to implement numerous enterprise use cases without compromising decentralization, speed, and UX.
The Avalanche Architecture
Avalanche can scale to thousands of validators that can actively participate in the consensus. By default, all validators must stake the native coin, AVAX, and become part of the Primary Network. This common subnet secures and validates the X-Chain, C-Chain, and P-Chain, where the latter can create further ad-hoc subnets that validate application-specific blockchains.
Each subnet scales the network throughput horizontally and does not impose a computational burden on other subnets and Primary Network validators. Theoretically, the total throughput of the whole Avalanche platform is uncapped.
For further details about subnets, you can check out the articles by
, , and . The next section will briefly discuss how subnets are secured and how they help AVAX accrue value.The Subnet Security
By design, Avalanche encourages subnets to have their own resources and become independent of each other. If a security issue halts the A-Chain, the B-Chain and the applications running on it should not be affected by this incident.
All validators must stake 2000 AVAX (~$140K) to participate in the Primary Network, a prerequisite to validating an Avalanche subnet as part of a subnet. Several additional security measures can be taken based on the type of subnet.
Public subnets: Since the liveness and security thresholds are parametrizable, a public subnet can choose a large quorum size, increasing the safety threshold to 80% for the lowered liveness tolerance. That would make the blockchains validated by this subnet less responsive instead of sacrificing security if an attack occurs.
To act maliciously in a public subnet, an actor would first have to stake 2000 AVAX and then buy up to 80%+1 of the staked native coin to attack the blockchain, which does not make much economic sense.
Permissioned subnets: In addition to setting a higher security threshold, a permissioned subnet may decide to do any of the following to enhance its security further:
- Whitelist only historically well-behaved Avalanche validators
- Start with a small set of validators and later transition into a decentralized setup via Initial Validator Offerings, where a new validator slot is auctioned via quadratic voting or private sales. This method increases the stake of a potential malicious actor and thus further disincentivizes any bad behavior.
- Future validators should meet KYC requirements, which are vital for institutional DeFi.
Permissioned subnets would have some additional off-chain methods and tools available to perform in-depth due diligence and thus minimize the risk of any potential malicious activity.
AVAX Value Accrual
There are multiple ways for AVAX to accrue value.
AVAX as a gas token
All transaction fees are paid in AVAX for all three default blockchains of the Primary Network and are immediately burned. This economical design benefits all AVAX holders as this deflationary effect makes AVAX scarcer.
AVAX has a fixed-capped supply of 720M, and so far, over 1.5M AVAX has been burned on the C-Chain alone, where Avalanche has seen exponential growth and usage. Since the C-Chain is just one of the hundreds of future blockchains that may decide to use AVAX as the native gas token, it would be natural to expect AVAX to become even more deflationary with time.
Dapps as blockchains
The future value proposition of AVAX is closely related to adopting subnet-driven economies. So, a topic to deep-dive into would be why a project should look into becoming an Avalanche subnet.
Many advantages of running applications as Avalanche subnets will likely make them the preferred method for deploying decentralized applications with out-of-the-box scalability, tooling, and flexibility in design choices.
Some ideas that can stem from a subnet-specific design can be as follows:
- Custom VM with low fees, high TPS, and fast time-to-finality
- Added token utility: Staking, gas burning (i.e., deflation)
- Fundraising via Initial Validator Offering
- Ecosystem development: Related dapps co-locate for a better UX
- Hosting other dapps: More TVL, higher network activity, added coin utility, etc.
- The increased role of governance coin due to the addition of the network-level economy
- Performance isolation guarantees the application’s ability to scale and contain high-quality UX, thus increasing user adoption.
We are already seeing many dapps turning into subnets as the benefits of owning a fast and cheap blockchain become clearer. Here is a small sample of existing and upcoming subnets:
- DeFi Kingdoms — a multi-chain game with over 200K users and 5M transactions
- Shrapnel — an AAA shooter game
- Dexalot — the first CLOB DEX on Avalanche
- Swimmer Network — the new home of Crabada
- Digard subnet and its first game, Eldarune
- Camelot by Pangolin— permissioned and permissionless liquidity for all subnets
- Aave institutional DeFi subnet and Terra gaming subnet, among many others
In addition to these, we could also see utility subnets that serve specific purposes, such as enshrined rollup subnets for data availability and subnets for shared security across different subnets.
Instead of crowding an existing subnet, projects may decide to create a new subnet, which could be customized to unlock the validator economy on the new subnet in addition to the application-level one.
A new validator economy
Since the early days, crypto markets have been primed by investors looking to enter early and support new products and primitives by acquiring stakes in projects before market discovery. Over the years, as the number of market participants grew, it became increasingly harder to acquire an early stake in new, exciting projects.
Since every new subnet requires validators from the primary network, running an Avalanche validator becomes a lucrative operation due to its easy access to new subnets launching on the Avalanche network and their need to acquire validators.
New Avalanche projects are looking into utilizing different methods to obtain validators for their subnets. These include but are not limited to Initial Subnet Offerings, Initial Validator Offerings, or smart-contract-based airdrops with a gradual token release in exchange for validation services (e.g., Subnet-as-a-Service).
Validators as a new scarce resource
Introducing the new subnet economy adds new streams of incentives to new and existing validators. It makes them scarce and highly demanded resources while giving them premium access to early participation in new subnets, additional validation rewards, and unmatched resource utilization. Moreover, some validators might even look into cross-subnet arbitrage opportunities for extra yield.
To ease and catalyze the transition from “traditional” decentralized applications to customizable and high-performant subnets, the recently announced Avalanche Multiverse Initiative, a long-term, 4M AVAX program, will step in and incentivize developers to launch their projects as a subnet on Avalanche. This initiative will help more AVAX get locked on the protocol, thus reducing the circulating supply of AVAX. The increasing demand should also allow AVAX to accrue more value as the circulating supply becomes sticky, thanks to the boosted staking ratio.
Currently, approximately 67% of the total AVAX supply is locked in staking from 1620 validators and 20750 delegators, and the current staking APR ranges between 7.9% and 9.4%. Considering the staked supply rates of >90% of way less rewarding protocols, it could very well be that >90% of the total AVAX supply could be locked in validators as the market recognizes the new meta.
Last but not least, new subnets would certainly have to lock up additional AVAX to provide liquidity for their native gas tokens and to enable cross-subnet transfers, which again will reduce the free-floating AVAX supply.
This new trend will increase the utility, scarcity, and demand for AVAX and the overall Avalanche network security.
To sum up, the blockspace is getting more expensive, and we need to scale it with advanced technical solutions that will not sacrifice decentralization, speed, and security. A good scaling design pattern has presented itself in application-specific blockchains, and Avalanche has taken the lead with its innovative consensus protocol and heterogenous blockchain design powered by subnets.
With the launch of the DFK Subnet, the era of Avalanche subnets has begun. By tackling exciting engineering challenges on the road, Avalanche is getting ready to introduce the next-generation blockchain technology to the world of finance, gaming, and entertainment as we await the upcoming explosive growth in crypto adoption.
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Disclaimer: This article is for informational purposes only and should not be considered financial or investment advice. Always do your own research and consult with a professional before making any financial decisions.
