Why Avalanche (AVAX) has the potential to be an incredible store of value
Blockchain is going to completely revolutionize most industries and even the Internet itself. We are presented with an incredible opportunity to invest in projects at an early stage that have the potential to become the next Apple, Microsoft, Amazon and Google’s of the world. Whilst there are many great projects (and a lot of awful ones as well), there are only a small number which have the tokenomics to match.
In this article I will be looking at Avalanche (AVAX) and as Bitcoin is the current king of store of value in the cryptocurrency space, I will draw on comparisons throughout the article.These are my views and should not be considered financial advice. I strongly urge everyone to not waste this opportunity and spend time doing your own research into any project you invest in.
A quick overview of Avalanche can be seen in the below video, along with additional info through links at the bottom of this article.
The token distribution details can be seen below. 360 Million AVAX were minted at launch, whilst the other 360 Million will be used as Staking rewards released over decades. Of the tokens that were minted, there are various vesting periods from 1 year to 10 years as detailed below.
Staking Rewards — 360 Million tokens were minted at launch and then the other 360 Million tokens will be used as staking rewards to validators, released over decades.
Seed Sale — 2.5% of the tokens were for participants in the seed sale. The price per token was $0.33 and they have a 1 year vesting schedule where 10% of their allocation was released on mainnet launch, and then 22.5% is released every 3 months over a year.
Private Sale — 3.5% of the tokens were for participants in the private sale. The price per token was $0.5 and they have a 1 year vesting schedule where 10% of their allocation was released on mainnet launch, and then 22.5% is released every 3 months over a year.
Public Sale Option A1–1% of the tokens were for participants in the Public Sale Option A1. The price per token was $0.5 and there was a maximum allocation per user of $25k. Tokens have a 1 year vesting schedule where 10% of their allocation was released on mainnet launch, and then 22.5% is released every 3 months over a year.
Public Sale Option A2–8.3% of the tokens were for participants in the Public Sale Option A2. The price per token was $0.5 and there was a maximum allocation per user of $2.5 Million. Tokens have a 1.5 year vesting schedule where 10% of their allocation was released on mainnet launch, and then 15% is released every 3 months over 18 months.
Public Sale Option B — 0.67% of the tokens were for participants in the Public Sale Option B. The price per token was $0.85 and there was no vesting period.
Foundation — 9.26% of the tokens are allocated to the Foundation. These tokens are used for various ecosystem-building initiatives, including marketing, bounties, incentive programs, and more. These have a 10 year vesting period.
Community and Development Endowment — 7% of the tokens are allocated to Community and Development Endowment. These tokens are allocated to individuals and groups that are developing core tooling and infrastructure on Avalanche as well as are supporting Avalanche through grassroots community building and marketing. For example, these may include Avalanche Hub, Avalanche Ambassadors, Avalanche-X grantees, and more. Any grants awarded have a 1 year vesting period from the date the grant is awarded.
Testnet Incentive Program — 0.27% of the tokens These tokens are allocated for participants that validated in the Avalanche incentivised testnet programs. Participants were able to complete challenges to earn up to 2000 AVAX. These tokens are locked for a full year.
Strategic Partners — 5% of the tokens are allocated to strategic partners. These tokens are allocated with the specific mandate of being distributed to groups, organizations, and enterprises that are building businesses using the Avalanche technology and network. For example, these may include entrepreneurs looking to build a business that does fast international remittance using Avalanche or financial institutions that are looking to tokenise assets on Avalanche through their own subnets. These have a 4 year vesting period.
Airdrop — 2.5% of the tokens These tokens are allocated with the specific mandate of being distributed to various communities in order to onboard more people to the Avalanche community. For example, these may include airdrops to various crypto communities, Reddit communities, developer forum communities, and even airdrops to exchange users. These have a 4 Year vesting period
Team — 10% of the tokens. are allocated to founding and non-founding members of AVA Labs. These have a vesting period of 4 years with Team members, including founders, who have vested tokens prior to launch are voluntarily re-locking all tokens for four years.
The recently public token sale raised $42 million in under 4.5 hours (and that was with a lengthy queue system) which included participants from an Ethereum Genesis address. The private token sale included prominent venture firms such as Andreessen Horowitz (a16z).
Scarcity alone is not enough to be a good store of value, there needs to be strong demand. Gold has a limited supply combined with a wide variety of usage such as jewellery, electronics and coins. Bitcoin has a limited supply combined with use as payments. Avalanche offers incredible utility, not only in the consumer space but also with enterprises as well.
Bitcoin is a decentralised peer-to-peer payment network, but its adoption has been limited due to only being able to process ~ 7 transactions per second, achieves transaction finality in 1 hour, and has relatively high transaction fees compared to other cryptocurrencies. Whilst Avalanche shares several features of Bitcoin such as utilising Satoshi’s UTXO model and structures transactions like Segwit (but without backward compatibility issues), it offers far more performance. Avalanche has achieved in excess of Visa-level throughput with 6,500 transactions per second, sub-second finality and able to accommodate millions of validators all participating in consensus for unparalleled decentralisation. Avalanche doesn’t only cater for payments in its native token, but also any other asset including stablecoins.
Burning of AVAX tokens
Fees for all sorts of operations on the network are paid out in AVAX. These are then burned, reducing the supply, and increasing the scarcity of AVAX for all token holders. If the number of AVAX burned exceeds the amount minted in staking rewards (which can be controlled through governance) then this creates deflationary pressures. Unlike Ethereum’s EIP 1559 Proposal all the fee is burnt rather than part and also there is a maximum amount of AVAX of 720 million and this can never be exceeded, whereas there are no limits with the size of Ethereum’s supply.
Transaction fees, creation and minting of assets and smart contracts
Avalanche was built with serving financial markets in mind. It has native support for easily creating and trading digital smart assets with complex custom rule sets that define how the asset is handled and traded to ensure regulatory compliance can be met. The assets could represent financial instruments such as equities, bonds, debt, fractionalized real estate, or anything else. Offering the best place to build DeFi applications but also the traditional finance market, where the derivatives market alone is worth a staggering $800 trillion. All transaction fees in the Primary Network are paid in AVAX which are burned, removing them out of supply forever resulting in everyone benefiting, rather than being paid to the miners. The primary network currently consists of 3 blockchains:
X-Chain — acts as a decentralized platform for creating and trading smart digital assets and is an instance of the Avalanche Virtual Machine (AVM). In addition to AVAX the X-Chain enables anyone to create and mint other smart digital assets such as stablecoins, utility tokens, NFT’s, wrapped tokens, equity etc. The creation and minting of these tokens also require a fee paid in AVAX which is also burned.
C-Chain — is a new, (originally) empty instance of the Ethereum Virtual Machine. It is compatible with all of the key Ethereum tooling that has fuelled decentralized finance’s (DeFi’s) growth to-date, including MetaMask, Web3.js, Remix, Truffle Suite, and Embark Platform. So current Ethereum applications can easily try Avalanche and take advantage of being able to process thousands of transactions per second, finalise transactions in seconds, extremely low gas fees and Solidity works out of the box! All gas fees are paid in AVAX which are also burned.
P-Chain — is the metadata chain on Avalanche and coordinates validators, keeps track of active subnets, and allows for the creation of new subnets and is where tokens are locked for staking. Again, all transaction fees are paid in AVAX which are burned.
Creation of subnets and blockchains
Avalanche is a platform of platforms, ultimately consisting of thousands of subnets to form a heterogeneous interoperable network of many blockchains, that takes advantage of the revolutionary Avalanche Consensus protocols to provide a secure, globally distributed, interoperable and trustless framework offering unprecedented decentralisation whilst being able to comply with regulatory requirements.
Avalanche allows anyone to create their own tailor-made application specific blockchains, supporting multiple custom virtual machines such as EVM and WASM and written in popular languages like Go (with others coming in the future) rather than lightly used, poorly-understood languages like Solidity. This virtual machine can then be deployed on a custom blockchain network, called a subnet, which consist of a dynamic set of validators working together to achieve consensus on the state of a set of many blockchains where complex rulesets can be configured to meet regulatory compliance.
Each subnet can have its own token / fee structure. They may also choose to have staking and transaction fees paid in AVAX, stablecoins, or their own token. Avalanche is a consensus platform, enabling projects to focus on the application layer by porting their blockchains over and continue to use their existing token / apps, but benefit from the increased performance, sub second finality and unparalleled decentralisation that Avalanche offers whilst being interoperable with all the other subnets. Anyone can create their own subnet by paying a subscription-style fee in AVAX, or they can look to use an existing subnet for the creation of a new blockchain. Both the creation of subnets and blockchains fee is paid in AVAX and is burned. A Validator can validate multiple subnets but it’s also mandatory to validate the primary network.
An example of another subnet due to launch soon is Athereum. Athereum is a ‘spoon,’ or friendly fork, of Ethereum, which benefits from the Avalanche consensus protocol and applications in the Ethereum ecosystem. It’s native token ATH will be airdropped to ETH holders as well as potentially AVAX holders. This can be done for other blockchains as well.
The traditional finance market is huge with the derivatives market alone is worth a staggering $800 trillion, but there are strict regulations and financial institutions need to ensure they can remain compliant. This is why subnets are so important, they enable complex rulesets to be enforced on who can validate a subnet. For example, it may require them be located in a given country, passing a KYC check or holding a certain license. So, you may have one subnet for validating a set of blockchains that deal with trading of securities in the US which requires validators be located in the US and hold certain licenses for example.
Private subnets similar to enterprise blockchains such as R3’s Corda and Hyperledger and Quorum are also possible where access is restricted and the contents of the blockchains only visible to those participants. Whilst having interoperating with other open permissionless subnets for other workloads that require less strict regulations. Permissioned blockchains don’t normally require the use of a token as access is restricted, but AVAX still benefits from the utility as all validators of any subnet, also have to validate the primary network and stake a minimum of 2000 AVAX. In addition, subnet creation requires subscription fees and blockchain creation fees to be paid in AVAX which are burned.
As every validator has to also validate the primary network, it creates an incredibly secure subnet which all participants can view the state, thus it will be used for bridges to external blockchains as well as within the ecosystem between subnets. This increases the usage of the primary network further, leading to more AVAX in fees being burnt and further reducing total supply.
An important characteristic of a store of value is scarcity. Unlike most other staking platforms which have an unlimited supply and continuously increase their supply at a compounded rate, Avalanche has a fixed capped supply of 720 million, creating scarcity. 360 Million tokens were minted at launch (with the vast majority locked up in vesting periods between 1 and 10 years) whilst the other 360 million are used for rewards for staking. As with Bitcoin, reward rates will decrease over time as it gets closer to the capped supply (although at a much smoother rate rather than infrequent halvings).
A completely meaningless comparison I see some people making is comparing the fully diluted cap of a fixed-cap asset such as AVAX to the diluted cap of a variable-cap asset. This makes no sense. Your comparing the fully diluted cap that will take 50+ years to reach, to the current total supply of a variable-cap asset which has unlimited supply and yearly compounded inflation rate, and that’s before you take into consideration the AVAX tokens which get burned. As an example, if a non-fixed cap has a current total supply of 1 Billion, with a 5% yearly inflation rate after 50 years the total supply will be 11.4 Billion. With a 10% yearly inflation rate the total supply would be 117.3 Billion. Then see how the favourably they compare.
In addition to having a limited supply like with Bitcoin, it goes further by burning of AVAX tokens for fees for all sorts of operations on the network in the primary network such as transaction fees, subscription style fees for creating subnets and creating of blockchains, thus increasing the scarcity of AVAX for all token holders and creating deflationary pressure when the amount burnt exceeds the minting rewards.
In the early days of Bitcoin anybody could mine Bitcoin with modest hardware and the rate of increase in supply was high, then as time progressed reward rates continuously decreased reducing the rate at which supply increased. Nowadays, mining Bitcoin is only really viable in countries with very cheap electricity and require expensive hardware to run as part of a mining pool. There are just 5 mining operations which control the majority of Bitcoin’s hashing power.
Avalanche uses proof-of-stake model for network security instead of proof-of-work, where you only need modest hardware requirements and it doesn’t use enormous amounts of energy. Avalanche’s revolutionary consensus mechanism is able to scale to millions of validators participating in consensus at once, offering unparalleled decentralisation.
Running a validator and staking with Avalanche provides extremely competitive rewards of between 9.69% and 11.54% depending on the length you stake for. The maximum rate is earned by staking for a year, whilst the lowest rate for 14 days. There is also no slashing, so you don’t need to worry about a hardware failure or bug in the client which causes you to lose part or all of your stake. Instead with Avalanche you only need to currently maintain at least 60% up time to receive rewards. If you fail to meet this requirement you don’t get slashed, but you don’t receive the rewards.
Currently the minimum amount required to stake to become a validator is 2000 AVAX (which can be reduced over time as price increases). Alternatively, validators can also charge a small fee to enable users to delegate their stake with them to help towards running costs. You can use a calculator here to see how much rewards you would earn when running a node, compared to delegating.
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The below article shows the step by step process of setting up a validator on Microsoft Azure
Setting Up an Avalanche Node with Microsoft Azure (Cheaper than AWS)
Running a validator and staking with Avalanche provides extremely competitive rewards of between 9.69% and 11.54%…
Circulating supply further reduced by staking
As Avalanche uses Proof-Of-Stake instead of Proof-of-Work a large percentage of the supply will be continuously locked up, in addition unlike other staking platforms where you can usually unbound after a few weeks, with Avalanche you are encouraged to lock them up for longer periods to receive higher rewards. So, upon staking to receive the maximum rewards you will need to lock up your tokens for a year, from which they can’t be moved. Currently over $14 billion is locked up and has a staking ratio of 60%. This further reduces available supply to sell, and simple supply and demand economics state that as supply falls, and demand stays the same, price will increase. If supply decreases in combination with increased demand (as the ecosystem continues to grow) then price increases faster.
- Avalanche makes an excellent payment platform, supporting a variety of assets with its revolutionary consensus engine, exceeding Visa-Level throughput with sub second finality whilst able to accommodate millions of validators. Avalanche offers a highly customisable, interoperable platform of platforms enabling other projects to build on / port blockchains over resulting in strong demand for the token.
- AVAX is a fixed capped supply token like with Bitcoin which creates scarcity and won’t suffer from the continuous dilution through inflation like other staking platforms.
- Transaction fees across all the blockchains in the Primary network, fees for creating and minting of assets, creation of blockchains and the creation of subnets are all paid in AVAX which are burned, reducing total supply.
- Avalanche is creating the Internet of Finance, offering the best place to build DeFi applications but also the traditional finance market, where the derivatives market alone is worth a staggering $800 trillion and able to meet regulatory compliance and Enterprise adoption, generating additional demand for the token.
- Staking, particularly in the early years, offers very competitive rates of between 9.69% and 11.54%, especially when the price of AVAX is likely to rise over time due to the above, making it an excellent long-term investment. Not only does running a validator node enable you to receive rewards in AVAX, but you can also validate other subnets in the ecosystem as well and receive rewards in the token native to their subnets.
- Staking encourages large amounts of tokens to be locked up for long periods of time, reducing circulating supply and when combined with increased of demand for the token due to excellent utility as mentioned above then price is likely to increase significantly.
To find out more about Avalanche see the following articles:
Why I’m so Bullish on Avalanche AVAX.
Avalanche is a platform of platforms, ultimately consisting of thousands of subnets to form a heterogeneous…