As blockchain technology continues to become more sophisticated, new generations of decentralised projects are emerging. One of the most popular of these is Avalanche, a blockchain platform that aims to address some of the long-standing issues in the decentralised finance (DeFi) ecosystem, including scalability, security, and cross-chain interoperability.
While not as popular as other smart contract platforms like Ethereum (ETH), Avalanche has steadily been growing over the years. Here's what you need to know about Avalanche, its AVAX token, and whether it's an investment opportunity to consider in 2022.
What Is Avalanche?
Avalanche is a fourth-generation decentralised finance protocol that went public in 2020. The project was started by Cornell University computer science professor Emin Gun Sirer and two of his doctoral students, Maofan Yin and Kevin Sekniqi.
Avalanche began as an academic project before eventually blossoming into a full-fledged tech start-up now known as Ava Labs. By 2020, the company raised US$42 million in a successful initial coin offering (ICO) before launching in September of the same year.
Similar to Ethereum, Avalanche is designed for smart contract developers, enabling a wide variety of projects to be built off of its infrastructure. Avalanche claims that it can dramatically increase processing speeds and lower transaction fees thanks to a few innovations. These include using multiple, parallel blockchains together as well as utilising multiple consensus mechanisms.
How Does Avalanche Work?
Avalanche is capable of drastically increasing processing speeds because it uses multiple blockchain networks that operate simultaneously.
To do this, Avalanche uses three separate blockchains networks, known as the X-chain, C-chain, and P-chain. Each of these blockchains performs a separate specialised function that, when combined together, allows the entire network to be significantly more efficient.
The X-chain is primarily responsible for sending, receiving, and handling Avalanche-based cryptocurrencies. Since that's the only thing it handles, the X-chain is a very streamlined and fast-acting blockchain. In contrast, the C-chain is responsible for running Dapps (decentralised apps), as well as letting Ethereum-based smart contracts run effectively on the Avalanche ecosystem. The P-chain is the backbone of the Avalanche platform, handling the creation of new subnets, coordinating validators, and keeping the network operational. .
Additionally, Avalanche gives developers the ability to create their own private blockchains within the broader Avalanche framework. These sub-networks are similar to other blockchain scaling solutions, such as Ethereum 2.0's shards and Polkadot's parachains.
Past Performance: Past Performance is not an indicator of future results.
What is AVAX, Avalanche's Token?
AVAX coin is the native token on the Avalanche network. In addition to using AVAX for paying network fees, subnets in the Avalanche ecosystem can use AVAX as a basic currency between sub-blockchains.
Like most blockchain projects, AVAX tokens can be staked within the network, which helps to further improve its security. Stakers are rewarded with more AVAX as compensation.
Unlike many other smart contract platforms, the total supply of AVAX coin is limited to a circulating supply of 720 million tokens. The current AVAX price is around US$92.3 per coin (as of April 2022) with 267.9 million tokens in circulation. That gives Avalanche a total market cap of US$24.8 billion. Most cryptocurrency exchanges, like Coinbase or Binance, allow users to buy AVAX.
What Are The Advantages Of Avalanche?
As a newer blockchain platform, Avalanche boasts a number of advantages over its older, but more popular competitors. Avalanche, just like Polkadot, is considered one of many upcoming contenders to Ethereum's throne, hoping to grow its market share at the expense of Ethereum.
Both Ethereum and Avalanche are designed for smart contracts, Dapps, and designing new cryptocurrencies off its architecture. However, there's a few reasons why Avalanche is considered more advantageous.
Faster Transaction Speeds
Because Avalanche has developed specific X-chain, C-chain, and P-chain blockchains, the end result of these specialised blockchains is that the entire network can process transactions much faster than older blockchain technology. This translates into lower transaction fees as well.
Current benchmarks estimate that Avalanche can process more than 4,500 transactions per second. That's just the start, as a future version of the blockchain could hypothetically process up to 20,000 transactions per second. However, even that figure could be much higher thanks to Avalanche's ability to easily create subnets, each of which can also process thousands of transactions per second.
In contrast, Ethereum is able to process only 15 transactions every second.
Scalability With Subnets
Unlike other blockchain networks, Avalanche allows users to create their own private, fully customisable blockchains, referred to as subnets. Besides enabling users to create their own blockchains, subnets help the Avalanche network scale in a way never before seen in other DeFi projects.
Each subnet is a separate but connected instance of the same blockchain. It can also help process transactions on the wider Avalanche network, further reducing fees and improving scalability. There's no limit to the number of subnets that can be created.
Interoperability refers to the ability to transfer information and data between separate blockchains. While the Avalanche network allows subnets to swap information between themselves, the project is also building bridges to other, non-Avalanche blockchains.
The first of which is a bridge to the Bitcoin (BTC) blockchain, effectively connecting Avalanche and Bitcoin-based projects together. Without interoperability, it becomes incredibly difficult to exchange cryptocurrencies built from two different blockchain platforms.
Avalanche And Snowman Consensus
Unlike BTC and Ethereum, which use Proof-of-Work (PoW) and Proof-of-Stake (PoS) consensus, respectively, Avalanche uses multiple different consensus systems.
The first system, the Avalanche consensus protocol, isn't PoW or PoS, but is instead similar to another technology called a directed acyclic graph (DAG). Whereas regular blockchain consensus mechanisms involve validating transactions block by block, a DAG is closer to a web of individual transactions, each of which helps validate other transactions on the network.
Instead of blocks, DAGs have vertices and edges. Crypto transactions are then stored on vertices, which are then stacked ontop of eachother. While a blockchain system looks like a chain, a DAG looks more like a graph. DAGs are considered a potential substitute to blockchains, as they are more efficient at storing data and processing transactions.
The benefit to DAGs is that they're a lot easier to scale and result in little to no fees, but DAGs don't necessarily keep an orderly timeline of transactions. For certain DeFi applications, like smart contracts, DAGs dont work nearly as well as blockchains.
That's precisely why Avalanche uses another consensus mechanism, called Snowman, The main difference is that Snowman establishes an orderly timeline of network transactions, something required for smart contracts to function. For that reason, only Avalanche's X-chain is run with a DAG, whereas Snowman operates closer to a PoS consensus mechanism.
Avalanche has plenty of use cases and has already been used to build a number of popular blockchain projects. This includes decentralised exchanges like SushiSwap, DeFi projects like Chainlink, and other cryptocurrencies like Tether. As of 2021, Avalanche has more than 320 projects built on its ecosystem.
What Are The Disadvantages Of Avalanche?
Despite its advantages, Avalanche still has a couple of hurdles to face as most young blockchain projects do. Here are a few factors that could prevent Avalanche from becoming the dominant smart-contract platform in the world.
As is the case with most up-and-coming DeFi platforms, Avalanche faces a lot of competition. Solana (SOL), Cardano (ADA), and Polkadot (DOT) are all competing platforms aiming to dethrone Ethereum as well. All of them have higher transaction speeds than Ethereum and lower costs also.
That's not including competition from Ethereum itself. It's the world's second-largest cryptocurrency, and millions of users would prefer to stick to the time-tested Ethereum if possible. Considering the Ethereum 2.0 mainnet update is coming, which aims to drastically increase processing speeds, it's possible that Ethereum simply has too much inertia right now that Avalanche can't overcome.
Certain Features Aren't Available Yet
While Avalanche has become one of the most popular altcoin projects out there, it still needs to be put to the test. Bridges to Ethereum and other blockchains are still being developed, and until that's done, the full extent of Avalanche's interoperability will remain limited.
Avalanche is one of several promising blockchain projects aiming to one day dethrone Ethereum. With more customizability, lightning-fast speeds, and significantly larger bandwidth, it's no surprise that a number of high-profile DeFi projects have already been built on its infrastructure.
The main question for Avalanche is whether it truly has enough momentum to grow past its current size. As of April 2022, Avalanche is around one-twentieth the size of Ethereum and roughly half the size of Cardano and Solana. That's good news if you're looking for an opportunity with room to grow, but that also means Avalanche still has a long way to go.
Regardless of whether Avalanche succeeds Ethereum or simply sticks around as one of many alternatives, it's already brought a lot to the blockchain ecosystem already.
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