Avalanche (AVAX) ecosystem: An overview

Avalanche is a smart-contract-powered, next-generation blockchain and is often considered a competitor to Ethereum. The Avalanche blockchain and platform for hosting decentralized applications (DApps) and nonfungible tokens (NFTs) are efficient and fast, and the Avalanche ecosystem and its native
AVAX
$43.80
cryptocurrency have seen notable interest from developers and investors. This article delves into Avalanche’s AVAX and the Avalanche ecosystem, touching on the project’s history, AVAX governance and voting, tokenomics, staking and the project’s future potential. 

What is the Avalanche platform?

Avalanche is a platform somewhat akin to its competitors other than Ethereum, including Cardano and Solana. The platform aims to solve blockchain technology’s issue of achieving an effective combination of speed, scalability, security, decentralization and interoperability. 
Avalanche is an ecosystem for building DApps, creating tokens and developing blockchain-based games. Avalanche allows projects to build their own customized and interoperable independent chains and develops bridges for Ethereum and other chain compatibility. The project hopes to prove its network can deliver lightning-fast transactions at scale.
AVAX is Avalanche’s native coin and has multiple use cases, such as paying for network transactions, participating in governance, staking, and acting as a store of value. AVAX’s market share increased by 275% in 2023, and the network crossed the $1-billion total transactions processed threshold. 

A brief history of Avalanche

In May 2018, a group of developers, dubbed “Team Rocket,” shared an article introducing the premise for the Avalanche protocol. A short time later, in 2019, Turkish-American computer scientist Emin Gün Sirer founded Ava Labs to create Avalanche. 
The project raised $42 million in an initial coin offering (ICO) in 2020, followed by a venture funding round that raised $230 million in 2021. Major investors in Avalanche include Polychain and Three Arrows Capital. Avalanche’s cryptocurrency ecosystem development led to the mainnet launch in September 2020.

How does Avalanche work?

Avalanche aims to solve some of the problems faced by blockchain technology with three novel features. It has an alternative proof-of-stake (PoS) consensus mechanism, uses subnetworks, and its mainnet consists of three main blockchains rather than one. 

Consensus

Avalanche consensus builds on classic PoS and works by turning each validation node into an independent voting station that decides if a new transaction is rejected or accepted. 
The consensus mechanism then uses “repeated random subsampling,” where a node selects a small group of other validators to make a decision until the network achieves a threshold of confidence in the transaction. 
In this way, Avalanche’s consensus protocol is designed for scalability while ensuring a very low margin of error. Avalanche’s consensus also has lower energy consumption compared to many other chains, as nodes are only active when they need to vote on a transaction. 

Subnetworks

Avalanche developers can launch their own customized blockchains with their own rules. Consensus for these independent chains is achieved via subnetworks, or subnets, groups of nodes selected to validate sets of blockchains. Subnetworks also participate in Avalanche mainnet validation. The feature is comparable to other blockchain scaling solutions, such as Polkadot’s parachains and Ethereum’s consensus layer upgrade.

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Three layer-1 built-in blockchains

The three blockchains at the core of the Avalanche ecosystem are its Exchange Chain (X-Chain), where assets are created and exchanged, including AVAX; the Contract Chain (C-Chain), where Avalanche smart contracts are created and executed; and the Platform Chain (P-Chain), which coordinates validators and subnets. Tokens move between the three chains to achieve network functionality. 
The three chains make Avalanche a layer-1 solution, in contrast to layer-2 solutions that validate transactions off-chain using rollup mechanisms to achieve faster processing speeds. 

Cross-chain functionality in Avalanche

The Avalanche Contract Chain (C-Chain) is based on the Ethereum Virtual Machine (EVM) and enables cross-chain interoperability for projects and tokens built on Avalanche. The platform also uses Solidity for its smart contracts, like Ethereum, and has multiple cross-chain bridges. 

Avalanche network scalability

The three layer-1 chains of Avalanche, combined with its proprietary consensus mechanism, give the blockchain speed and scalability. Avalanche also uses a directed acyclic graph (DAG) structure for its X-Chain that handles token transactions, making it non-linear and, in turn, faster. 
Avalanche says it’s able to process 6,500 transactions per second (TPS). In comparison, Ethereum is currently processing around 15 TPS, but once all of Ethereum’s upgrades are completed, it promises much faster TPS speeds. 

Governance

Holders of AVAX can participate in network governance, and any network node can issue a governance proposal. Avalanche uses on-chain voting for certain critical network parameters, such as staking amounts and times, its minting rate and its transaction fee amount. It doesn’t use voting for all decisions, making it only partly decentralized. 

AVAX staking mechanisms and liquidity pools

AVAX holders can stake their coins to validate transactions on the network in return for newly minted AVAX coins. Validator rewards are based on proof-of-uptime and proof-of-correctness. 
Network validators don’t receive Avalanche transaction fees; instead, fees are burned to increase AVAX’s scarcity.
Avalanche is gaining a reputation for its healthy validator incentives, having paid over $275 million in AVAX to well over 1,000 validators for the network in 2023.

AVAX tokenomics

There is a capped supply of 720 million AVAX tokens. Half of all tokens were created and distributed when the mainnet launched in 2020. 10% went to the Avalanche team, 9.26% to the foundation, and 5% to strategic partners, with the remaining to the ICO recipients and elsewhere for development. The remaining supply is continuously minted as staking rewards.  

Avalanche C-Chain applications 

DApps, decentralized finance (DeFi) applications, NFTs and games created by developers on the Avalanche blockchain live on the C-Chain. These projects include the Trader Joe and WooFi decentralized exchanges, the GMX prediction market and the cross-chain messaging system Synapse. 
There’s also the omnichain project Stargate Finance for cross-chain liquidity transfers, which added support for Avalanche and may give the platform further traction in 2024. As a comparison to the 500+ DApps on Avalanche, Ethereum and BNB Smart Chain host around 5,000 DApps each. 

Avalanche ecosystem development

AVAX ecosystem development continues. Avalanche is building two further key pieces of technology, HyperSDK and Avalanche Warp Messaging (AWM), that use elastic subnets. HyperSKD could increase throughput, and AWM is for better interoperability. Avalanche hopes the developments will further encourage the adoption of its network by developers. 
In November 2023, the ecosystem also confirmed that developer Colony Lab would commit $10 million in AVAX to support the growth of the network by creating validators and investing in its Colony Avalanche Index (CAI). CAI is a yield-bearing token index on the network. 
Avalanche also has partnerships with Amazon Web Services and Tencent Cloud and performed a proof-of-concept demonstration with JPMorgan and Apollo, all of which are indications of mainstream interest. 
The platform’s launch of inscription (ARC-20) tokens in June 2023, following Bitcoin’s lead with Bitcoin Ordinals and the BRC-20 standard, has also garnered substantial traction. There are now over 100 million inscriptions on the Avalanche blockchain. Over a five-day period in December 2023, Avalanche users spent over $4 million in transaction fees to create and transfer tokens and NFTs via inscriptions. 

The future of Avalanche

Between November 2023 and January 2024, AVAX’s price rose from $11.32 to over $48 before dropping back to around $32, highs not seen since 2022. This surge was likely, at least in part, spurred by the cryptocurrency market recovery. Still, experts and investors are reasonably bullish about both the AVAX coin and Avalanche as a layer-1 blockchain.  
Avalanche is becoming popular for its throughput and potential to scale, its novel consensus mechanism and robust security, and its flexibility and customization for developers creating DApps. Avalanche’s blockchain speed is faster than Ethereum’s and has lower transaction fees, but Ethereum is more decentralized and has a significant headstart in the market. 
Ethereum’s proven security and extensive ecosystem of developers and DApps make it the most popular choice for smart contract-powered development. However, crypto proponents are watching the likes of Avalanche, Cardano, Solana and other new-generation blockchains closely to see which one of these will achieve the greatest adoption in the future.