Avalanche is a technologically advanced and versatile smart contract platform. It has become a significant player in the market after gaining a lot of popularity during the bull run of 2021. This article is an Avalanche beginner’s guide. We will go through the history, the technology, and the potential of Avalanche as an investment.
Avalanche is a popular smart contract platform
Let’s first put Avalanche into the proper cryptocurrency category. We divide crypto projects into three clear categories: currencies, platforms, and tokens.
Bitcoin is the best-known example of a currency. Other popular currencies include Litecoin, Monero, and Bitcoin Cash. Currencies have no other significant features besides transferring and storing value.
Platforms are operating systems for smart contracts and decentralized applications. You can think of them as like an Android or iOS operating system. The best-known platforms are Ethereum, Cardano, Terra, and Polkadot.
Tokens are always issued on smart contract platforms. They function either as utility tokens or governance tokens. The purpose of a token is often limited to a specified decentralized application (dapp). Uniswap, Aave, and Chainlink are well-known tokens.
Avalanche falls clearly into the platform category. The native token of the ecosystem is AVAX. It is used for staking and paying for transactions.
Below is a two-minute YouTube presentation of the project.
Avalanche is also trying to position itself in the interoperability (internet of blockchains) sector. Cosmos and Polkadot are the best-known projects in this niche. These platforms do not directly compete with Ethereum. They provide an infrastructure for blockchains that are interoperable with each other. Avalanche can also be placed in this sub-category, but in practice, it is seen more as a challenger to Ethereum.
Emin Gun Sirer is the man behind Avalanche
The man behind Avalanche is Emin Gun Sirer, born originally in Turkey. He moved to the United States at the turn of the millennium and graduated with a Ph.D. in Computer Science in 2002.
Sirer published a whitepaper of a digital currency called Karma just a year later. It is based on Proof of Work and shares other similarities with Bitcoin as well. Why did Karma never become a Bitcoin-like success? In Sirer’s own words, the reason is as follows.
The system didn’t go anywhere because I didn’t get the timing right, and I didn’t have a vision as big as Satoshi. I had a much more limited vision, a much more realistic vision, but it would have been much better to have an unrealistic vision that rallies people than to have a realistic vision that is narrower in scope and doesn’t get people going with the same fervor. (source)
Satoshi Nakamoto appealed to the right audience and envisioned Bitcoin as a replacement for the U.S. dollar. Emin Gun Sirer’s vision was much narrower and focused on solving payment transactions between people who want to share files with each other.
The launch of Bitcoin reignited Sirer’s interest in cryptocurrencies. In 2013, he published a study titled Majority is not Enough: Bitcoin Mining is Vulnerable. The paper addressed the risks associated with Bitcoin mining. Sirer received initially criticism for his publication, but the Bitcoin community eventually acknowledged that his claims were correct. Sirer also tried to warn the Ethereum community about the security risks of The DAO project.
The Avalanche project was launched in 2018. It all started with a white paper published by an anonymous group called Team Rocket. The white paper was titled “Snowflake to Avalanche: A Novel Metastable Consensus Protocol Family for Cryptocurrencies”. Team Rocket is apparently a reference to the popular Pokemon series.
The whitepaper described a novel consensus mechanism that combined the best of the classical consensus and the Nakatomo consensus. Emin Gun Sirer tweeted about the publication as follows.
Someone dropped this paper on IPFS and some IRC channels yesterday. It describes a new family of consensus protocols that combines the best of Nakamoto consensus with the best of classical consensus. Huge breakthrough:https://t.co/K2bATHZi8g
— Emin Gün Sirer🔺 (@el33th4xor) May 17, 2018
Some claimed Sirer was also one of the members of Team Rocket, but this was never confirmed. Sirer announced the new consensus to a wider audience at the Token Summit event. Later that year (2018), he founded a company called Ava Labs and started developing Avalanche based on this new consensus mechanism.
Avalanche was not part of the 2017-2018 ICO boom. It’s a relatively young project compared to many platforms, but the Ava Labs founding date doesn’t tell the whole story. You won’t find many people in the crypto industry with stronger CVs than Emin Gun Sirer has.
History of Avalanche
Avalanche is still developed by Ava Labs. The company is based in New York. In addition to founder Emir Gun Sirer, researchers from Cornell were involved in the early stages. Sirer was a professor at the university. Ava Labs employs these days a couple of hundred people.
The project raised $6 million in the first private funding round from well-known VC firms such as a16z and Polychain Capital. The second private round raised $12 million in the spring of 2020. Just a month later the public ICO of the AVAX token was held. It raised as much as $42 million in just five hours.
Avalanche’s MainNet was launched on the 21st of September 2020. AVAX, the native token of the project, was also launched on the same occasion. Its price performance is shown in the graph below.
Avalanche’s popularity really took off during the cryptocurrency boom of 2021. It even raised $230 million dollars through another private funding round in September 2021.
AVAX has been on the market for less than two years. It has so far followed other popular smart contract platforms such as Terra and Solana. All have made their ATHs in the autumn of 2021. Avalanche was boosted by the project’s investments in the DeFi sector. Among other things, the popular DeFi protocol Aave was also launched on the Avalanche platform at that time.
You can check out the latest updates on Avalanche in this video from the Coin Bureau.
At the time of writing, the AVAX token is 46% below its ATH. It has fared slightly better than the other top 15 cryptocurrencies, many of which have fallen more than 60% in the 2021/2022 bear market.
Avalanche’s three blockchains
As explained in the first chapter, Avalanche falls into the category of smart contract platforms. Avalanche’s founder Emin Gun Sirer has sought to solve the classic blockchain trilemma and developed a platform that is scalable, secure, and decentralized.
Avalanche’s infrastructure is different from a typical competitor. Its core consists of three different blockchains. They are called the P-Chain, the X-Chain, and the C-Chain.
All tokens in the Avalanche ecosystems are issued on the Exchange Chain (X-Chain). These can be user-generated tokens, but the X-Chain also runs the native token AVAX. The X-Chain, unlike the other two, is a DAG (directed acyclic network). A DAG is a more sophisticated solution than a traditional blockchain. Fantom and IOTA are examples of other platforms using a DAG.
The X-Chain uses the Avalanche consensus protocol. Its network can handle around 4500 transactions per second.
The Platform Chain (P-Chain) is a blockchain that uses the Snowman consensus protocol. It is a customized version of Avalanche’s consensus protocol. The P-Chain has all the validators of the Avalanche ecosystem.
It’s also possible to create a custom blockchain that leverages the P-Chain validators. These are called subnets in the Avalanche ecosystem. The P-Chain (and the C-Chain) has a capacity of 1500 transactions per second.
The Contract Chain (C-Chain) is a regular blockchain like the P-Chain. Both use the Snowman consensus. As the name suggests, the C-Chain runs all smart contracts and decentralized applications (dapps). It uses a modified version of the Ethereum Virtual Machine (EVM) to process smart contracts. This makes it easy to clone protocols built on the Ethereum platform to the Avalanche platform.
The Avalanche consensus protocol
Let’s take a closer look at the Avalanche consensus protocol. It is a very interesting solution from a technical point of view, as it combines the best of the classical consensus and the Nakamoto consensus.
The Practical Byzantine Fault Tolerance (PBFT) is an example of a classical consensus protocol. It has the advantage of instant finality. This is possible because the network nodes cannot disagree with each other about the state of the blockchain. However, PBFT doesn’t scale that well.
Bitcoin’s founder Satoshi Nakamoto created an improved version of this consensus. The Nakamoto consensus is also known as the longest chain model. In this model, nodes don’t have to be in complete agreement on the state of the blockchain. Over time, the longer chain wins and the consensus of the blockchain is reached.
Avalanche combines the advantages of each protocol: scalability and decentralization of the Nakamoto consensus and transactional finality without Proof of Work from PBFT. The Avalanche consensus looks like this.
The Avalanche consensus protocol is using a method called sampling and gossiping. Each network validator inquires about the state of the blockchain from randomly selected peers. They then form a consensus among nearby validators. The consensus spreads quickly to the whole network.
It is also a Proof of Stake consensus, which gives the network validators a status. The more AVAX tokens a validator stakes, the more likely other validators are to believe its gossip.
This structure makes Avalanche highly resistant to a 51% attack. A hostile operator would need to corrupt 80% of network validators to succeed, making an attack extremely costly.
Avalanche’s X-Chain uses the consensus protocol described above. Since it is a DAG, it can also handle multiple transactions simultaneously. The P-Chain and the C-Chain use a slightly modified Snowman consensus protocol optimized for smart contracts.
If you want to learn more about Avalanche’s technology, please visit docs.avax.network for more information. Avalanche’s website provides a lot of information on the topics described above.
The AVAX token
Avalanche’s native token is AVAX. It has a similar role as native tokens of other Proof of Stake blockchains. AVAX is used for staking and paying transaction fees.
The maximum number of AVAX tokens is 720 million (about 265 million in circulation). Half were set aside during the MainNet launch for staking rewards for the next couple of decades. Currently, the AVAX token has a staking rate of as much as 74% of the tokens in circulation. The staking reward is currently about 9.6% (APY).
The statistics above are taken from Avalanche’s website at the time of writing (3/2022) this article. As you can see, there are already more than 1200 validators. This is significantly more than many of its competitors (excluding Ethereum).
If you don’t want to become a validator, you can also delegate your tokens to one of the validators. This will also give you access to staking rewards. Delegators receive an annual return of around 9.3%.
Staking removes tokens from circulation. One other feature that does this is the burning of transaction fees. At the time of writing, just over one million AVAX tokens have been burned. The more applications there are developed on the Avalanche platform, the higher the price per token will go – at least in theory.
AVAX is also used in creating new subnets. However, these custom blockchains can have their own native tokens for transaction fees. Hence, the AVAX token is not necessarily needed there.
Avalanche as an investment
The CV of Avalanche founder Emin Gun Sirer is unrivaled in the world of cryptocurrencies. Sirer is a true expert in the field having developed his own digital currency five years before Bitcoin. He has done a huge amount of research on blockchains and built a technically advanced solution.
Although Avalanche’s MainNet was only released in autumn 2020, the project has quickly become one of the top 15 cryptocurrencies. The AVAX token is consistently knocking on the door of the top 10 rankings.
Avalanche’s success is also reflected in more than just the price of the native token. More than 500 dapps have already been built on the platform with over two million users.
Avalanche’s DeFi applications have locked in more than $10 billion of liquidity. The only blockchains ahead of Avalanche in the DeFi ranking are Ethereum, Terra, and BNB Chain. The most popular DeFi applications are Aave, Trader Joe, and Curve.
Avalanche is also due for some useful updates. Check out the summary in the Coin Bureau video below (go to timestamp Updates). Among other things, there will be blockchain size-compacting pruning, a native wallet for mobile, and bridges to other EVM-compatible blockchains.
While Avalanche looks like a great investment on paper, it also has its weaknesses. Check out the concerns section of the video above, where the Coin Bureau discusses the clear shortcomings in the project’s transparency.
The bigger question mark, however, is the competition. Avalanche has done well so far in the platform sector. In 2021, it left behind many quality platforms such as Algorand, Polygon, Cronos, Cosmos, and Fantom. Avalanche is in the top 5 in the platform race by many measures.
How much can Avalanche grow relative to its competitors? While Avalanche’s architecture is advanced and scalable, other smart contract platforms offer broadly similar performance. The race for application developers is so fierce that Avalanche did not meet its 2021 roadmap targets due to recruitment issues.
In any case, Avalanche is a high-quality project. It is backed by a truly experienced founder with hundreds of millions of dollars from the biggest VC firms in the scene. Technically, Avalanche also has the pieces in place to build a popular ecosystem. Time will tell how well it succeeds in a very tight platform race.
Avalanche price and how to buy AVAX
Avalanche’s native token AVAX can be found on the most popular exchanges. Most exchange pairs and liquidity are found on Binance, which is the market’s leading trading platform. You can easily deposit euros to Binance both by debit card and SEPA transfer.