What is Avalanche crypto (AVAX)& how does it work?

Avalanche is a scalable open-source platform that supports both decentralised applications as well as custom blockchain deployments. Avalanche boasts some of the fastest transaction confirmation times, highest potential transaction throughput and lowest fees of any Smart Contract-supporting blockchain. 

These unique characteristics, make Avalanche popular for DEFI and NFT applications and combined with its EVM compatibility and environmentally friendly Proof of Stake consensus model, one of the main challengers to Ethereum. 

Launched in 2020, Avalanche was founded by Emin Gün Sirer, previously an associate professor at Cornell University, assisted by Kevin Sekniqi, a PhD student, and Maofan “Ted” Yin, the architect of Facebook’s abandoned Libra project. 

Gün Sirer’s vision was to create a blockchain that solved the problem of scalability and enabled the support of layer 2 applications as well as entire sub-networks of layer 1 chains that could be configured for any purpose including permissioned private enterprise chains and CBDCs. 

The Avalanche blockchain supports the AVAX token providing a means for users to pay for Smart Contract execution and to share value across its ecosystem of digital applications. 

How to Use Avalanche?

Avalanche takes a completely new approach to consensus and claims to have addressed the blockchain trilemma; achieving decentralisation, security and scalability. Transactions achieve finality in less than a second with a potential throughput capability of 4,500 per second (compared to 15 with Ethereum) and unlimited capacity for validating nodes. 

But how does Avalance succeed where others have failed over the last 40 years of blockchain research?

Avalanche (AVAX) Chains

Avalanche features a Primary Network running a Proof of Stake consensus and three built-in blockchains, the X-Chain, C-Chain and P-Chain. 

Platform Chain (P-Chain): The Platform Chain coordinates validators and tracks Subnets running the Snowman Consensus Mechanism. It is where users can serve as a validator and stake/delegate AVAX earning rewards in kind. The P-Chain allows developers to deploy custom chains.

Contract Chain (C-Chain): Unsurprisingly, given its name, the Contract Chain handles Smart Contracts and DEFI. The C-Chain uses the Snowman Consensus Mechanism and runs an instance of the Ethereum Virtual Machine so unlike the other two chains, uses an Ethereum-compatible address structure which is supported by MetaMask.

Exchange Chain (X-Chain): The Exchange Chain is an instance of the Avalanche Virtual Machine (AVM) and is used for sending and receiving transactions, though doesn’t support DEFI which is the job of the Contract Chain. It has a custom address structure and uses a specific AVAX wallet.

The Primary Network secures these chains along with a set of validators each staking at least 2,000 AVAX.

Avalanche features Subnets or Sub Networks, sets of validators that validate transactions on a blockchain or group of blockchains. 

"A subnet, or subnetwork, is a dynamic set of validators working together to achieve consensus on the state of a set of blockchains. Each blockchain is validated by exactly one subnet. A subnet can validate many blockchains. A node may be a member of many subnets." Avalanche Official Overview

The Primary Network is a special Subnet and all validators, whatever their specific properties, must support the Primary Network.

The flexibility of Subnets means that they can be designed to suit any type of blockchain set-up: 

Compliance-focused - This could require validators to be in a specific country, pass KYC/AML criteria or hold a particular license.

Permissioned - Validators could be chosen to join a private Subnet which wouldn’t be visible to the general public.

Separation of concerns - The standard blockchain model doesn’t allow validators to choose which chains they validate. Avalanche’s Subnet model gives validators this discretion though all validators must support the Primary Network.

Application-specific requirements - Blockchain-based digital applications (dApps) can have a huge spectrum of specific needs. Some might need a lot of RAM or CPU. The Avalanche Subnet allows validators to be selected based on application-specific requirements.

Smart Contract Execution

Avalanche has set out to provide similar Smart Contract functionality as Ethereum, able to support a DEFI ecosystem, but without restricting every blockchain to the same EVM - which sits at the heart of Ethereum executing Smart Contract requests.

On Avalanche every blockchain has its own Virtual Machine (VM) that can be customised in a variety of programming languages. A Virtual Machine defines the application-level logic of a blockchain, specifying the blockchain’s state, state transition function, transactions, and the API through which users can interact with it.

Avalanche Consensus Mechanism

Avalanche uses a version of the Proof of Stake consensus mechanism called Snowman which is designed to enable agreement through a random sampling process. Their official documentation uses the example of a large group of people trying to reach a consensus on a binary choice of meal items: Pizza or BBQ.

Rather than poll the entire group, individuals ask a sample of people for their preference adopting the majority decision on each round.

Validators across a network will repeat this process until a sufficient number reaches a consensus. The chances of a Validator being polled - selected to validate a block -  is proportionate to their stake.

A validator will receive a staking reward if they are online and respond for more than 80% of their validation period but the network waives slashing fees - penalties for negative validator behaviour - which is one of the reasons why Avalanche has a high validator count. 

However, to counter the risk of the network being spammed with validators that go unpunished for poor behaviour a minimum of 2,000 AVAX is required to be a Validator. 

AVAX Tokenomics

AVAX is the token for the Avalanche blockchain system with a fixed maximum supply of 720million AVAX tokens. Half were created when the project went live in September 2020 with about 35% of that Premine distributed among founders, investors, staff and the community.

360 million AVAX are being issued over time as rewards for Validators with passive delegators able to earn around 10% annual yield. 

To counter the inflationary pressure of token issuance for block rewards all fees for contract execution and transfers are burned, a feature that is unusual within blockchain design and one of the reasons that Avalanche has gained popularity.

Avalanche (AVAX) Staking 

As the Primary Chain uses a Proof of Stake consensus mechanism holders of AVAX can choose to stake their coins and earn a reward, either by directly running a Validator or delegating their stake to a Validator. The current reward is just under 9% with around 65% of the circulating supply of AVAX staked.

Avalanche describes itself as an ‘incredibly lightweight client’ but though the hardware requirements may not be offputting you will need technical know-how to manually set up a Validator node.

The biggest barrier to becoming a Validator is the minimum requirement of 2,000 AVAX, equivalent to around €47,000 at the time of writing. As a result, the more common route is staking AVAX is delegation, with a minimum stake requirement of 25 AVAX, around €600.

How Avalanche compares to Ethereum

Avalanche is commonly thrown into the category of Ethereum challengers but what does that look like in numbers?

DEFI Ecosystem

DefiLlama shows that Avalanche has around 6% of the TVL that Ethereum boasts - $4.6bn compared to $70.35 - though it has 43% of the total number of applications. This illustrates a growing network of relatively DEFI applications each trying to gain critical mass.

Fees

Where Avalanche clearly has an advantage is in terms of fees. A normal transaction on Avalanche cost around 2 cents at the time of writing, as opposed to $1.44 for Ethereum, making it about 70 times cheaper.

Fee Revenue

Avalanche generates about 1.5% of the fee revenue of Ethereum - $83k per day compared to $5.6million - according to Cryptofees, which puts in perspective the value being generated for the network, though in the case of Avalanche all fees are burned, with close to 1.8million AVAX burned in total with a value of around $56.2million.

Performance

Transaction speed tells a different story, despite it being one of Avalanche’s big claims, as Ethereum currently managing a throughput of 15 transactions per second (including L2s) with Avalanche at about 4 which is a long way off the claims of 4,500 TPS.

Decentralisation

In terms of decentralisation and network health, Avalanche has a long way to go to catch up to Ethereum with less than 1% of the Validators (1,569 vs 383,142), despite its claim to be able to scale to almost unlimited validators.

ESG

One of the big selling points of Avalanche is its green credentials as a Proof of Stake chain. Though that is true, it will only hold that relative advantage over Ethereum until later in 2022 when the Merge is expected to move Ethereum from an energy-intensive Proof of Work chain to PoS, with a 99.95% reduction in energy use.

Tokenomics

AVAX has a fixed supply of 720million tokens and is issuing new tokens at a rate of around 5%.

Fees being burned create a deflationary pressure on the AVAX token but you also have to factor in the impact of token vesting (to investors and founders) on liquid supply which according to Messari creates an inflation rate of around 26% at the time of writing compared to 0.5% for Ethereum (pre Merge). 

That inflation rate will decrease over time and the slope of that decline will depend in part on the scale of transactions but for Stakers the inflation rate suggests that current rewards are net negative.

Bridging

Rather than seeing Ethereum and Avalanche as adversarial, it is worth remembering that over $2bn in assets is currently bridged between the two chains. The design of the C-Chain with EVM compatibility and the support of Ethereum addresses shows that this was baked into the plan.

Popular Avalanche Applications

According to DappRadar the most popular applications on Avalanche are DEFI services, which shouldn’t be a surprise given the focus on transaction speed and low fees. 

The no.1 ranked protocol is called Trader Joe, a one-stop-shop for trading, yield generation and farming boasting around $1bn in TVL (total value locked) and around 12,000 users. It ranks among the top 10 blockchain applications in terms of fee generation generating over $200k in fees a day, which is almost three times that generated by Avalanche itself.

Outside of Trader Joe most Avalanche native applications are relatively small, with no more than 1,000 users, illustrating that the network is very much in the growing phase. The Pangolin Exchange is a good example, a decentralised exchange (DEX) that focuses on delivering fast and cheap trades and value to its community.

How to use Avalanche

Using Avalanche is fairly straightforward if you take the Centralised Exchange route. Assuming you wanted to use one of its DEFI applications you can buy AVAX from popular exchanges like Binance, Coinbase and Kraken then send it to a browser wallet like Meta Mask. Just remember to connect to the C-Chain, which is EVM compliant.

Avalanche (AVAX) Crypto FAQs

When did Avalanche crypto launch?
The Avalanche release date (mainnet) was July 2020. The AVAX token was available three months later in September. The initial Avalanche concept was published by a pseudonymous group called ‘Team Rocket’ in May 2018.

Where is Avalanche crypto Traded?
Avalanche is traded on the major regulated exchanges with about 25% of the volume on Binance and Coinbase. 

Does Avalanche crypto have its own wallet?
Avalanche has developed its own wallet imaginatively called the Avalanche Wallet. It is a non-custodial web wallet that enables you to transact across the three Avalanche chains and to send/receive AVAX.

Is Avalanche on Ethereum?
Avalanche is a separate blockchain from Ethereum, sometimes described as an Ethereum Challenger. It is however designed to be compatible with Ethereum applications. The C-Chain (Contract Chain) runs an instance of the Ethereum Virtual Machine using an Ethereum compatible address structure which is supported by MetaMask.

Is Avalanche better than Ethereum?
On paper Avalanche certainly appears to have a strong claim to challenge Ethereum. It can theoretically support more transactions - 4,500 TPS vs 14 - and fees are around 70 times cheaper. 

Avalanche is also much greener as a Proof of Stake chain, whereas Ethereum relies on the energy-intensive Proof of Work consensus mechanism. It also claims to be able to support almost unlimited Validators, making a strong claim to decentralisation.

In reality, Avalanche has a long way to go to fulfil that promise as it is yet to reach that promised TPS, and though fees are cheap, they will rise as transactions increase. 

Ethereum’s planned switch to Proof of Stake will remove the Green Premium of using Avalanche and tiny fee revenue relative to issuance places question marks over its tokenomics.

How much is Avalanche crypto?
AVAX is trading at around €23 at the time of writing compared to €16 one year ago.

How High can Avalanche (AVAX) crypto go?
AVAX reached an All-Time High of $136.60 on November 21st, 2021 but the current price (June 2022) is over 80% down from that peak.

When to buy Avalanche Crypto?
With crypto experiencing a Bear Market it is worth considering a Cost Averaging strategy for AVAX but with the understanding of the real risk that its price will not recover to anywhere near previous highs.

Avalanche going forward

Avalanche has a lot of the credentials to make it a credible challenger to Ethereum on paper. It takes a novel and flexible approach to consensus which promises over 4,500 TPS. It doesn’t have a limitation on the number of Validators that many other PoS chains suffer giving it decentralised credentials and it ticks the ESG box. 

Beyond its open-source blockchain credentials, appealing to diverse applications across DEFI and NFTs, Avalanche can equally be used as the basis for permissioned Sub-chains within traditional finance and CBDCs. That is a flexibility that Ethereum lacks. 

Despite all this promise Avalanche just has to prove its theoretical potential can be delivered in the wild. Right now it is processing just four transactions per second with concerns that any improvement will increase fees, creating a Catch-22 situation. Competition on fees is also increasing from a growing number of Layer 2 Ethereum applications which will increase if the Merge, slated for later in 2022, is successful. 

Ethereum’s upgrade will also erode Avalanche’s ESG advantage, as both chains will be running on the environmentally friendly Proof of Stake. 

The blockchain space is constantly evolving and innovating, the question for AVAX holders to answer is to what extent Avalanche can deliver on its promise of scaling transactions without increasing fees in order to generate enough revenue to reasonably support an increased token valuation.