Layer 1 Blockchain: Avalanche — Enhancing Scalability through Multi-Chains

Blockchain technology led to the cryptocurrency revolution. Bitcoin, the pioneer in the crypto space, took the world by storm. Though bitcoin remained unflipped, it suffers from various limitations. With the idea of introducing new features in the cryptocurrency arena, altcoins emerged.

Ethereum, the second-most popular cryptocurrency, incorporated features like Non-Fungible Tokens (NFTs) and Decentralized Finance (DeFi), and more. Despite this, it faces criticism due to its speed and high transaction costs.

In the previous post, we discussed one of the popular Layer 1 blockchains, Solana, which uses the proof-of-history mechanism to provide faster speed with a lower fee for transactions. In this article, we will have a closer look at another Layer 1 blockchain, which supports NFTs, and DeFi aspects plus a high degree of scalability was developed to overcome these problems — Avalanche.

What is Avalanche?

Launched by Ava Labs in 2020, the Avalanche blockchain offers a highly scalable solution with support for decentralization, security, low transaction fees, and fast processing speeds. It is powered by its native token, AVAX, various distributed applications (Dapps), and several consensus mechanisms. Its native token AVAX is also the 14th-largest token with a market cap of $6 billion at the time of writing in July 2022.

Essential characteristics of Avalanche include:

  • Coin Development: The maximum number of AVAX tokens is fixed at 720 million; however, by voting on the amount of AVAX tokens to be given as a reward, crypto users can influence the rate of AVAX coin development.
  • Transaction Fee: Transaction fee refers to the cost involved in processing a transaction. This, in turn, depends on the type of transactions and the extent of network congestion over the Avalanche blockchain. In the case of Avalanche, the rate keeps varying as the fees are burned over time.
  • Consensus Mechanism: The Avalanche blockchain uses the Proof of Stake consensus mechanism, which requires users to stake some AVAX coins in exchange for the opportunity to act as validators for the AVAX transactions. Also, users need to have AVAX tokens to participate in AVAX governance proposals.

How does Avalanche work?

The feature that distinguishes Avalanche from other Layer 1 blockchains is its design. Avalanche comprises three blockchains together as an ecosystem rather than the conventional one. The idea underpinning this design is that instead of a single chain handling all tasks, it would make more sense to have multiple chains, each serving a specific purpose. This, in turn, enables the Avalanche blockchain to tackle the blockchain trilemma of security, decentralization, and scalability.

The three chains in the Avalanche ecosystem include:

Exchange Chain (X Chain): This chain of Avalanche’s ecosystem enables creating and trading the assets on the blockchain. Primarily, the AVAX token, which is the native cryptocurrency of Avalanche, is popular on this chain. The transaction fee is also paid using AVAX. In addition, decentralized exchange tokens, JOE and PNG are emerging.

Contract Chain (C-Chain): The contract chain is akin to the Ethereum Virtual Machine (EVM), used to create smart contracts. In Avalanche, smart contracts are created on the contract chain. The key advantage is that as Avalanche is EVM compliant, the Ethereum smart contracts can be deployed on the contract chain.

Platform Chain (P-Chain): This is also referred to as Avalanche subnets and the P-Chain acts as the default subnet. So, what’s a subnet on Avalanche? Well, subnets are the clones of the default blockchain, i.e., the primary network, Avalanche. These subnets are integral to enhancing the scalability of Avalanche blockchain.

Subnets set their own rules on blockchain activities and must validate their own chain and the Primary blockchain. Essentially, a subnet creates another subnet to free up transactions based on network traffic once its required scalability is attained.

What benefits does Avalanche bring?

Due to its unique design and technology, Avalanche offers several benefits over other blockchains like Bitcoin and Ethereum. Some of these are discussed below:

  • Scalability:
    The blockchains that emerged prior to Avalanche lacked the ability to scale. For instance, Bitcoin requires enormous power, while Ethereum has a low processing speed of 15 transactions per second. However, Avalanche was particularly designed to overcome these shortcomings and thus offers a high degree of scalability. It operates at a speed of 4500 transactions per second.
  • Interoperability:
    Unlike most blockchains, Avalanche offers the power of interoperability, enabling cross-platform trading of cryptocurrencies and exchanging data with other blockchains.
  • Usability:
    The extent to which technology makes itself applicable is of great significance. Avalanche blockchain is gaining traction with its diverse applications in the crypto arena. It mainly finds applications in DeFi projects which have transformed the financial sector. Besides, Avalanche offers stiff competition to Ethereum in the realm of NFTs. Gaming and NFTs are two applications where Avalanche stands as a preferred choice.

Potential Risks

Although Avalanche offers several benefits that allowed its ecosystem to grow rapidly to over 200 projects since its launch in 2020, it suffers from certain risks too. Some of these include:

  • Competition from other blockchains:
    Avalanche is one of the few blockchains that supports connection to Ethereum before, due to its EVM compliance. However, its close competitors including Polkadot, Solana, and Algorand are accelerating to develop the EVM compatibility while having high transaction processing speeds. Also, in the next phase of its upgrade, Ethereum will switch to a proof-of-stake consensus mechanism, expected to improve the long-standing problems of processing speed and scalability and enhance its competitiveness in Web3 with more security and sustainability.
  • Malicious Validator Activity is not Punishable:
    Most crypto blockchain platforms penalize the validators for mistakes or frauds. This process is known as Slashing, and the crypto networks follow a slashing protocol. Due to slashing, validators tend to lose some or the whole of their cryptos staked. Avalanche says on its website that its validators never face the risk of slashing. It is unknown why Avalanche does not have a slashing protocol.

Bottom Line

Despite recent market volatility over the past few months, the pace of development in the public chains, Layer 2, and their ecosystems has not stopped. We will continue staying close to the latest update in Web3 and DeFi and exploring the possibilities of developing within them.

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DisclaimerThis content is not financial advice and it is not a recommendation to buy or sell any financial instruments, FX trading, cryptocurrency or engage in any trading or other activities. You must not rely on this content for any financial decisions. Acquiring, trading, and otherwise transacting with financial instruments or cryptocurrency involves significant risks.We strongly advise our readers to conduct their own independent research before engaging in any such activities.GMO Trust does not guarantee or imply that any cryptocurrency or activity described in this content is available or legal in any specific reader’s location. It is the reader’s responsibility to know the applicable laws in their country.

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GMO-Z.com Trust Company

Building Financial-Grade Digital Assets. The World’s First Regulated JPY-Pegged Stablecoin Issuer.