What is Avalanche?
Avalanche (AVAX) is an open-sourced, layer 1 smart contract blockchain platform that has been quickly gaining traction over the last year.
As a reminder, think of layer 1 protocols as softwares that allow for auto-executing contracts to allow users to exchange digital goods. Avalanche, a leading EVM protocol, is mainly focused on providing faster transaction speed and lower gas fees than its competitors. It aims to be a leading operating system for a blockchain-based web.
Founded in 2020 by Ava Labs, the protocol uses a proof of stake model (PoS) called Avalanche Consensus, as opposed to a proof of work model (PoW), which has higher energy usage. Avalanche Consensus is unique, combining the best characteristics of other consensus mechanisms to allow for decentralization, scalability, and high throughput.
AVAX’s network consists of 3 individual blockchains.
The X-Chain is used for the creation and exchange of Avax tokens.
The Contract Chain (C-Chain) is used for smart contracts and decentralized applications.
The Platform Chain (P-Chain) is used to coordinate validators and allows for the creation and tracking of subnets.
Thanks to using three different chains, AVAX is able to offer different features without sacrificing speed. Avalanche looks to continue on its sharp path of scalability and compete with other layer 1 smart contract platforms, like Ethereum.
Why Was it Created?
As cryptocurrency application usage – DeFi, gaming, trading, NFTs – accelerates, there is a need for bigger, better, and faster programs. Many of the first blockchains and tokens had to sacrifice speed, security, or decentralization to function. For example, bitcoin offers decentralization but lacks in transaction speed, with time ranging from ten minutes to one hour. Ethereum lacks speed and scalability in its current state. The network only has capacity for 13 transactions per second (TPS), compared to Avalanche’s 4,500 TPS. This leads many of the apps built on Ethereum to use layer 2 scaling solutions to deal with these problems.
The bitcoin and Ethereum blockchains reveal a clear need for a layer 1 blockchain that is fast, decentralized, scalable, and secure. To fix this, Emin Gün Sirer, formerly at Bell Labs and Cornell, teamed up with Cornell Ph.D.s Maofan Yin and Kevin Sekniqi to launch Avalanche. Their tech caught the eye of many venture capital firms, including a16z. After raising $6 million in private funding, Avalanche has seen rapid growth, with their private and public token sales now reaching upwards of $290M, $230M funded by Polychain and Three Arrows Capital.
The Avalanche Ecosystem
Avalanche has grown substantially in the past year, with the native AVAX token up 220% as of March 2022. This has followed a year of consistent growth and the stabilization of network usage, performance, and infrastructure.
Average Active Daily Addreses have exploded from 10,330 in Q3 2021 up to 92,081 in Q1 2022.
Over the preceding three quarters, total quarterly revenue has grown from $7,149,020 to $52,286,902.
Avalanche broke into the Bitwise 10 Large Cap Crypto Index in early January 2022, “an important benchmark for institutions looking at crypto assets.”
Avalanche is leading its competitors in gaming volume with $1.1B in gaming volume in Q1. This was primarily due to the games Crabada and Defi Kingdoms.
In addition to the growing market cap, the Avalanche network has seen steadily rising fee revenues. Fees are collected in two parts, similar to Ethereum: (1) a base fee determined by network usage and availability and (2) a variable tip to determine how a transaction is prioritized within a block.
Similar to ETH, AVAX plans to incorporate many other companies and platforms into their ecosystem. Right now on the platform, you can trade on a decentralized exchange, manage a portfolio, buy NFTs, and more. Metamask allows for the transfer of AVAX tokens between different wallets. Although Metamask is the most popular wallet, Ava Labs has launched the beta version of Avalanche Bridge, a software allowing users to transfer any ERC-20 token to Avalanche’s platform. With the growing popularity of NFTs, Avalanche has seen an opportunity to partner with companies like Topps to expand network share of the market.
What is the Downside?
The question looms if Avalanche can compete with the likes of other layer 1 protocols like Solana and Ethereum 2.0, which is set to be released this year. ETH 2.0 is said to be able to process 100,000 TPS, which is 22 times Avalanche’s 4,500. It will be interesting to see how AVAX puts a plan in place to increase its transaction speed, something that must happen if they want to compete with Ethereum.
Avalanche’s growth has been helped by GameFi, or play-to-earn games. Crabada has led this growth, so much so that the game accounts for 50+% of revenue fees for the network. While network growth is impressive, it will be important to continue to monitor revenue sources and network demand as more is built on the protocol.
The Future of Avalanche and its Improvements
Platypus Finance, a standout automated market maker (AMM) built on the Avalanche network, was the fastest-growing DeFi protocol of Q1 2022. Platypus aims to be the most user-friendly, scalable, capital-efficient stablecoin swapon Avalanche.
The previously-mentioned Avalanche Bridge, which allows the transfer of ERC-20 tokens, has additional infrastructure in the works too. At the March Avalanche summit in Barcelona, Ava Labs Head of Product Nick Mussallem announced that they will be launching their own wallet application called Core, which will add native support for Bitcoin. This is significant: Avalanche users previously had to use an ETH-AVAX bridge through Metamask in order to move their assets onto the Avalanche blockchain.
As Avalanche adoption grows, it will be interesting to see the improvements they make as a company, and how they will compete with new blockchains in the future.
AVAX Statistics
The Avalanche blockchain uses the equivalent of 46 homes worth of carbon
The AVAX token market cap is $16B, which is the 13th-largest
Circulating Supply of the liquid token is 268M
Sources
Avalanche page on CoinMarketCap
A graphic comparing AVAX and ETH from Bitpanda
Avalanche Platform Breakdown
How to Explore Avalanche
Read about the upcoming Core extension
Ava Labs Summit Recap from Coindesk
Further reading about Avalanche Consensus
Avalanche Digital Asset Review was published in collaboration with Carter Valerio.