Ethereum and Avalanche are two highly popular blockchain platforms. While many blockchains support smart contracts and decentralised applications (DApps), few have earned the respect as being serious DApp platforms. The most popular of which is Ethereum, a long-time frontrunner in the blockchain decentralised finance (DeFi) ecosystem. However, Avalanche has attracted a passionate following within the past couple of years as well.
This article will explain the differences between Ethereum and Avalanche, how they overlap, and why investors would pick one over the other.
What Is Ethereum?
Ethereum is one of the oldest cryptocurrencies. Unlike Bitcoin, which is just a digital currency, Ethereum was designed to add more functionality to the world of blockchain. Fast forward to today, and many decentralised finance projects now use the Ethereum network as a foundation.
Since going live in 2015, Ethereum has become one of the largest cryptos in the world. As of writing, Ethereum's market cap is around US$293.5 billion. In comparison, Bitcoin is worth US$698.3 billion.
A Decentralised World Computer
Most modern systems, programs and websites run off a centralised server. However, Ethereum's system doesn't have a central mainframe or server. Instead, Ethereum relies on a network of participating computers all around the world to function.
This kind of decentralised system eliminates the need for a third-party intermediary. According to Ethereum founder Vitalik Buterain, the end goal of Ethereum would be to create a sort of "world computer." Think of a massive network of participating computers that could run the internet without the need for third parties..
Enhanced Security for Users
One benefit of Ethereum is that it's harder to hack. Centralised systems, while convenient, have been compromised in the past. Back in 2013, for example, a data breach at Yahoo compromised the private information of more than 3 billion users. Other famous hacks include the Capital One hack, wherein information for 100 million credit card applications and accounts were breached.
In contrast, a decentralised network doesn't have a single point of failure. That's why it's much more difficult to hack a decentralised network, at least in theory.
The security of any blockchain network is closely tied to its consensus mechanism. This is the way a blockchain network verifies and validates transactions without the need for a centralised authority. There are multiple types of consensus mechanisms, and Ethereum uses the Proof-of-Work (PoW) approach.
In a Proof-of-Work-enabled blockchain, participants verify transactions by lending their computing power to the network. This computing power is then used to validate and approve new blocks onto the blockchain. In exchange, participants usually receive a small fee for successfully verifying each block that's added onto the blockchain. This is how crypto miners generate returns.
Like Bitcoin, Ethereum has relied on PoW since its inception. However, the downside to PoW is that it requires much more energy and it's far from low-cost. Ethereum is planning to migrate over to a Proof-of-Stake (PoW) consensus mechanism in 2022.[fn ref="5"]
In recent years, Ethereum's rise in popularity has led to congestion and higher fees on the network. Ethereum's current infrastructure can't process more than 15 transactions per second. In contrast, centralised credit card processors like Visa can handle an average of 1,700 transactions per second.
For Ethereum users, this means that they have to pay more in gas fees each time they make an Ethereum transaction. Earlier in 2021, gas fees were almost US$75 per transaction, although they fell to around US$2.5 in early 2022.
What Is Avalanche?
Avalanche is a next-generation DeFi protocol that went live in 2020, and has since become a trending topic on social media. Developed by Ava labs, Avalanche is similar to Ethereum in that it also allows decentralised apps and smart contracts on its platform. However, Avalanche uses multiple specialised blockchain networks operating simultaneously to avoid the same congestion issues Ethereum's dealing with, while also having lower transaction fees.
Avalanche allows users to create and deploy their own private, fully customisable blockchains, known as subnets or subnetworks. Projects built off of Avalanche's subnet framework will be able to take advantage of Avalanche's faster infrastructure, as well as its own consensus mechanism, Proof-of-Stake (PoS).
Each subnet is highly customisable. Each also manages its own membership and may require its participants and validators to fulfill certain properties as well.
Three Specialised Blockchain Networks
Avalanche's main innovation is that it combines three separate blockchain networks, known as the X-chain, C-chain, and P-chain, which are each specialised for certain purposes.
- The X-chain (Exchange chain) specialises in issuing new cryptocurrencies and digital assets. This also includes non-fungible tokens (NFTs), stablecoins and other types of crypto-assets.
- The C-chain (Contract chain) helps Ethereum developers convert pre-existing Ethereum DApps and smart contracts to Avalanche without hassle.
- The P-chain (Platform chain) is mainly responsible for keeping the Avalanche platform secure and operational, including handling all staking protocols and other defi features.
These specialised Avalanche blockchains allow the network to operate more smoothly and remain low-cost, instead of relying on a single generalised blockchain network to do everything.
Avalanche currently uses a Proof-of-Stake consensus algorithm. Unlike PoW, which is much more energy-intensive, PoS is known for being much more efficient, especially when processing large numbers of transactions.
In a PoS model, token owners can "stake" their investments as collateral to become a platform validator. Validators are then randomly selected to confirm new transactions onto the blockchain network. In exchange for staking their tokens, validators earn a small network fee as compensation.
Faster Transaction Speeds
Benchmarks report that Avalanche can process over 4,500 transactions per second. In contrast, the full, production-ready version of Avalanche could handle as many as over 20,000 transactions per second.
That makes it among the fastest blockchain DApp platforms out there right now. However, there are still some next gen blockchain networks that are faster. Solana claims it can process 65,000 transactions, although it's currently only doing around 1,954.
AVAX Defi Token
Avalanche has its own native cryptocurrency token called AVAX. Besides using AVAX for fees and staking, participating subnets within the Avalanche ecosystem can use AVAX as a basic unit of account between blockchains.
Unlike similar smart contract platforms, the total supply of AVAX is hard-capped to 720 million. This limited supply may cause prices to increase in the future, especially if demand continues to grow.
How Ethereum And Avalanche Differ
Ethereum and Avalanche overlap in many ways. At the same time, Avalanche is considered to be one of many competing blockchain platforms hoping to one day surpass Ethereum. That's because Ethereum's infrastructure has a much slower transaction speed of 15 per second, compared to the thousands per second that Avalanche can handle.
However, most next-generation blockchain platforms are already faster than Ethereum, so it's not just Avalanche that makes this claim. Despite this technological superiority, there are still reasons why people still prefer Ethereum.
Ethereum Is Time-Tested
While Avalanche went public in 2020, Ethereum has been around for much longer. The project went live in 2015 and has since grown to more than 487,000 daily active Ethereum addresses worldwide (or around 14.6 million per month). In contrast, Avalanche surpassed 800,000 active users per month in December 2021.
Ethereum is also considered more secure since there are many more validators on the platform. As of writing, there are more than 280,000 validators on the Ethereum blockchain. Avalanche, on the other hand, has 1,200.
While Ethereum demand spiked in 2021/2021, the networks' overall growth rate has stalled. In contrast, Avalanche is continuing to see exponential growth, both in total users as well as the value of its cryptocurrency.
The AVAX token trades at US$65.9, a 468.1% increase from early 2021 when AVAX traded around US$11.6. Although AVAX has lost around half of its market capitalisation in the past quarter, many other altcoins have seen a similar selloff. This has largely been due to Bitcoin's steady decline in early 2022.
As of this writing (late January 2022), ETH trades at US$2,459.2. That's more than 95.6% higher than one year ago when prices were around US$1,376.1. Just like with AVAX, Ethereum has been down a lot over the past quarter of 2022, where prices peaked at around US$4,812.
Both Ethereum and Avalanche are promising blockchain projects, and both of their native tokens have the potential to generate returns for investors. Avalanche is the faster-growing newcomer, whereas Ethereum already has a tried-and-true reputation in the crypto ecosystem.
Ethereum is already worth hundreds of billions of dollars, so it likely won't see the exponential growth it had during its early years. In contrast, Avalanche is still growing, which may make AVEX a more attractive opportunity.
Also, Avalanche may be trying to replace Ethereum, but it's not the only blockchain project attempting to supplant Ethereum's throne. Projects like Cardano and Solana both market themselves as "Ethereum-killers," so Avalanche will also have to compete with these other projects as well.
Both projects could see significant growth in the future, especially if crypto adoption throughout the world continues to grow.
FXCM Research Team
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