Avalanche: an alternative smart-contract blockchain
Computers gossiping to each other
The emergence of Decentralized Finance in the summer of 2020 clearly showcased the weaknesses in the current blockchain ecosystem, namely capacity. Capacity, in the form of blockspace on Ethereum, was so limited that transaction fees spiked up to several hundred dollars, and sometimes even thousands were paid to be included in a block. In times of high volatility, this can get even more extreme as more market participants want to adjust their position. According to its critics, its transactions are slow and fees are too steep for average users, leading some to call it the blockchain for the rich and wealthy.
As a result, a flurry of competitors have attempted to overtake Ethereum's success by fixing its issues with a competing blockchain. Avalanche, which describes itself as "blazingly fast, affordable, and environmentally friendly," is one of the primary competitors.
Ava Labs, a company based in New York, is in charge of Avalanche's development. Maofan "Ted" Yin, who created the protocol for Facebook's failed digital currency project Libra, co-founded the company with Kevin Sekniqi and Emin Gün Sirer.
The blockchain Avalanche promises to combine scalability capabilities and rapid confirmation times through its novel consensus mechanism ‘Snow’ which was formalized and published (pdf) in August 2020. It has a 4,500 TPS capacity on the main-chain with the potential for an unlimited number of subnets also carrying the same TPS limit. (transactions per second). For comparison, this amount for Ethereum is 14 TPS.
Understanding fundamentals, keeping track of usage, popularity and developments of other blockchains can be a great way to earn better returns than to just stick to Bitcoin and Ethereum. Similarly, invest in the wrong Layer-1 blockchains, and your returns can be alot poorer.
How does Avalanche work?
A blockchain, as a decentralized system, needs a way to reach decisions among its globally distributed participants (validators) who maintain the public ledger – a way to reach consensus governed by a protocol. In Avalanche, that role is fulfilled by the Avalanche Consensus Protocol, which was first proposed in 2018 by a pseudonymous group called Team Rocket – a precursor to Ava Labs.
The Avalanche Consensus Protocol claims to combine the benefits of two other sets of consensus protocols known as Classical and Nakamoto. Classical protocols lack decentralization and scalability but are quick, environmentally friendly, and low-maintenance. Nakamoto protocols deliver decentralized, reliable, and scalable blockchains, as is the case with Bitcoin, according to Satoshi Nakamoto, the mysterious creator of Bitcoin. However, the network is expensive to maintain and transactions take a while since a block gets created on average every ten minutes.
Avalanche attempts to bring these two together by taking a different approach amongst consensus by repeated network subsampling, easiest envisioned as ‘multi-round gossiping’. By taking a different approach, it attempts to harmonize the strengths across the board and partially circumvent the blockchain trilemma to provide a strong probabilistic safety guarantee that has such a low chance of failing that the chance of a double spend is lower than an asteroid destroying our planet if sampled a sufficient number of times.
The AVAX token has three use cases, of which two are the same as for other networks such as Ethereum. The token is used as fees for using the network and getting transactions included in a block. On top of that another use case is to pledge it for a validator node in the Proof-of-Stake validation mechanisms which is required to participate in the generation of new blocks.
The third use of AVAX is more technical and less of an interest to regular users. It’s used as a basic unit of account between the multiple subnets deployed on Avalanche. A Subnet is a sovereign network which defines its own rules regarding its membership and token economics. Essentially, they are customizable blockchains that live on top of the Avalanche Blockchain that and change and tweak the design choices of the specific Subnet.
This third use case of the token to launch Subnets on top of the Avalanche Network allows for modularity, customization, privacy, single use application chains and many difficulties that current enterprises potentially encounter while using the traditional blockchains. It is not acceptable for your financial transaction to get clogged in a blockchain because some new cat picture NFTs are being minted. Need mandatory Know-Your-Customer on your blockchain? All of that is possible on a subnet. This concept is utilized currently by blockchain gaming protocols, primarily because those need sub-cent transaction fees. However, it’s also an ideal form for enterprises to quickly launch a blockchain that exactly serves their needs. For example, Deloitte announced a partnership with Avalabs to do just that. The subnet will leverage the Avalanche blockchain to improve security, speed and accuracy of Federal Emergency Management Agency reimbursements.
Investing in Avalanche
Investing in Avalanche through its token AVAX can be an enticing prospect. The novel consensus mechanism has been running for over 2 years now. While this is not a lot of time, and the Lindy effect will need to grow over time, critical flaws and bugs have not occurred.
Next to this, the design allows for a great Total Addressable Market (TAM) as the modular design allows for a high amount of design choices ranging from security, compliance, enterprise specific needs, throughputs, KYC, geo-blocked, privacy and more. The Ava labs team seems competent and the network has a vibrant community of early adopters.
One should keep in mind that currently 56 out of top 100 blockchain projects are similar Layer-1 utility blockchains, and thus the competition is fierce. Not only that, Layer-1 blockchains also face competition from Web2 companies or hybrid Web2.5 companies that decentralize part of their value stack to keep the trust of the customers.
On top of this, the token distribution is poor, compared to Bitcoin or even Ethereum. This is to be expected since the network is only 2 years old and no trustless way of acquiring tokens was ever present. Anyone who currently holds an AVAX token has gotten permissioned access towards this by either a pre-sale, ICO sale, or as a block reward for consensus staking. It doesn't matter if you traded in your own crypto-asset to receive these AVAX tokens as then the one you bought it from, once received permission. Both the choice of distribution, and choice of token unlocks in the future increasing the inflation significantly, are often heard as criticisms. Finally, network effects of first movers such as Ethereum are hard to overcome, and if you want to invest in alternative Layer-1 blockchains, this is a key metric to track as we have seen with many technologies in the past. Currently, Fourstack has a limited stake in Avalanche and utilizes the Avalanche C-Chain for Decentralized Finance protocols.