This article aims to provide an overview of the Avalanche network and its various functions. If you are unfamiliar with DeFi, consider reading our introductory article on DeFi here first. You might also want to read our articles on blockchain and cryptocurrency before reading this article.
Avalanche, like Ethereum, is a platform for Layer-1 smart contracts, where users can build and deploy decentralized apps (dApps). Avalanche features superior scalability and interoperability with its unique consensus protocol. Unlike other platforms, Avalanche is powered by a combination of three different blockchains.
How Does Avalanche Work?
Avalanche combines three separate blockchain networks to create a consensus protocol that operates as an integrated DeFi ecosystem. The three blockchains, the X-chain, C-chain, and P-chain, all serve different roles in the network.
Contract Chain (C-Chain)
Dubbed the “conversion chain”, the C-Chain develops and launches smart contracts similar to the Ethereum network. The chain’s Ethereum Virtual Machine (EVM) compatibility allows users to seamlessly convert their Ethereum dApps and access Avalanche’s features, such as greater scalability and security benefits. Among the most popular dApps on Avalanche is Aave, a lending and borrowing protocol ported from Ethereum. Throughout 2021, the number of transactions and development activity on Avalanche has significantly increased. According to Snowtrace, daily transaction volume on the C-Chain peaked at 934K transactions in May 2022.
Exchange Chain (X-Chain)
The X-Chain is responsible for issuing new digital assets on the Avalanche blockchain using distributed ledger technology as well as facilitating asset transactions. AVAX, the platform’s native token, is the most popular cryptocurrency on the blockchain. Users can mint new tokens, such as NFTs and stablecoins, by overcollateralizing these assets with AVAX. Transaction fees are paid in the form of AVAX tokens, similar to how Ethereum users pay gas fees with Ether (ETH).
Platform Chain (P-Chain)
The purpose of the P-Chain is to enable developers to create Layer-1 or Layer-2 blockchain solutions. The chain monitors and validates the state of custom blockchains called subnets. Avalanche-powered blockchains can be configured to meet just about any requirement, such as creating multiple blockchains, unique virtual machines, rules sets, and requirements for participation. By dividing tasks across different chains, the Avalanche blockchain platform can maintain its agility. Moreover, validators can stake AVAX on the P-Chain.
The Consensus Protocol
Every blockchain is powered by validators who maintain a public ledger by reaching consensus globally. Validators in Avalanche use a consensus protocol called Avalanche Consensus Protocol, which was first proposed by a pseudonymous group called Team Rocket before it became Ava Labs.
The Avalanche Consensus Protocol combines the benefits of two other sets of consensus protocols known as Classical and Nakamoto. While classical protocols are fast, green, and low-maintenance, they are not usually decentralized or scalable. In contrast, the Nakamoto protocol, which was developed by Bitcoin’s pseudonymous inventor Satoshi Nakamoto, offers decentralized, robust, and scalable blockchains. However, the network is expensive to maintain, and transactions are slow.
Conversely, Avalanche’s consensus mechanism is based on Proof-of-Stake (PoS). PoS systems are far more energy-efficient than Proof-of-Work systems since they do not rely on miners. Instead, validators stake AVAX to add blocks of transactions to the blockchain.
Repeated subsample voting is used to validate the transactions, where a random group of validators decides to accept or reject a transaction requested by Avalanche protocols. Generally, the transaction will proceed if a sufficient number of the sampled validators approve of it, and vice versa. This process is repeated until the majority of validators queried respond the same way (i.e., accept or reject) for several consecutive rounds.
If a transaction has no conflicts, finalization occurs very quickly. When conflicting transactions occur, honest validators cluster around these transactions to create a positive feedback loop until all validators favor that transaction. As a result, transactions without conflicts are accepted, and transactions with conflicts are rejected.
Here are the key functionalities of Avalanche:
In a similar manner to sharding on Ethereum 2.0, the subnets operate like clones of the P-Chain that remains connected at launch. Users can customize subnets to their requirements and create them on-demand. Therefore, when a subnet reaches its scaling limits, users can create another subnet to accommodate high traffic levels and ensure smooth transaction flow.
The Avalanche Bridge facilitates fast and secure transfers of ERC-20 assets between the Ethereum and Avalanche networks. Avalanche users can use their existing ERC-20 tokens on the Avalanche chain, thus demonstrating the platform’s interoperability. Moreover, the bridge can work seamlessly with online wallets such as MetaMask and Coinbase Wallet.
“Red Coin”: The AVAX Token
The AVAX coin, affectionately known as the “red coin” by its holders, is the main utility token for the Avalanche ecosystem. The token can be used in a variety of ways, including paying transaction fees, staking, and collateralizing new assets. In fact, the fee algorithms used by Avalanche are inspired by Ethereum’s dynamic gas fee model, EIP-1559. However, unlike Ethereum, where some of the gas fees go to validators while some are burned, Avalanche’s gas fee is entirely burnt. According to the tracker site BurnedAvax, more than US$33M worth of AVAX has been burned as of June 2022. Learn more about AVAX’s token distribution here.
Avalanche offers a wide range of benefits compared to other conventional blockchains. Its most prominent advantages include:
The multi-chain design allows the network to scale linearly, and its novel consensus protocol can confirm transactions in less than a second. In addition, subnet creation is unlimited, thus resolving conventional blockchains’ scalability problems. On the Bitcoin blockchain, TPS (Transaction Per Speed) averages around 5, while Ethereum can handle roughly twice that amount. In contrast, the C-Chain has a high transaction throughput of approximately 4,500 TPS. Additionally, Avalanche Consensus has decentralized its network security on a massive scale, reaching 1,400 validators in less than two years since its launch in 2020.
The Avalanche network is highly interoperable, as it allows the creation of different subnetworks using the blockchain as a common platform. In addition to facilitating ERC-20 token swaps, Avalanche is compatible with Solidity smart contracts and Ethereum tools such as Remix, MetaMask, Truffle, and more. Few blockchain-based platforms allow for different blockchains to share assets and data. Even fewer can accomplish interoperability with third-party tokens, let alone with a consistent throughput and short transaction speeds.
The fees charged by Avalanche are among the lowest of all programmable networks, with the cost of minting new assets and creating blockchains being minuscule. These fees are then burned, which allows AVAX to increase in price with a reduced supply of tokens in circulation and thus increased demand. Due to its cost-effectiveness, Avalanche directly addresses Ethereum’s record-high gas fees caused by its high congestion levels. Read more about Ethereum’s own innovative solutions here!
The Future of Avalanche
The Avalanche network processed over 32M transactions in May 2022, whereas it processed fewer than 1M transactions just a year earlier. Since 1 May 2021, the number of unique smart contracts deployed has increased by a staggering 81%. Large organizations like Deloitte, Lemonade, and Togg have also begun using Avalanche’s blockchain technology. Needless to say, Avalanche’s future continues to burn bright despite the ongoing crypto winter.
The Avalanche network is now supported by our DeFi analytics platform, Harvest! Protocols such as Aave, BENQI, Curve, and Trader Joe are now available on our Analytics App. Harvest users can view their digital assets across three chains: BNB Chain, Ethereum, and Avalanche. Try it here!
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