Avalanche (AVAX): An Innovative Consensus Protocol in DeFi

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With the rising interest in cryptocurrency, there’s a race to make the most feature-rich blockchain. As a result, some impressive platforms have emerged in the past few years. One of these is the Avalanche Network (native token: AVAX).

Avalanche is an open-source platform for decentralized applications and financial primitives. Its developers aim to steer the market toward decentralized finance and build new foundations in the field.

How did the Avalanche network begin — and should you invest in it? Below, we discuss the Avalanche Foundation and AVAX in detail.

What Is Avalanche Crypto?

Avalanche is a decentralized platform that allows anyone to produce decentralized applications and multi-functional blockchains. Ava Labs designed this platform to minimize certain limitations of some of the “older” blockchains.

Some of these limitations include centralization, lack of scalability, and slow transaction speeds. The platform’s native Avalanche consensus protocol offers high throughput, low latency and resistance to attacks in order to eliminate these issues.

The Avalanche mainnet was launched in September 2020. Its developers raised $42 million only two months ago in a successful native token sale. All 72 million of the Avalanche tokens sold out in under five hours. The investors are from over 100 countries around the globe.

Therefore, it was almost a given that Avalanche would be a popular project in the coming year, with such a phenomenal response to its ICO. The president of Ava Labs, John Wu, commented, “The success and velocity of the Avalanche sale is a testament to the quality of our project, and the impact it can have on both institutional and decentralized finance.”

Many previous crypto assets, notably Bitcoin, rely on a proof of work consensus, with its extended confirmation times during which users have to wait for a new block to be created by the miners.

In contrast, Avalanche features a heterogeneous network on which several validator sets and blockchains are present to offer the same security standard as Ethereum or Bitcoin, but in a shorter time span.

The Avalanche network aims to take on Wall Street’s traditional role of building new finance foundations, thereby offering users a platform that’s secure and scalable.

What Is AVAX?

Avalanche’s native token is called AVAX. It secures the Avalanche network via staking. Token holders can use it to pay fees and conduct peer-to-peer transactions.

The demand for AVAX comes from different sources:

  • Avalanche uses AVAX to transfer value at scale and speed.
  • Users can earn AVAX tokens to generate passive income by staking them, or by setting up a validator.
  • The Avalanche platform allows open financing for assets such as stablecoins. The use of AVAX is required to create sub-networks and digital assets.

Validators will not lose the AVAX tokens, which are the staked assets, since these tokens don’t act as collateral. As a result, validators have a lower risk of losing money. This particular feature of AVAX makes it different from Ethererum and other cryptocurrency platforms.

In addition, the Avalanche network encourages participation and incorporates predictability in staking.

AVAX is also used to pay for fees on the network. Just as with the Nakamoto consensus, the tokens don’t go to validators or miners. Instead, they’re burned to ensure that the whole ecosystem is benefiting, rather than just of a few players.

Who Founded AVAX?

Ava Labs created the AVAX token, Avalanche network and the novel consensus protocol made by “Team Rocket” which aims to revolutionize the classical consensus protocols and Nakamoto consensus. A professor at Cornell University, Emin Gün Sirer, formed Ava Labs along with two computer science PhDs, Maofan “Ted” Yin and Kevin Sekniqi.

Sirer attended Princeton University on scholarship. He earned his PhD in Computer Science and Engineering from Princeton in 2000 and became an assistant professional at Cornell University the next year.

His first attempt at starting a cryptocurrency was in 2002–2003 when he created a peer-to-peer virtual currency, Karma, with Sangeeth Chandrakumar and Vivek Vishnumurthy. Karma was created six years before Bitcoin and was the first cryptocurrency to use a proof of work minting process.

However, unlike Bitcoin, Karma didn’t combine the consensus protocol with the new supply’s minting. Also, Karma was introduced at an unfortunate time, right after 9/11. Funding was scarce, and there were security concerns regarding Karma’s peer-to-peer model of virtual currency.

Sirer assessed the decentralization of Ethereum and Bitcoin before the cryptocurrency market overheated in 2017. He recorded his findings in 2018, remarking that further research was required to decentralize the consensus protocols.

After presenting a paper at the Genesis London Conference in 2018, Sirer’s next step was the creation of Avalanche, often termed “Blockchain 3.0” since it improves on its predecessors.

How Does Avalanche Work?

The working mechanism of Avalanche is different from former blockchains and other similar platforms. It has three interoperable blockchains: a Platform Chain, a Contract Chain and an Exchange Chain.

The Exchange Chain, or X-Chain, helps create and trade new crypto assets. Meanwhile, the C-Chain is the Ethereum virtual machine implementation of Avalanche, enabling the creation of smart contracts. Finally, the P-Chain tracks and creates subnets and coordinates validators.

The Snowman mechanism secures the C-Chain and P-Chain, enabling smart contracts with high throughput, whereas the DAG-optimized Avalanche consensus secures the X-Chain. The Avalanche consensus protocol allows transaction finality in just a few seconds.

Since the Avalanche network’s architecture is split across three blockchains, the network is well-optimized for security, speed and flexibility. Thus, it is a robust platform for enterprise and individual use, as developers can flexibly build different applications.

AVAX, the native token in the Avalanche ecosystem, is used for staking and paying network fees. What makes Avalanche so unique is that it can handle significantly more transactions than many other blockchains. In fact, it can handle 4,500 transactions per second, compared to only 14 on Ethereum and seven on Bitcoin. Also, it gets to transaction finality in just three seconds or less. This makes it a much better option for bringing scalability to decentralized applications.

Along with being more scalable than other blockchains, Avalanche is also interoperable.

It achieves this interoperability by enabling blockchains between subnets and within a subnet to facilitate communication. Thus, these can be complementary, while supporting cross-chain value transfers.

Avalanche is also more inclusive than other proof of stake blockchains which only allow a certain number of validators. Anyone who stakes at least 2,000 AVAX can participate in Avalanche.

Although Avalanche supports the Ethereum virtual machine, the ecosystem doesn’t use the same consensus mechanism as the Ethereum network. Moreover, cross-chain value transfers on Avalanche don’t require bridges.

Avalanche Architecture

Avalanche’s architecture includes subnetworks or subnets. A subnet is a set of validators that work together to achieve consensus. One subnet validates each blockchain. In addition, a node can be a member of several subnets.

In a subnet, validators may be required to have the following features:

  • Be in a certain country
  • Pass KYC/AML checks
  • Have a specific license

The network’s architecture also supports private subnets where only predefined validators can join. Thus, the blockchain’s contents will only be visible to these validators. The private subnets are ideal for organizations that want to keep their data confidential.

Here is a brief overview of how Avalanche’s architecture works: the primary network validates the built-in blockchains on Avalanche. Then, the P-Chain coordinates validators, creates subnets and uses the Snowman Consensus Protocol, which enables self-executing smart contracts on the network.

Within this protocol, the X-Chain creates assets, exchanges assets and uses the Avalanche consensus protocol. The C-Chain runs executive EVM contracts and uses the Snowman consensus protocol.

The Consensus Mechanism

Avalanche Consensus Protocol
Credit: Avalanche white paper

The Avalanche consensus protocol has three mechanisms that give structural support to the network. These are the non-BFT protocol (Slush) that progressively built up to Snowflake and Snowball. These are single-decree consensus protocols with increasing robustness and are all based on the common majority-based metastable voting mechanism.

According to Ava Labs’ white paper, “Inspired by gossip algorithms, this new family gains its safety through a deliberately metastable mechanism. Specifically, the system operates by repeatedly sampling the network at random and steering the correct nodes towards the same outcome. Analysis shows that metastability is a powerful, albeit non-universal, technique: it can move a large network to an irreversible state quickly. However, it is not always guaranteed to do so.”

Avalanche Consensus Protocol
Credit: Avalanche white paper

In gossip algorithms, the connected nodes are randomly sampled to receive information. The Avalanche consensus protocol takes inspiration from this algorithm as it subsamples nodes to achieve consensus.

Let’s explain this with an example. Suppose there’s a network where the nodes have to select between two numbers, such as four and five. A node in this network will randomly pick several nodes and ask them to choose a number.

All of these selected nodes will send back a response with their chosen number. With this response, the node that posed the question initially would know which number the network is leaning toward.

Subsequently, all in-network nodes will undergo this process to achieve a consensus in the network. If there’s a tie between both options in the first voting round, the network will have a second round of voting in which the likelihood of a tie will be lower.

With every round of voting, the probability keeps reducing. This feature of the network is called metastability, which means the network will eventually land on a single choice.

The entire purpose of achieving a consensus within the network is to ensure that the nodes agree with each other and that there’s no “tie.”

As each round of voting comes to an end, the network begins to determine the final number more rapidly. Once all nodes come to a consensus, the network will achieve a finality. In Avalanche, this happens in a matter of seconds.

Avalanche Bridge Technology

At the beginning of 2021, Avalanche launched the Avalanche Ethereum Bridge. Just a few months later, the developers launched the aptly named Avalanche Bridge, which is five times cheaper and enhances cross-chain interoperability.

According to the developers, the Avalanche Bridge has been designed to:

  • Ensure that users have access to security-first technologies
  • Cut the cost of bridging assets, making it as low as possible
  • Speed up transactions
  • Increase transparency so that users can be fully informed every step of the way
  • Make crypto assets intuitive so that new users can easily understand how to use the bridge
  • Support the ecosystem so that users understand how capable the Avalanche ecosystem is after they’ve crossed the bridge
  • Allow users to seize opportunities with minimal friction in understanding the scope of the Avalanche ecosystem
  • Support blockchains and make Avalanche the hub of decentralized finance (DeFi)

Founder and CEO Sirer says, “The new Avalanche Bridge is a leap forward in bridging technology, but most importantly, it is a dramatic improvement in experience for users and developers across the Avalanche community. It will be a growth engine for the next phase of growth on Avalanche and set a new standard for secure and efficient cross-chain interoperability.”

Why AVAX Coin Is Important

The AVAX coin acts as the in-house payment method on the Avalanche platform. It’s used to collect transaction fees. Users can stake their AVAX coins to earn rewards as a form of passive income.

Currently, there’s a circulating supply of 720 million AVAX, half of which were in the Genesis Block. The other half, according to the white paper, will be released per an emission curve.

The Avalanche community consensus can change the release date for the coin, but it won’t change the circulating supply.

As of Sept. 10, AVAX is trading at $45.79. At one point, AVAX had the second-largest gains in the crypto market. At the time of this writing, the cryptocurrency is the 18th largest by market cap. On top of that, the Avalanche community is growing as the demand for the DeFi ecosystem expands, which means there’s greater interest in the AVAX coin.

How DeFi Increases the Demand for AVAX

The demand for AVAX has increased significantly in the past few months. One of the reasons for this is the growing DeFi ecosystem.

Total DeFi Market Cap

On August 18, 2021, Avalanche announced the release of Avalanche Rush, an incentive program for liquidity mining. The program, launched in collaboration with Curve and Aave, will bring more assets and applications to Avalanche’s growing DeFi platform.

Avalanche has set aside $27 million for the second phase of this program, owing to its importance. It‘s been designed to showcase Avalanche’s commitment to DeFi scalability and create a cost-effective ecosystem.

Currently, there’s clear evidence that DeFi is growing on the Avalanche ecosystem, as the number of total value locked (TVL) on the network’s protocols is increasing.

Additionally, the Avalanche Bridge has also contributed significantly to increasing the demand for AVAX. The cross-chain-bridging technology allows asset transfer between Ethereum and Avalanche.

In an August 19, 2021 tweet, Avalanche reported that the Avalanche Bridge had transferred more than $100 million in tokens to and from Ethereum.

AVAX Price Analysis

As of now (Sept. 3, 11:13 UTC), the price of one AVAX coin is $47.54. The technicals show that the coin is in the “buy” spectrum, which means it’s safe to buy AVAX at the moment.

According to different experts, the sentiment around AVAX’s price is quite positive. According to Wallet Investors, ‘’Based on our forecast, a long-term increase is expected; the price prognosis for 2026 is $247.519. With a 5-year investment, the revenue is expected to be around +1102.07%.”

Meanwhile, the experts at Tokeneo say, “AVAX price seems to be showing tremendous positive momentum for this year. The AVAX price might record around a 304% hike, making it the best option to invest.”

But the crypto asset’s price is not only forecasted to rise this year. In fact, experts are certain that this positive price increase will continue into the future, forecasting an ATH for November 2022 up to $207.91, which would be a 426% increase from the coin’s current price.

Experts at Digitalcoin estimate the highest future AVAX price for $236.86, while the lowest is forecast at $65.58. They also regard AVAX as a wise investment and expect its price will increase according to their predicted data.

Avalanche vs. Solana: How Are They Different?

Scalability is one of the main issues many blockchains trying to resolve. Obviously many blockchains like Polygon, Cosmos, Polkadot and Solana are competing with each other to address the issue, still, they all have a different approach. 

For one, Avalanche differentiates itself from the DAG-optimized consensus mechanism. The blockchain claims to have over 4,500 transactions per second (TPS) with less than two seconds of transactional finality relying on thousands of nodes to validate the transaction. Still, Solana’s proof of history allegedly claims to handle over 1000% more TPS than Avalanche.

Since finality guarantees that the immutability of cryptocurrency transactions, it is critical to decides which blockchain is more susceptible to the public’s adoption. As mentioned above, the average finality for Avalanche is around two seconds, whereas Solana claims to have finality in 500ms. Thus, the network appears to be faster for users.

Avalanche has about 80% parameterized safety threshold that is comparably higher than other blockchains. The know your customer (KYC) process is unique in which a validator’s identity needs to be inspected and verified to minimize the chances for a group or entity from gaming the network.

However, you can have one subnet requiring high validator requirements with Avalanche. Thus, it leverages GPU processing to avoid slowing down. On the other hand, Solana tries catering to each use case, making developers compromise. 

Limitations of Avalanche

Although Avalanche has a lot to rave about, such as permissionless smart contracts and staking rewards, the platform has its limitations.

One of them is the issue of decentralization. Ava Labs has 10% of the total token supply of AVAX, or 72 million. Distributing these tokens so that the platform is decentralized sufficiently, with none of the nodes having more than 1% of the network, is a challenge.

Moreover, if the in-network nodes disagree, the Avalanche consensus protocols don’t perform as efficiently. The developers are trying to address this by means of the Frosty consensus, which creates a “leader” node to improve performance when there’s a block contention.

However, these limitations likely won’t be a problem for long, as the developers take active steps to improve scaling and decentralization on the Avalanche blockchain.

Final Note

With utilities such as smart contracts and transaction finality in seconds, Avalanche has become a hit. Although it’s been in the market for less than a year, it’s been moving quite quickly, releasing new features one after another.

Its future will bring the Apricot Upgrade, which will improve many aspects of the network. One of these will be verifiable pruning, which means the nodes will be online in a fraction of the current time. In addition, token issuers will be able to utilize freezing and unfreezing functions.

But all of these improvements and the monetary hype surrounding the network are useless if its participants don’t stick around for the long haul. Experts at Forbes are also thinking about the same thing: “The thought that’s on our mind is if Avalanche and the community there can convert this influx of new Avalanche users into long-term participants in the network’s DeFi ecosystem.”

Therefore, it will be interesting to see in the coming months whether the users stick to the network or not.

Disclaimer

This article is intended for and only to be used for reference purposes only. No such information provided through Bybit constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific person. These forecasts are based on industry trends, circumstances involving clients, and other factors, and they involve risks, variables, and uncertainties. There is no guarantee presented or implied as to the accuracy of specific forecasts, projections, or predictive statements contained herein. Users of this article agree that Bybit does not take responsibility for any of your investment decisions. Please seek professional advice before trading.

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