Coins to Watch in 2022: AVALANCHE

Avalanche (AVAX) is a smart contract platform and AVAX is the native token that powers transactions on the network.

Between December 14th and December 22nd, AVAX rose ~51% in price. Over the same period, the prices of Bitcoin (BTC), and Ethereum (ETH), rose marginally by ~5% and ~4%, while the price of Binance-coin (BNB), the third-largest asset in crypto slid by ~1%.

These better than average market returns underline AVAX’s meteoric rise up the cryptocurrency market cap table in the last 12 months. On January 1st, 2021, Avalanche’s native token AVAX was the 70th largest asset in crypto. It had a market cap of US$267.2 million and each token was priced at US$3.47. Just over a year later, AVAX is the 13th largest asset in crypto with a market cap of ~US$21.9 billion and each token is priced at US$89.

Source: Google Trends

Google search interest for ‘Avalanche Crypto’ and ‘AVAX Crypto’ grew steadily during 2021, before gathering steam in September and exploding in popularity in late November. Search interest for both terms hit new all-time-highs in the week between November 21st-27th. The search interest peak correlates with the price of AVAX hitting an all-time-high of US$144.96 on November 21st. This suggests that the popularity of Avalanche and AVAX is most tied to the price of the AVAX token.

Search interest for both terms remains high into 2022.

Source: Santiment

Social sentiment data from crypto data providers Santiment suggests that Avalanche and AVAX have a pattern of spikes positive in social sentiment before a cool down and then another spike. Notably in mid-September, late October, and mid-November 2021. The spikes in social sentiment correlate with rises in the price of the AVAX token. On a number of occasions, the peak in social sentiment preceded a local high price top.

At one point in mid-November the Social Dominance of AVAX, in the context of crypto, was ~3.03%. The market cap dominance of AVAX in the context of crypto is ~0.1%. This suggests that at the time, AVAX was overvalued and overhyped by social media users. The social dominance of AVAX dropped down to 1.961% by late November.

Santiment data also indicates that the most recent AVAX price pick up in mid-December was backed by less social volume than previous price spikes. Social volume for AVAX has been declining slowly so far in 2022.

Source: Defi Llama

The total value locked (TVL) into the Avalanche blockchain’s DeFi ecosystem currently is US11.31 billion. Fundamentals appear to back up the strong price performance of Avalanche. This number is up a staggering 4569% in the last six months.

The most popular decentralized application (Dapp) on Avalanche is Aave, dominating the ecosystem with 25% of the value locked ($2.82 billion).

Aave was originally an Ethereum application but alongside another popular DeFi protocol, Curve, it launched on Avalanche in early October. Aave is a DeFi protocol that allows users to lend and borrow a range of digital assets using both stable and variable interest rates.

Aave is the 7th largest DeFi protocol on the Ethereum blockchain. Because of the strong UI of the bridging infrastructure and the similarity in operations between the networks, Ethereum users have been able to comfortably shift to the new network.

Avalanche offers builders the exact same functionality as Ethereum because it supports the Solidity programming language and is integrated with the Ethereum Virtual Machine. Applications can be built to be completely interoperable with EVM chains, while still maintaining the transaction model of Avalanche.

Avalanche pitches itself as an Ethereum alternative blockchain network with sub-second transaction times and low fees. Avalanche joins a group of cheaper, faster direct Ethereum alternatives that include the Binance Smart Chain and Fantom.

Source: Twitter user @Rareliquid

Even compared to other semi-centralized Ethereum alternatives, Avalanche’s theoretical transactions per second, finality time and block times are impressive. Waiting less than two seconds for a transaction to go through and paying five cents for it is appealing particularly given the slow wait times and high costs relative to smart contract incumbent Ethereum.

Avalanche transactions have remained high into 2022. Source: Snowtrace

Daily transactions on the Avalanche platform have surged since late August. At the start of the month, Avalanche was averaging around 12,568 transactions a day. By the end of the month, the network was supporting 160,024 transactions a day. On December 20th the network handled 877,021 transactions per day. Since August, daily transactions have risen by ~68780%,

The key in the rise in daily transactions and the surging value of the AVAX token is the US$180 million Avalanche Rush liquidity mining incentive program announced on August 19th.

The program involved offering AVAX incentives to liquidity providers on Aave and Curve. US$20 million in AVAX will be allocated to Aave users and US$7 million to Curve users. The program will support the launch of Avalanche deployments of Curve and Aave.

Just before Avalanche Rush, Avalanche Bridge was launched to allow assets to be moved easily between blockchains including Avalanche. The Avalanche Bridge has already proven popular with ~US$6 billion worth of assets being ported over from the Ethereum network to Avalanche.

Most of these assets are sent straight to Ethereum-like solutions (Benqi-Compound, Pangolin-Uniswap) or existing applications from other chains ported to Avalanche like Aave and Curve.

The Avalanche DeFi Dapps offer frictionless user experiences in comparison to Ethereum ones. Operations like trading, compounding yields, and removing assets from vaults, which incur heavy gas costs on Ethereum, are cheap and fast on Avalanche. The bridge has simplified the first step of moving the assets from Ethereum to Avalanche.

On September 17th the project announced that it had raised US$230 million in a private sale of AVAX tokens. Well-known crypto funds Three Arrows Capital and Polychain led the raise. Big-name VCs willing to spend on a project is a sign to markets that it may have the legs to sustain bullish momentum through multiple market cycles.

Avalanche even appears to be catching the eye of institutional investors. Avalanche’s blockchain infrastructure was backed by Bank of America in late 2021. In a research note, the bank wrote that the network’s subnet-based model “enables faster time-to finality (settlement) and lower costs than alternative blockchains.” The ecosystem also received a boost of positive sentiment after the popular USD-Coin (USDC) announced that it would be launching on its platform.

The Avalanche model

The Avalanche blockchain was created by Ava Labs and launched its mainnet in September 2020. The wider Avalanche mainnet is made up of multiple smaller subnets which contain multiple blockchains within them. They are connected by a novel proof-of-stake consensus model that is purported to support transaction speeds of up to 6500 transactions per second.

Chains on Avalanche are designed to support a variety of virtual machines (like computer systems) and allow chains within Avalanche to have specific functionality. For example, the current most active Avalanche chain is the C-chain which uses the popular Ethereum Virtual Machine (EVM). Other virtual machines, like the WASM, could conceivably be included. These chains exist within subnets of Avalanche which have their own set of validators and incentive mechanisms. This model resembles architecture used by networks like Polkadot and Ethereum 2.0.

Three blockchains currently absorb most of the activity on the Avalanche mainnet. The X-chain is for exchanging and managing assets like AVAX, the C-chain is where smart contracts and Dapps live, and the P-chain is for co-ordinating validators. The X-chain uses the Avalanche consensus protocol and the other two use the Snowman consensus model.

The Avalanche protocol has all nodes working in parallel to check other validators’ transaction confirmations randomly. After enough random sub-sampling, a transaction is determined to be probabilistically true. Snowman is similar but uses a more linear process with blocks.

This style of consensus uses Directed Acyclic Graphs or DAGs, a method for distributed network consensus first popularized by the IOTA network. It has historically not always worked smoothly.

Nodes on the Avalanche network only communicate with each other directly occasionally. There is no network-wide consensus that needs to be achieved on every finalized block or to confirm the state of the network. This is very different from operations on proof-of-work networks and is the reason Avalanche is able to process transactions so quickly and cheaply.

The three-chain system is designed to split up the work of the blockchain, to prevent it all converging and congesting to one chain, further boosting potential throughput. The AVAX token is used across all three chains, the asset is common, usable across all three chains, and is needed for staking and paying network fees.

Staking rewards

As mentioned, Avalanche is a proof-of-stake blockchain where users can either run their own validator nodes or assign their stake to a validator which will earn rewards on their behalf. This means that anyone who holds AVAX can choose to delegate some of their tokens to one or more validators, who process transactions and run the network.

StakingRewards.com lists Avalanche as the 5th-largest blockchain by value of assets staked – with US$21,109,543,283 staked. There are ~60% of token holders participating in Avalanche, which implies 40% of token holders are passively holding their AVAX and are likely just speculators.

The current estimated interest rate for Avalanche holders who delegate their tokens to a validator is a healthy 9.3%. Adjusted for the inflation rate of network supply, however, this interest rate drops to 3.29%. cording to Staking Rewards, validators running an Avalanche Node will earn an interest rate of 9.76% but once adjusted for network supply inflation this drops to 3.72%.

Users can delegate their tokens to a staking pool that will, for a fee, participate in the network’s proof-of-stake consensus on behalf of the delegator. Or they can run a node themselves and directly participate in consensus. Staking rewards.com describes the complexity of delegating AVAX to a staking pool as ‘easy’. The minimum required amount for staking is 25 AVAX (~US$2254). A relatively high amount to simply delegate, which may explain why there are so few Avalanche delegators.

According to the documentation on the official Avalanche channel, users can run nodes with commodity or off-the-shelf hardware because the network is lightweight at this stage. It does state, however, that as the network grows more complex, hardware will be needed to maintain a node. The minimum percentage of the time a validator must be correct and online in order to receive a reward is 80%.

Stakingrewards.com does not list how complex it is to run a validator. The minimum required amount for staking is 2000 AVAX (~US$180,360). The minimum amount of time one can stake funds for validation and delegation is two weeks.

Conclusion

Avalanche is pitched as a cheaper, faster version of Ethereum. At this stage, it can be viewed as a direct substitute for Ethereum using the same wallets, virtual machines, and developer tools. In the future, however, its multi-chain, multi-virtual machine model may mean it can evolve from being seen as an Ethereum clone only.

Driving activity value into the chain in recent months are the profitable early adopter yield programs, an efficient bridging tool that makes the transition to the new chain for early users very straightforward, support from VC partners and support from a social community.

The network has big-name VC backers and is attracting developers to build on it. It has a relatively large quorum of validators but appears to run on a consensus model that isn’t entirely bulletproof. The key to its future success will be to find a way to continue getting users and liquidity providers to participate in the network. The development of more complex bridging capabilities and the porting of Ethereum based solutions looks set to keep the ecosystem ticking over in the short term.