What is Avalanche (AVAX)?
Avalanche is a relatively new cryptocurrency that combines features of other popular blockchains like Ethereum and Polkadot.
The layer one blockchain, launched only in 2020, supports smart contracts and cross-blockchain interoperability, with a bridge to Ethereum’s rich ecosystem of applications.
The AVAX token has been performing remarkably well in Q4 2021, suggesting that investors are pricing in positive growth for the Avalanche cryptocurrency. But what is Avalanche, and how does the AVAX coin work?
The Avalanche Story
High gas fees and slow speeds on Ethereum continue to detract from the user experience. Although Ethereum users are beginning to adopt new scaling solutions like Arbitrum and Polygon, the fees have also pushed people to adopt highly scalable blockchains like Avalanche. One of the ways that Avalanche scales is by splitting the blockchain into three parts.
The Avalanche P-Chain allows anyone to create a new blockchain on top of Avalanche. This is similar to how parachains work on the Polkadot network. The P-Chain uses the snowman consensus protocol.
The C-Chain also uses the snowman consensus protocol, since snowman is designed to work with smart contracts. The C-Chain, which hosts smart contracts on Avalanche, is EVM compatible. Because it’s EVM (Ethereum Virtual Machine) compatible, Ethereum developers can easily deploy their applications to the C-Chain on Avalanche.
The X-Chain is where developers can create their own tokens on the Avalanche blockchain, much the way the ERC20 token standard works on Ethereum. Tokens can also trade on the X-Chain via decentralized exchanges.
All three Avalanche networks are secured by the primary network, the main security mechanism for Avalanche which serves the same role as miners on the Bitcoin network.
One of the key advantages of Avalanche, a feature that sets it apart from other blockchains, is that it can finalize most transactions in less than two seconds. That’s a big advantage over the competition. Bitcoin takes 30 to 60 minutes to finalize a transaction, depending on how much security is needed, and Ethereum takes about 10 to 15 minutes to finalize transactions. More information about fast finality on Avalanche is available here.
Another advantage of Avalanche’s security design is that it enables high throughput on the base layer. Avalanche can clear about 4,500 Transactions Per Second (TPS) even while thousands of nodes are validating transactions. Avalanche can scale even more through the use of subnets.
The AVAX Ecosystem
One of main reasons that Avalanche’s price is spiking is the amount of money that’s already locked up in its DeFi ecosystem. Avalanche currently has $11 billion of Total Value Locked (TVL) and this number is rapidly increasing.
Currently the largest dApp on Avalanche is Aave, with just over $3 billion in TLV. That’s followed by two more protocols that are unique to Avalanche: Trader Joe and Benqi. The fourth-largest application on Avalanche is Curve, which is live on several blockchains as well as several second layer scaling networks, such as Polygon and Arbitrum. A full list of all the applications on Avalanche is available here.
Trader Joe is Avalanche’s most popular decentralized exchange, and its recent announcement of a liquidity mining incentive program has helped to account for the growth of the protocol. Trader Joe is giving away $20 million in rewards to liquidity providers, which has helped to push its TLV over the $2 billion mark.
Benqi is a lending and borrowing app on Avalanche with APR rates similar to Compound on Ethereum. Users can deposit cryptocurrencies to earn a yield, or borrow crypto using a collateralized loan.
Interoperability is one of Avalanche’s key advantages. If Avalanche can fully integrate with Ethereum it could benefit both blockchains. Etherians can use Avalanche for low-cost transactions, and Avalanche DeFi protocols could expand their services by connecting with applications on Ethereum.
The AVAX Token
Similar to most other cryptocurrencies, the AVAX token is used to send value and pay transaction fees on the Avalanche network. AVAX can also be staked to help secure the network. As of the time of writing (Nov 2021) the staking reward on Avalanche is 9.8% per year. There is a maximum supply of 720 million AVAX tokens, however, that supply will decrease over time.
Like with EIP1559 on Ethereum, Avalanche has a built-in mechanism which burns the AVAX token. The key difference between Avalanche and Ethereum is that Avalanche burns the entire transaction fee, rather than just part of it. Avalanche also burns all of the tokens used to create new blockchains and assets on the network.
If Avalanche burns more tokens than it issues, the network will become deflationary. $42 million worth of AVAX has already been burned and the number is rapidly rising.
The Future of AVAX
Avalanche isn’t even two years old but it’s already a top twenty cryptocurrency by market cap. That rapid run up the price charts shows just how successful the project’s visibility has been so far. Getting to $11 billion in DeFi total value locked took Ethereum roughly 3 years, while Avalanche managed to make it happen in just 10 months. As fast as that growth has been, it’s really just the beginning.
The Avalanche Foundation recently announced a $220 million investment fund called Blizzard which is, “dedicated to accelerating development, growth, and innovation across the ecosystem of builders and users of the Avalanche public blockchain and beyond. - The fund is focused on four key areas of growth across the Avalanche ecosystem: DeFi, enterprise applications, NFTs and culture applications, and will also look for opportunities to support other emerging use cases such as security token issuances, liquidity providers and self-sovereign identity.”
The Blizzard fund should play a key role in growing the Avalanche ecosystem and attracting all sorts of new protocol development. So long as gas fees remain high on Ethereum, Avalanche is going to keep stealing away users who are sick of having to decide whether they can afford to make a transaction or not.
For more, this Medium article lays out a dozen more reasons why the writer is bullish on Avalanche and the AVAX token.
This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.