What is Avalanche? A look at AVAX and the platform built by Ava Labs

Avalanche describes itself as an open, programmable smart contracts platform for creating custom blockchain networks and decentralized applications. The platform’s native coin is $AVAX which is used to pay transaction fees and can be staked to secure the network. This is pretty standard for many Layer 1 blockchains throughout the industry, so you might be thinking what sets Avalanche apart? Well to start AVAX was never intended to be the only coin on the Avalanche network. The objective of Avalanche is to provide a unifying platform for the creation, transfer, and trade of digital assets. During a presentation at Web3 Summit in 2019 (before Avalanche even officially launched), Founder and CEO of Ava Labs, Emin Gün Sirer said, “We envision having thousands of other coins. Every asset should be digital and it should be a coin family on Avalanche.” In keeping with this theme you’ll even notice upon visiting the Ava Labs website the first thing you see is “Digitize The World’s Assets” in big bold letters. In a different August 2021 interview the Ava Labs CEO also made an interesting and insightful point when asked exactly what he means by tokenizing assets and if that will potentially include stocks in the future. The CEO and former Cornell University professor responded to this question by saying, “Wall St is Wall St… And if your familiar with those codebases, they are many, many, many layers thick, they are very fragile and very complicated and very expensive to maintain and that makes them impenetrable… Its not going to be overnight where people just patch over. Instead, on the side and separately from this, we will see a flourishing ecosystem of new companies, new projects, and new efforts coming to be and issuing their coins to fund themselves. Those coins will be the stock certificates of tomorrow. So there will suddenly be a different ecosystem here that grows bigger and bigger and bigger and at some point this thing on the side for all these like legacy companies will be too small to matter.”

So if the goal is to digitize the worlds assets, how does Avalanche begin on that path? To start, an important feature to note is that Avalanche is compatible with Ethereum’s programming language, Solidity, and can be used to deploy custom private or public blockchains as “subnets.” These “subnets” can be used to build application specific blockchains spanning permissioned (private) and permissionless (public) deployments. This gives developers the ability to build arbitrarily complex digital assets with custom rules, covenants, and riders. This would allow parties like governments or private businesses to add a subnet in the Avalanche ecosystem and easily harness the power of blockchain technology while maintaining the flexibility to do things such as designing the individual blockchains of a network in such a way that allows them to remain compliant with rules and regulations in a certain geographic area or meet license, tax, and other political obligations. The implications of this should not be under estimated or under appreciated. This idea opens up an entirely different world because now you can program your network. In the same way that Ethereum opened up the programmability of the asset, Avalanche aims to open up the programmability of the network. There has already been tons of development and activity in the Avalanche ecosystem as there have been 358 projects launched so far in just over 13 months at the time of this writing. This is a great sign of ecosystem health and growth. Avalanche and Ava Labs have very ambitious goals for their project and how they want to impact the global financial and cryptocurrency landscape. So lets take an even deeper dive into exactly how they have set out to solve the various distinct problem sets that they aim to conquer.

Avalanche has taken a very unique approach to solving a variety of common pain points within the blockchain and financial industry. Off the bat, one thing that sets them apart is the fact that Avalanche actually features 3 built in blockchains: the Exchange Chain (X-chain), the Platform Chain (P-chain), and the Contract Chain (C-chain). All three of these blockchains are validated and secured by a special subnet called the Primary Network. All members of all custom subnets must also be a member of the Primary Network. All three of these chains are also built and optimized for specific use cases. The Exchange Chain, or X-Chain, is a platform for creating and trading crypto assets including $AVAX. It is used for the creation, management, and transaction of tokens. The Exchange Chain uses the Avalanche Consensus Protocol which is described in detail here. The Platform Chain, or P-Chain, coordinates transaction validators, tracks active subnets, and enables the creation and management of new subnets or custom blockchains. The P-Chain utilizes the Snowman Consensus Protocol. The Contract Chain, or C-Chain, facilitates the creation of smart contracts which are necessary for a variety of popular use cases such as DeFi and NFT’s. The C-Chain is EVM compatible which allows Ethereum developers to easily move projects over to Avalanche. Similar to the Platform Chain, the Contract Chain also uses the Snowman Consensus Protocol.

Avalanche doesn’t stop here when it comes to implementing different approaches to solving the variety of problems faced by Layer 1 blockchains. As briefly mentioned another of these unique approaches comes in the form of their consensus protocol. The main Primary Network and the Exchange Chain (X-Chain) use the Avalanche Consensus Protocol, which incorporates a DAG (Directed Acyclic Graph) structure and is suited for a more general use case. According to The Avalanche Platform Whitepaper published by Ava Labs on 06/30/2020, “…the protocol operates by repeated sampling of the network. Each node polls a small, constant-sized, randomly chosen set of neighbors, and switches its proposal if a supermajority supports a different value. Samples are repeated until convergence is reached, which happens rapidly in normal operations.” An example of this would be when a transaction is created by a user and sent to a validating node, which is a node participating in the consensus procedure, and then propagated out to other nodes in the network via gossiping. So what happens if that user also issues a conflicting transaction, aka a double-spend? To choose amongst the conflicting transactions and prevent the double-spend, every node randomly selects a small subset of nodes and queries which of the conflicting transactions the queried nodes think is the valid one. If the querying node receives a supermajority response in favor of one transaction, then the node changes its own response to that transaction. Every node in the network repeats this procedure until the entire network comes to consensus on one of the conflicting transactions. Because this method does not make use of Proof of Work mining it avoids exorbitant energy expenditure and subsequent leak of value in the ecosystem. It also is able to do all of this and still boast an extremely impressive 4500 transactions per second per subnet and a finality clock at less than a second.

The Platform Chain (P-Chain) and Contract Chain (C-Chain) make use of The Snowman Protocol which is essentially just a linearized version of The Avalanche Consensus Protocol so it can fit the needs of the Ethereum Virtual Machine while being optimized for smart contracts and high throughput. The stated goal of The Snowman Protocol is to combine the best properties of classical consensus protocols with the best properties of Nakamoto consensus. This facilitates a much more scalable and decentralized platform than many of Avalanche’s competitors. Ava Labs says that, “The Snowman Protocol gives Avalanche the ability to scale without incurring fundamental tradeoffs and gives us best-in-class system decentralization.” The reason for this is that it can scale to tens of thousands or millions of nodes, without delegation to subsets of validators, which allows every node to fully validate. This point is again hammered home in their whitepaper when they state, “First-hand continuous participation has deep implications for the security of the system. In almost every proof-of-stake protocol that attempts to scale to a large participant set, the typical mode of operation is to enable scaling by delegating validation to a subcommittee. Naturally, this implies that the security of the system is now precisely as high as the corruption cost of the subcommittee. Subcommittees are furthermore subject to cartel formation.”

So now that we have established that Avalanche consists of 3 built in blockchains and that it uses a unique consensus protocol, you might be wondering what is a subnet? A subnetwork, or subnet, is a dynamic set of validators working together to achieve consensus on the state of a set of blockchains. Each blockchain is validated by one subnet, and a subnet can validate arbitrarily many blockchains. Each validator also may be a member of arbitrarily many subnets. Again an important note here is that each subnet decides who may enter it which allows you to set up private subnets. This is fascinating because it means a subnet can require its constituent validators to meet specific requirements for regulatory purposes such as holding a necessary license related to financial management in that jurisdiction, or even KYC and AML screening.

In order to create a new subnet or to join a subnet, one must pay a fee denominated in $AVAX. There is one special subnet called the Default Subnet which is validated by all validators. In order to validate any subnet, one must also validate the Default Subnet. The Default Subnet validates a set of pre-defined blockchains, including the blockchain where $AVAX lives and is traded. By validating your own subnet you are also contributing to the validation of the entire network via the primary 3 chains. Avalanche says that the subnet model offers a number of advantages. These advantages include the fact that if a validator doesn’t care about the blockchains in a given subnet, it will simply not join that subnet. This reduces network traffic, as well as the computational resource requirements of validators. In contrast, other popular blockchain projects require every validator to validate every transaction, even the ones they don’t care about. By allowing subnets to decide who may enter them and enabling the creation of private subnets, each blockchain in the subnet can be designed to be validated only by a set of trusted validators.

It seems like Avalanche has used a variety of new and impressive ideas compared to some of its other notable competitors in the cryptocurrency space. So you might be wondering do these innovative ideas come with any concerning security tradeoffs? According to Ava Labs the answer to that question is a resounding no. Avalanche is designed to be robust and achieve high security. Classical consensus protocols are designed to withstand up to f attackers, and fail completely when faced with an attacker of size f + 1 or larger. Although highly unlikely at this point with Bitcoin specifically, Nakamoto consensus provides no security when 51% of the miners are Byzantine. In contrast, Avalanche provides a very strong guarantee of safety when the attacker is below a certain threshold, which can be parametrized by the system designer. According to Ava Labs, “Avalanche provides graceful degradation when the attacker exceeds this threshold. It can uphold safety (but not liveness) guarantees even when the attacker exceeds 51%. It is the first permissionless system to provide such strong security guarantees.” This system is also designed to provide unprecedented decentralization by implying a commitment to multiple client implementations and no centralized control of any kind. The ecosystem is purposely designed to avoid divisions between classes of users with different interests. Specifically, there is no distinction between miners, developers, and users.

Another important area of concern for blockchains is governance. So how does Avalanche approach governance? In their White Paper, Ava Labs says, “$AVAX is a highly inclusive platform, which enables anyone to connect to its network and participate in validation and first-hand in governance. Any token holder can have a vote in selecting key financial parameters and in choosing how the system evolves.” Participants are able to vote on changes to the network and settle network upgrade decisions democratically. This includes factors such as the minimum staking amount and minting rate, as well as other economic parameters. Any user can propose an improvement to the protocol and if there is social consensus the system will adopt that proposal. Because of this the platform can effectively perform dynamic parameter optimization through a crowd oracle. However, Avalanche does not allow unlimited changes to arbitrary aspects of the system. Instead, only 320 pre-determined parameters can be modified via governance, rendering the system more predictable and increasing safety. On top of this, all governable parameters are subject to limits within specific time bounds which helps ensure that the system remains predictable over short time ranges. These are highly innovative approaches to complex problems and the case studies that play out within the Avalanche ecosystem over the coming years will provide invaluable information as to how to best optimize for governance on the blockchain.

In order for systems like this to grow exponentially, obviously they have to be engineered with economic incentives and sound monetary policy. So lets take a quick look at the Tokenomics of $AVAX. The native token, $AVAX, is capped-supply, where the cap is set at 720 Million tokens. 360 Million tokens were made available at mainnet launch. The Ava Labs team and foundation were also given 20% of all the coins. Unlike other capped-supply tokens which bake the rate of minting perpetually, $AVAX is designed to react to changing economic conditions. In particular, the objective of $AVAX’s monetary policy is to balance the incentives of users to stake the token versus using it to interact with the variety of services available on the platform. Participants in the platform collectively act as a decentralized reserve bank. The levers available on Avalanche are staking rewards, fees, and airdrops, all of which are influenced by governable parameters. One noteworthy observation is that the transaction fees on the network are paid in $AVAX and then subsequently burned. On the C-Chain, fees are structured dynamically in a similar fashion to EIP-1559. Another thing to note is that Ava Labs pre sold 127 Million coins upon launch which are subject to an unlocking period. This is something to keep in mind when considering purchasing $AVAX as it is always possible that early investors may want to dump some coins and realize the profits that have been locked up for some time on, or soon after, those unlocking dates.

The Avalanche Foundation also rolled out a $180 Million incentive program which has enticed many interesting projects such as Aave and Curve Finance to begin operating on their platform. Avalanche is designed to be a universal and flexible infrastructure for a multitude of blockchains/assets, where the base $AVAX is used for security and as a unit of account for exchange. The system is intended to support, in a value-neutral fashion, many blockchains to be built on top. Most blockchains today are unable to support business applications, such as trading or daily retail payments. Ava Labs declares that, “It is simply unworkable to wait minutes, or even hours, for confirmation of transactions. Therefore, one of the most important, and yet highly overlooked, properties of consensus protocols is the time to finality. The Snowman Protocol reaches finality typically in ≤ 1 second, which is significantly lower than both longest-chain protocols and sharded blockchains.”

There is much to digest when trying to understand what sets Avalanche apart from other competitive Layer 1 blockchains. We have talked about Avalanche’s use of three built in blockchains, subnets, and unique consensus protocols. We have also touched on their approach to security, governance, and monetary policy. But to me what gives Avalanche a tremendous chance to succeed is its narrow focus. This can be best summarized by the answer given from Founder and CEO of Ava Labs Emin Gün Sirer in an August 31st interview on the Scott Melker YT channel when he was asked, what exactly are you building? Gün Sirer responded by saying, “It takes a while for people to realize this is not a winner takes all game… It was many years ago when I realized we were going to move to a multi chain world. It is going to be a system of systems where certain chains are specialized, and either for technical purposes or because of the social environments surrounding them, they will wind up having cornered the market in certain areas. And thats when it hit me… For blockchains, the killer app isn’t just competing with the US dollar, it isn’t replacing Euros, it is not just programming a giant world computer out there Ethereum style, it is creating and transferring value… It sounds kind of obvious now, but when I realized this it wasn’t really shared at all. Our vision with Avalanche is to digitize all assets… I don’t know of anybody else who has the technical wherewithal to actually support the diversity of assets out there, and the diversity of legal jurisdictions you need to operate in, the compliance you need to deal with, in order to be able to actually digitize and allow people to transfer these assets worldwide.” Only time will tell if the team at Ava Labs is able to lead Avalanche’s development to a place that meets its lofty goal of “Digitizing The World’s Assets.” However, what is unquestionable is that they are off to a great start so far, have a highly impressive team and are definitely a project worth paying attention to over the coming months and years in the blockchain and cryptocurrency industry.