Avalanche: A Glimpse of Light in the Winter
Co-written by Kennard Low, Samuel Oscar Yobeliano, Alden, and Russell
What is Avalanche?
Avalanche began as a protocol for solving for consensus in a network of unreliable machines. The protocol’s fundamentals were first shared on the InterPlanetary File System (IPFS) in May 2018 by a pseudonymous group of enthusiasts going by the name “Team Rocket”.
Avalanche was launched by Ava Labs in 2020. Emim Gun Sirer, a Turkish- American computer scientist and associate professor at Cornell started Ava Labs in 2018. The company currently has offices in New York City and Miami and was initially funded by Andreessen Horowitz, Polychain Capital, Initialized Capital and angel investors such as Balaji Srinvasan and Naval Ravikant of AngelList.
Many hailed AVAX as a revolutionary feat in the blockchain space given their ability to handle high throughput, stay secure and versatile. Its open-sourced nature allows developers to contribute to AVAX’s code and wide ecosystem. This article aims to delve into AVAX without getting technical, and evaluate it as a whole.
Avalanche’s Chains
Avalanche operates using 3 main blockchains, namely the C, P and X Chains, all of which are validated by the Primary Network. To qualify as a validator, one needs to stake at least 2,000 AVAXto be a member of the Primary Network. The different chains perform vastly different functions, all of which play a crucial role in ensuring the viability and success of AVAX.
C-Chain
Avalanche’s C-chain, or Contracts Chain, is arguably the most important chain in the Avalanche Network. It is the chain upon which some of the most notable DeFi applications are built on, namely Benqi, Trader Joe XYZ and AAVE. Thus, it forms the basis of the AVAX network by allowing developers to implement their decentralised applications, along with scalability and security features.
Most importantly, this chain complies with the Ethereum Virtual Machine (EVM) software, which allows Ethereum smart contracts to be deployed on the C-Chain. This in turn translates to the onboarding of big DeFi names, where they are able to launch an AVAX version of their product with ease. AVAX’s use of Ethereum style wallet address (0x) also means that wallets on the chain could be added to Metamask. On the whole, this raises AVAX’s interoperability and allows them to cater to a wide variety of users.
Both the C and P Chains utilise AVAX’s famed Snowman Protocol, which is a consensus model that inherits the best properties of the classical and Nakamoto models. The following paragraphs attempt to dissect AVAX’s consensus model in the most simplified way possible.
In a nutshell, consensus models aim to facilitate agreement between all the validators in the network, with the final intent of all nodes achieving a common state of data. However, a violation occurs when a different transaction goes through on a node and the data on that specific node is not synonymous with the rest in the network. This is where consensus protocols come into play, minimising the probability of violations occurring, ideally till it’s very unlikely to occur.
Firstly, it’s important to understand the flaws of the classical model. Since its viability depends on nodes knowing and agreeing on the identities of fellow nodes, violations can occur easily when there are issues with maintaining the network membership. Scalability then comes up as another issue when trying to expand the network due to increasing costs of trying to integrate them into the network.
The Nakamoto consensus was groundbreaking in making the correctness definition probabilistic, which allowed the network to scale quickly and efficiently. However, high energy is needed to maintain the network and the consensus speed is slow.
Snowman Protocol draws lessons from the abovementioned and intends to omit the pitfalls whilst preserving their benefits. In sum, AVAX’s open sourced and permissionless nature meant that the classic model’s over-centralisation and scalability issues had to be eliminated. Similarly, Nakamoto’s high transaction costs and slow speed posed obstacles to attaining high throughput. Besides omitting the obstacles, AVAX utilises Nakamoto’s probabilistic approach and generalises the classical model, allowing them to reduce errors and bring down transaction finality respectively. Moreover, AVAX nodes are only put to work when there are transactions to validate and not to mine or poll for new blocks, allowing it to operate on lesser energy requirements.
P-Chain
The primary function of the P-chain (Platform-chain) is for staking AVAX and for serving as a validator. Stakers and validators will receive their AVAX rewards on this chain. With that said, this chain also coordinates validators, tracks active subnets and also enables the creation of new Subnets.
With the increasing demand coupled with limited blockspace, Avalanche uses subnets to tackle rising gas fees on the C-Chain. Subnets are a dynamic set of Avalanche validators that reach consensus on an arbitrary number of blockchains which they are assigned to. Similar to C-Chain, the P-chain also implements the Snowman consensus protocol.
Subnets are independent and don’t share execution thread, storage, or networking with other Subnets or the Primary Network. This creates more blockspace and computation needed to keep up with demand, thus enabling lower fees, higher TPS and lower latency for developers who want to launch their own blockchain.
An Avalanche validator can create a subnet with rulesets for its respective validators and can even launch their own blockchain with customised virtual machines. For example, a validator can implement rules that require KYC for all users before interacting with applications on the subnet. As such, it is possible for the private subnets to be created that are only accessible to certain users.
As of writing this article, there are currently two live subnets: DeFi Kingdoms and Crabada.
X-Chain
The X-chain (Exchange Chain) is used for atomic swaps to facilitate transferring assets between different chains. On top of the creation and exchange of assets, the X-Chain also facilitates cross-Subnet transfers. It serves similarly to a cross-chain bridge, except assets can also be stored on the chain.
While C-Chain can also be used to transfer funds, X-Chain was designed with the goal of speed and efficiency, focusing solely on sending and receiving funds. Ergo, it is not used for DeFi platforms, nor can it be used with MetaMask or similar wallets. A user’s X-Chain address can only be assessed from the Avalanche wallet and a new address is assigned after every deposit. Using DAG technology, it can achieve ultra-high TPS and rapid finality. This offers anyone exchanging tokens on the chain to achieve extremely fast transactions with insanely low fees of 0.001 AVAX compared to other layer 1 blockchains.
The X-Chain uses the Avalanche consensus protocol, making it an instance of the Avalanche Virtual Machine (AVM); AVM defines an application for creating and trading smart assets.
Tokenomics
Supply
The supply of AVAX is limited to 720 million. Therefore, AVAX is a deflationary asset as its availability is limited. AVAX coins can also be used for governance on the platform because by holding and staking coins one gets voting rights which one can use to vote on important decisions on the future of the network.
Fee
Fees in Avalanche are also burned quite similar to that in the Ethereum network, and this progressively deflates the token supply. There are different tiers of transactions that vary in their fee structure. For example, creating a subnetwork on Avalanche carries a considerable fee (roughly 1 $AVAX), while individual transactions take the lowest costs (approximately 0.001 $AVAX depending on gas prices).
This mechanism was implemented to make $AVAX a deflationary asset over time, ultimately driving up the price of $AVAX. At the time of writing this, approximately 1,999,333 $AVAX burned, equating to roughly $$33,928,690 at current prices.
Minting
A node earns the right to mint by first putting up a stake and then participating actively in the consensus process. Node rewards are directly linked to proof-of-uptime and proof-of-responsiveness. This mechanism does not allow any compounding effect as there is no appointed leader and thus there will be no “rich gets richer” effect. Of the 720 million tokens, 360 million are contained in the genesis block and the rest would be minted over time.
Staking
As a proof-of-stake platform, Avalanche relies on validators that stake AVAX to earn block rewards. Validators can earn up to 11% APY on staked AVAX, with the average yearly return currently around 9.75%
Launch and Initial Token Distribution
Staking Rewards — 50% of the tokens were minted at launch. The remaining 360 million tokens will be utilised as staking rewards released over decades.
Seed Sale — 2.5% of the tokens were for participants in the seed sale. The price per token was $0.33 with a one-year vesting schedule. 10% of the allocation was released on mainnet launch, with the remainder released every three 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 with a one-year vesting schedule. 10% of the allocation was released on mainnet launch, with the remainder released every three 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, with a maximum allocation per user of $25k. 10% of the allocation was released on mainnet launch, with the remainder released every three months over a year.
Public Sale Option A2–8.3% of the tokens were for participants in the Public Sale Option A2 sale. The price per token was $0.5 with a maximum allocation per user of $2.5 Million. 10% of the allocation was released on mainnet launch, with the remainder released every three months over 18 months.
Public Sale Option B — 0.67% of the tokens were for participants in the Public Sale Option B sale. The price per token was $0.85 and with no vesting period.
Foundation — 9.26% of the tokens were allocated to the Foundation. These tokens are used for several ecosystem-building initiatives, including marketing, bounties, and incentive programs. These tokens have a 10-year vesting period.
Community and Development Endowment — 7% of the tokens were allocated to Community and Development Endowment. These tokens are allocated to individuals and groups that are developing core tooling and infrastructure on Avalanche.
Testnet Incentive Program — 0.27% of the tokens were allocated to participants that validated in the Avalanche incentivized testnet programs. Participants were able to complete challenges to earn up to 2,000 AVAX. These tokens were locked for an entire year.
Strategic Partners — 5% of the tokens were allocated to strategic partners. These tokens were allocated with the specific mandate of being distributed to groups, organisations, and enterprises that are building businesses using the Avalanche technology and network. These tokens have a four-year vesting period.
Airdrop — 2.5% of the tokens were allocated with the specific mandate of being distributed to various communities to onboard more people to the Avalanche community. These tokens have a four-year vesting period.
Team — 10% of the tokens were allocated to founding and non-founding members of AVA Labs. These tokens have a vesting period of four years.
Metrics
Financial metrics are important in indicating the healthiness and popularity of different blockchains. In the case of AVAX, we looked at the TVL and number of transactions and unique contracts deployed.
Total Value Locked (TVL)
TVL represents the total value of on-chain assets including staked tokens and those deposited in on-chain protocols such as liquidity pools. It represents the amount of capital locked on a chain, reflecting its popularity and utility.
According to DefiLlama, the Total Value Locked (TVL) on Avalanche is around US$1.34B, making it the 4th largest chain at the time of writing. Making up 2.47% of TVL on all chains, Avalanche sits behind Tron, BNB Chain, and Ethereum only.
Number of Daily Transactions
According to Avalanche, its daily transaction count currently sits at 1.8 million while its daily cumulative transaction count equals 430 million. Despite being in Crypto Winter where prices and trading volumes are relatively low, we can see that the number of daily transactions on the Avalanche network has generally increased over the past year by a significant amount. This reflects the usability and popularity of its network, which may be attributed to the low gas fees.
Number of Unique Contracts Deployed
The number of unique contracts deployed on Avalanche stands at over 250,000 at the time of writing, and it has exploded 2500x since January 2021. This reflects the increasing amount of developer activity on the network and the potential boom in the Avalanche ecosystem.
Major Investors
According to Crunchbase, Ava Labs has raised over $290.1M in funding over 7 rounds. Its major investors include Andreessen Horowitz and Polychain which led a US$6 million round in 2019, Bitmain and Galaxy Digital which led a US$12 million private token sale in 2020 as well as Polychain Capital and Three Arrows Capital which led a US$230 million round token sale in 2021.
Competitors
Avalanche’s largest competitors are Ethereum and Polkadot, which are chains that both act as base layers for decentralized applications to be built on. Once dubbed the ‘Ethereum killer’, Avalanche promises a “blazingly fast, low-cost and eco-friendly” chain. In terms of transactional throughput, Avalanche triumphs over its rivals by processing over 4,500 transactions per second (TPS) while Ethereum and Polkadot which only manage 15 TPS and 1,500 TPS respectively. Transactions on Avalanche also have almost instant finality while transactions of Ethereum and Polkadot both have a 60 second finality. With faster and cheaper on-chain transactions, Avalanche takes the cake, providing the perfect infrastructure for dApp development.
Conclusion & Future:
Attributed to the multiple rounds of funding over the past 3 years, we can expect to see major growth across the Avalanche ecosystem in the areas of DeFi, NFTs, GameFi and even real world use cases. Due to its EVM compatibility and low smart contract deployment costs, we are already seeing the increase in development activity on Avalanche. Furthermore, the customizability of the chain allows developers to create and launch their own chains with settings specific to their applications. One of the most renowned examples would be DeFi Kingdoms, which launched their DFK chain as a subnet on Avalanche as part of the Avalanche Multiverse program. This allowed the game to expand its player pool and access the liquidity of the Avalanche ecosystem which also allows for cross-subnet transfers.
With the ability to solve real world problems by leveraging on its technology, the future of Avalanche seems to be promising with institutions, enterprises and even governments deploying their own subnets, integrating blockchain to solve real world problems. For example, Deloitte announced a strategic partnership with Ava Labs in 2021 to enable a new disaster recovery platform that uses the Avalanche blockchain to help state and local governments easily demonstrate their eligibility for federal emergency funding. Using the Avalanche blockchain, the Close As You Go (CAYG) cloud-based platform provides state and local officials with a decentralised, transparent and cost-efficient system that empowers both grant makers and funding recipients while minimising fraud, waste and abuse. Despite the bleak macroeconomic conditions we are currently facing, there seems to be a glimmer of hope with the large number of developers silently building on blockchains like Avalanche, showing huge promise in the future of its ecosystem.
