Avalanche — AVAX

Who is Team Rocket?

Technological Analysis:

The Ava Labs, the organisation behind the Avalanche Protocol was founded in 2019 by Emin Gun Sirer, a computer science professor from Cornell. However, the theory behind the protocol was actually published in 2018 by pseudonymous organisation “Team Rocket”. It was then iterated and improved upon by Emin Gun Sirer into what has now become the Avalanche protocol. Like Solana, Avalanche offers a true next generation blockchain experience and touting blazingly fast & cheap transactions plus hypersonic settlement times, whilst also maintaining an outstanding level of decentralisation across the network. But what truly differentiates Avalanche from its peers is that it also delivers on the promise of interoperability, effectively combining the strongest traits of Solana: Transaction throughput with strongest traits of Polkadot: Interoperability all in one platform.

Avalanche achieves these goals through an incredible technological breakthrough in a new consensus model: Avalanche Consensus. Essentially what Avalanche Consensus does is sample a small set of validators opinions on whether a transaction is valid or not. Then the node takes the result of the majority. This process repeats across all nodes on the network each sampling multiple sets of validators until an overall consensus has been reached between all validators on the network. Link to video explainer This consensus model is known as probabilistic consensus model meaning that you can never be 100% sure whether a transaction is fraudulent or not, similar to how Bitcoin trades a small of probability for performance. To put this into perspective it is dozens of orders in magnitude more likely for a life-ending asteroid to hit earth in the next hundred years than a bitcoin error to occur in the next thousand years whilst computing 1 quintillion hashes a second, meanwhile the probability of Avalanche making an error is less than Bitcoin. Therefore, this trade-off is a no brainer in terms of the benefits gained. Avalanche consensus is combined with a Proof Of Stake model where the probability that a validator is chosen weighted to the size of their stake of Avalanche’s native token AVAX. These factors combined mean that Avalanche can be parametrised by an attack of up to 80% unlike most of Blockchains where 51% is the safety threshold, this means that bad actors are not required to be slashed if they misbehave, as if they do they do not receive any staking reward. Avalanche is also arguably one of the most decentralised blockchain platforms out there. To become a node operator there is no requirement to have specialised hardware, you can be a node operator with 2 CPU cores, 4GB of RAM and only 200GB of diskspace, to put this into comparison the iPhone 13 has 6 CPU cores and 4GB of RAM and many people have more powerful than the new iPhone. This means that almost anyone can run a node unlike platforms like Solana or Ethereum where specialised hardware and large upfront investments are required. At the same time the number of nodes is not limited, it can as easily scale from 1000 to 10000 as from 10,000 to 1M without sacrificing performance. Before details transaction throughput I will describe the overall structure of the network.

The Avalanche protocol features three integrated chains:

Exchange Chain (X-Chain)

Platform Chain (P-Chain)

Contract Chain (C-Chain)

The X-Chain is a specialised blockchain responsible for creation of assets on Avalanche, their trading, and transfers across subnets.

The P-Chain is the chain responsible for creating dedicated subnets. A subnet is a similar concept to Polkadot’s customisable Parachains. Subnets are completely customisable like blockchains built on Polkadot’s substrate. Therefore, these blockchains can be specialised to address specific use cases. Subnets are also designed to be natively interoperable across all subnets on the Avalanche ecosystem. In addition, Avalanche is also building bridges connecting external chains to its ecosystem. The most notable bridge which currently exists on Avalanche connects the Ethereum network. Each subnet can handle up to 4,500 TPS and 2s settlement times without specialised hardware. If subnet requires a higher performance, then a specialised subnet can have higher minimum hardware requirements for its validators to be able to achieve 10,000+ TPS. There is no limit to the number of subnets that can be created. Another strong feature of subnets are the flexibility in terms of regulatory compliance. Subnets can customize and set their own parameters for who can take part in staking, governance etc… dependant and in compliance with jurisdictions, something which is difficult to implement for current blockchain platforms.

The C-Chain is an Ethereum Virtual Machine (EVM) chain responsible for executing Ethereum smart contracts, while enjoying high throughput and 2s transaction finality. The EVM allows for many DEFI projects built on Ethereum to seamlessly migrate to Avalanche similarly to Binance Smart Chain. There is also the possibility for more dedicated virtual machine chains to appear around specific platforms if there is sufficient demand in the future i.e. Cardano VM, Solana VM etc…

With this all however, Avalanche is not without its problems. Currently the end user experience is not truly seamless which is a problem for users new to crypto. For example, users have to choose between Avalanche’s 3 chains within the wallet when they want to transfer funds. This is too much to ask for a new user who knows nothing of the architecture of the platform, this process should be completely automated and made invisible to the end user, unless specifically requested. The Avalanche team promises to improve this soon.

In conclusion, it is clear that Avalanche is a stellar and best in class technology, not only being a true contender claiming to have solved the blockchain trilemma, but also having solved the challenge of Interoperability, all in one platform, quite an astonishing feat I might add. I advise to monitor future developments of the Avalanche network closely.

Market Adoption Evaluation:

The Avalanche network launched 12 months ago, during last September. Avalanche shipped with all its features from day one, granted that a totally seamless experience for the end user was not yet there. Over the last 12 months Avalanche has accumulated a total of 327 projects. The rate of growth over the last six months has been very rapid at a growth monthly rate of 30% trending upwards.

Analysing the developer community, Avalanche does not have significant adoption according to Github as of late June with only 723 stars. On the other hand, The size of the discord community tells a different story with a reasonably size of 17,000 as of late June. It is worth noting that GitHub stars may be lacking as most of the projects migrating towards Avalanche a coming from the Ethereum community, which suggests that there is more activity than there seems to be.

The overall size of the Avalanche is significantly smaller than its peers with 284K followers on twitter and 13k followers on reddit. Although it worth noting that it is increasing on a positive trend at an avg. monthly rate of 29% on twitter and 43% on reddit. Overall the community is still relatively small but growing at pretty rapid rate. We will see how it develops over the next coming months.

From a markets perspective, things have looked very positive over the last few months. AVAX’s, Avalanche’s native token, current market cap is at $14B which although is significantly smaller than all its counterparts has increased at a stellar monthly rate of 83% over the last few months, which is trending upwards. AVAX is currently the 11th largest cryptocurrency in the world. The Avalanche network has enjoyed the 2nd largest rate of growth with only Solana outperforming with an avg. monthly growth rate of 347%. AVA labs, the firm responsible for building Avalanche has received $290M in funding to date, putting it just behind Polkadot in terms of cash funding. In addition Avalanche controls a total of 16% of the token supply, currently valued at $2.24B, which it will use to incentivise growth of the network. This puts Avalanche’s total funding at $2.5B which a very reasonably amount. In addition, not only is Avalanche backed by many prestigious investors such as Anresson Horowitz, Polychain Capital and Abstract Ventures but it has also received great kudos and endorsement from prominent figures in the crypto space: Vitalik Buterin, Charles Hoskinson and Alex Tapscott. Although Avalanche has not yet received full-fledged institutional support, in my opinion it is only a matter of time, given than it has native regulatory compliance features which is something very appealing to this group of investors.

When analysing Avalanche’s ecosystem it is worth noting, that Avalanche has pulled a similar strategic move as Binance Smart Chain by providing $230M in incentives for DeFi platforms to migrate from Ethereum to its platform. In reality, these rewards will be closer valued at $400M as the scheme was announced before Avalanche’s native token seriously spiked in value. Given this strategy, the most notable projects on Avalanche are: Chainlink, the largest oracle provider, Maker DAI, algorithmic stable coin project and Pangolin, a DEX which has processed $6.73B in value to date. Ecosystem wise it is fair to say that at the moment there aren’t as many technologically interesting projects building from scratch on Avalanche as Polkadot or Solana but this makes sense as their strategy has prioritised migration so far. Only time will tell whether this will change going forward, especially given that the USP of interoperability is that there are useful and interesting technologies you can seamlessly integrate with which is why Internet of Blockchains heavily benefit from Economies of Scale and strong network effects. Currently all DAPPs on Avalanche a processing a daily volume of $143M which is mediocre. The current TVL in Avalanche’s DeFi ecosystem is currently $2.81B which suggests that their migration strategy is working. I am sure we will see these figures increase significantly over the coming months, as many DAPPs and projects complete their migration plans onto Avalanche.

In summary Avalanche’s ecosystem is still in its incubation period and although is not performing as well as some of its competitors at the moment, clearly shows some very positive signs of change, at the end of day the best investment opportunities are ones which are on the brink of receiving mass adoption, which I would wager for Avalanche.

Token Economics Analysis:

Avalanche’s native token is AVAX. AVAX is used for a variety of uses on the Avalanche network. AVAX’s current supply is 391 million. AVAX has been designed with a maximum supply cap of 720 million units, making it a naturally scarce asset like Bitcoin. AVAX can be used for governance and staking similarly to other POS blockchains. The economical design of AVAX is also interesting to analyse, AVAX is designed with inflationary deflationary pressures embedded into the protocol. In long run the goal with this monetary policy is to have a steady average supply with Inflation = Deflation. However, this will not be the case for a while to come.

Avalanche’s token distribution is as follows:

At Genesis (when AVAX launched) the initial supply was 360 million, spread across various agents as per the left side of the diagram above. The vesting periods for the minted tokens range between 1–10 years. What is notable is that half of the total supply has been dedicated to staking. The way in which Avalanche team envisioned the supply of AVAX to vary over time in comparison to BTC can be seen through the following graphs:

Currently the returns for staking Avalanche are quite high at 11%. Ultimately stakers have right to decide the amount of newly issued AVAX when staking, albeit they can never exceed the maximum supply of 720 million.

The deflationary pressure of the AVAX economy comes from transaction fees paid in AVAX. In addition, projects have to pay a charge to create custom blockchains and subnets. All the AVAX generated from these fees are burned at not distributed to validators. Validators are only rewarded with newly minted AVAX from staking.

Therefore, when the network gets significant adoption it is expected for transaction fees to offset inflation from staking. The system is designed to never grind to a halt if deflation becomes to high due to stakers voting to increase the rate of inflation reward. The opposite is also possible when inflation is too high, stakers can vote to increase transaction fees and reduce staking rewards.

Overall the tokenomics of Avalanche seem quite solid, it will be interesting to see if the envisioned model of a steady supply comes to fruition over the years.

Conclusion:

Technological Analysis:

• Hight Transaction Throughput: 4,500 TPS/subnet (can be scaled to a 10,000+ TPS with specialised validator hardware)
• Instant settlements time: 2s finality
• Avalanche utilises a breakthrough consensus mechanism: arguably one of the biggest breakthrough’s since Nakamoto consensus (Bitcoin)
• High level of Interoperability across subnets and networks
• High level of decentralisation: compatible with millions of nodes without sacrificing performance
• low hardware requirements for validators: You can literally run a node on a Toaster
• Dedicated C-Chain for EVM compatible smart contracts
• P-Chain fully customisable and interoperable platform for building specialised blockchains
• Subnets can natively set parameters for nodes and validators in compliance with local jurisdictions
• User experience needs some sharpening

Total: 10/10

Market Adoption Evaluation:

• Avalanche shipped with all of its main features from launch one year ago
• Mediocre size of ecosystem: 327 projects
• Developer community is increasing: 17,000 discord members + Ethereum migration
• Smallest community: 284k twitter, 13k reddit, but increasing at a healthy monthly growth rate of 29% and 43% respectively
• Smallest market cap out of its peers: $14 Billion
• Second largest average monthly growth rate of 84% (after Solana)
• Avalanche is very well funded: $290M invested so far
• Avalanche has reputable investors: notably Andreessen Horowitz, Polychain Capital
• Avalanche has received kudos and commendations from the most respected figures in the blockchain industry: most notably Vitalik Buterin (Ethereum), Charles Hoskinson (Cardano)
• Avalanche has not yet fully received institutional support
• Avalanche has provided $230M, now valued closer to $400M, in incentives for projects to migrate from Ethereum and other EVM blockchains to its platform
• Avalanche has high quality projects on its platform: MakerDAO and Chainlink most notably
• Avalanche has a healthy and growing DeFi ecosystem with $2.81B TVL

Total: 7/10

Tokenomics Analysis:

• AVAX is naturally scarce: maximum supply of 720 million
• The AVAX token is responsible for network governance and staking
• In the long run AVAX is designed to have a stable supply: inflationary pressures = deflationary pressures
• Good Pre-Mine Token Distribution: 50% of tokens will be earned via staking and vesting period for founders + investors is long 1–10 years
• High staking returns 11% APR
• All fees earned by network are burned: transaction and subnet fees
• Uncertain how successful the network fee burn will be at offsetting inflation
• Mediocre to Poor P/S ratio: 812x

Total: 8/10

Net Total: 25/30

Summary:

Avalanche is perhaps one the most promising layer blockchains out in the wild. In my opinion it has best in class technology outclassing all of its competitors both in scalability and interoperability whilst maintaining superb levels of decentralisation and censorship resistance. Its market adoption thus far been quite slow, but over the past few months it is becoming increasingly clear that this is rapidly changing. In fact, from an investment perspective I would view this as a real opportunity: there is still room on the bus, unlike Solana whose ship has already sailed.

In addition, Avalanche’s tokenomics are also competitive, by implementing a maximum supply and significant deflationary pressures over time, investors become heavily protected. However, if there is one criticism I may make, it is that the subnet fees are only charged during creation. I would have preferred a subscription style model which would generate much more revenue as the network scaled, rather than relying on transaction fees for the bulk of the revenue during growth. A variation of Polkadot’s economic model would have also been preferable for business model of the P-Chain.

This being said, I am still very confident that Avalanche’s revenue model will work out in the end. It is certainly more competent than Solana’s (its main competitor) in my opinion, especially given that most of the networks on Avalanche will transact within the 4,500 TPS range, generating substantial transaction fees over time.

Out of all the layer one platforms, I believe Avalanche is the best network to invest in at this point in time. It’s market cap is not too overly inflated while the network is clearly growing at a rapid rate whilst the technology is truly next generation.

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Nikita