What Is Avalanche (AVAX)?
The Avalanche network attempts to improve scalability without compromising on decentralization. Three blockchains make up its mainnet: the X-Chain, C-Chain, and P-Chain.
The X-Chain is used for managing assets and uses the Avalanche consensus protocol. The C-Chain is for smart contracts creation and the P-Chain for coordinating validators. These two blockchains use the Snowman consensus protocol.
The Avalanche consensus protocol has all nodes work in parallel to check other validators' transaction confirmations randomly. After enough repeated random subsampling, a transaction is probabilistically determined to be true. This improves transaction throughput to 6500 TPS and provides a sub-one-second finality time. Snowman is similar but works in a linear process with blocks.
Avalanche also allows for the creation of customized, interoperable blockchains. There's no limit on the number, but you need to pay a subscription fee to operate one in Avalanche's native token AVAX.
As blockchain technology develops, it provides new solutions to the old problems of scalability, interoperability, and usability. Avalanche has taken a unique approach with the use of three separate blockchains in its platform. Powered by its native token AVAX and multiple consensus mechanisms, Avalanche claims to be "the fastest smart contracts platform in the blockchain industry, as measured by time-to-finality". In this article, we'll look at the factors that lead to this claim and the solutions it provides.
When was Avalanche launched?
The Avalanche blockchain was launched in September 2020 by the Ava Labs team in the US. Ava Labs raised $6 million (US dollar) in their financing round and followed this with private and public token sales totaling $48,000,000. The three-person team behind Avax Labs consists of Kevin Sekniqi, Maofan "Ted" Yin, and Emin Gün Sirer.
What problems does Avalanche solve?
There are three main problems Avalanche attempts to solve. These are related to scalability, transaction fees, and interoperability.
Scalability vs. decentralization
Blockchains have traditionally struggled to balance scalability and decentralization. A network with increasing users and high activity can fail to generate consensus on valid transactions quickly. Bitcoin (BTC) is a good example of the issue, as transactions have sometimes taken hours or even days to process in periods of network congestion.
One way to combat this is to make the network more centralized, giving fewer people more authority to validate network activity. If fewer people have to check and validate transactions, they can be confirmed much more quickly. However, decentralization is an important, desired aspect of blockchain technology. New blockchains constantly attempt to solve this problem with technological advancements, and Avalanche has created a unique approach, which we'll cover later.
Another common issue seen with the larger blockchains like Ethereum is their gas fees. High traffic and an increase in users contribute to the problem. This ultimately discourages users from these blockchains, but the competition on offer has less established ecosystems. For example, Ethereum's popularity and a lack of alternatives have led to almost permanently high traffic and fees without relief. At certain points, simple transfers cost more than $10, and complex smart contract interactions were even more expensive.
Different projects and businesses have their own needs when it comes to blockchains. Previously, projects would have to work with either Ethereum, another individual blockchain not tailored to their needs, or a private blockchain. However, finding the balance between customizability and cooperation between multiple blockchains has been challenging.Avalanche offers its solution to the problem with subnets and custom blockchains that share the network’s security, speed, and compatibility.
How does Avalanche work?
To solve the problems outlined, Avalanche uses a combination of methods that make it somewhat unique. To begin, Avalanche is actually made up of three interoperable blockchains: the X-Chain, C-Chain, and P-Chain.
1. The Exchange Chain (X-Chain). This chain is used for creating and exchanging AVAX tokens and other digital assets. These assets have modifiable rules that govern their behavior, just like Ethereum's token standards. Transaction fees are paid in AVAX, and the blockchain uses the Avalanche consensus protocol.
2. The Contract Chain (C-Chain). The C-Chain is where developers can create smart contracts for DApps. This chain implements an instance of the Ethereum Virtual Machine (EVM), allowing coders to fork over EVM-compatible DApps. It uses a modified version of the Avalanche consensus protocol called Snowman.
3. The Platform Chain (P-Chain). This chain coordinates network validators, tracks active subnets, and allows for the creation of new subnets. Subnets are sets of validators providing consensus for custom blockchains. A blockchain can be validated by only one subnet, but each subnet can validate multiple blockchains. The P-Chain also uses the Snowman consensus protocol.
With each blockchain taking on different roles, Avalanche improves speed and scalability compared to running all processes on just one chain. The developers have combined this aspect with two different consensus mechanisms tailored to the needs of each blockchain. Tying all of these blockchains together is Avalanche's native utility token AVAX. Users need the token to stake and pay network fees, giving the ecosystem a common usable asset between different Avalanche subnets.
How do Avalanche's consensus mechanisms work?
There are a lot of similarities between Avalanche’s two consensus protocols. However, each one is tailored towards its specific blockchain(s). This dual system is a key reason for the network's improved scalability and transaction processing speed.
The Avalanche consensus protocol doesn't need a leader to reach consensus like Proof of Work (PoW), Proof of Stake (PoS), or Delegated Proof of Stake (DPoS). This factor increases the decentralization of the Avalanche network without sacrificing scalability. In contrast, PoW, PoS, and DPoS end up having one actor process transactions, whose work is then validated by others.
Avalanche uses all nodes to process and validate transactions by implementing a directed acyclic graph (DAG) optimized consensus protocol. DAG allows the network to process transactions in parallel. Validators randomly poll other validators to determine whether a new transaction is valid. After a certain number of this repeated random subsampling, it's statistically proven that it would be almost impossible for a transaction to be false.
All transactions are finalized immediately without other confirmations needed. This means that there are no blocks as seen in traditional blockchains but instead parented transactions known as vertices. Running a validator node and validating transactions have low and accessible hardware requirements, which helps with performance and decentralization.
The Snowman consensus protocol builds on the Avalanche consensus protocol but orders transactions linearly. This property is beneficial when dealing with smart contracts. Unlike the Avalanche consensus protocol, Snowman creates blocks.
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AVAX is Avalanche's native token with a capped supply of 720 million. All fees paid on the network are burned as a deflationary mechanism. The token has three main use cases:
1. You can stake your AVAX to become a validator or delegate it behind a validator. Validators can earn up to 11% Annual Percentage Yield (APY) and set a custom percentage fee of the reward they keep from delegators who back them.
2. AVAX serves as the common unit of account for all subnets, improving interoperability.
3. Transaction fees and subnet subscriptions are payable in AVAX.
How do you stake AVAX?
AVAX holders can earn rewards by staking their tokens with the network. You can earn rewards by becoming a validator or by staking tokens with a validator. Becoming a validator requires staking 2000 AVAX.
The hardware requirements are low enough that most standard laptops or desktops should be suitable to begin validating. You can also stake tokens behind a validator and receive rewards when the validator successfully confirms transactions.
Customizable Avalanche blockchains
At its base level, Avalanche offers the same functionality as Ethereum. Developers can create new tokens and NFTs, smart contracts, and DApps. Users can stake, validate transactions, and use DApps. The benefits of Avalanche, according to them, come from the improvements made to these actions. As an extra feature, Avalanche also allows for the creation of interoperable, customized blockchains.
A customized blockchain using a highly scalable platform is well suited towards large enterprises’ needs. It's even more convenient for custom blockchains to interact with others in an ecosystem and leverage their security. Avalanche has its own Avalanche Virtual Machine (AVM), which is also compatible with the (EVM). Developers familiar with Ethereum's Solidity coding language can easily use Avalanche and also port over existing projects.
Each blockchain can have custom native tokens, and transaction fees can be paid with it. There is a creation fee paid in AVAX for creating a subnet and a blockchain. Subnet maintainers must also be validating in the primary subnet, in order to validate custom subnets.
How is Avalanche different from other scalable blockchains?
The problems and solutions we've bought up aren't unique to Avalanche. In fact, Avalanche is competing with other scalable platforms and interoperable blockchains like Polkadot, Polygon, and Solana. So what is it that makes Avalanche different from the alternatives?
By far, the most significant difference is the DAG-optimized Avalanche consensus mechanism. However, Avalanche is not the only blockchain with a novel consensus mechanism. Solana has Proof of History that allegedly can handle up to 50,000 TPS (transactions per second), outperforming the 6,500 TPS Avalanche claims. Still, the validity of both these claims in real-life usage is uncertain.
Transaction speed and finalization
Another noticeable difference is Avalanche's finality time of sub 1 second. What does this mean exactly? TPS is just one metric when measuring speed. We also need to factor in the time it takes to guarantee that a transaction is finalized and cannot be reversed or altered. You could process 100,000 transactions in one second, but if there is a delay in finalization, the network will still be slower for users.
One of Avalanche's biggest claims is its commitment to decentralization. Compared to its size and age, it does have a large number of validators due to its reasonably minimal requirements. However, as the price of AVAX has risen, it's become more expensive to become a validator.
Avalanche's interoperable blockchains are also unlimited in number. This is in direct competition with Polkadot, one of the most famous projects offering customized and interoperable blockchains. Polkadot has limited space auctioned off in Parachain Slots auctions, whereas Avalanche works with a simple subscription fee.
With Decentralized Finance (DeFi) platforms looking for Ethereum alternatives, blockchains like Avalanche are attractive due to their EVM compatibility and low fees. However, DeFi platforms already have a long list of alternative platforms when it comes to scalability and speed. Avalanche has increased in popularity since its release, but whether it will be able to compete with other blockchains like Solana or Polygon is yet to be seen.