What is Avalanche (AVAX)?

Avalanche is a smart contract-capable platform built to maximize blockchain scalability.

Ethereum revolutionized the concept of blockchain utility by introducing smart contract functionality to the blockchain, but it has been criticized for its high cost and low speed of computation. Avalanche’s design is meant to retain the ability to run smart contracts and build decentralized applications (dapps) while improving on scaling—or the ability for many users to efficiently operate on the network.

To handle more transactions per second (tps), Avalanche uses a unique take on the Proof of Stake (PoS) consensus mechanism that capitalizes on a random sampling of the network’s nodes to validate transactions. It also divides its structure into three separate chains, each with its own dedicated function, and creates the opportunity for scaling through subnetworks of validators that can operate independently and thus more efficiently.

As one of the projects that gained significant momentum—and investment—through the course of 2021, Avalanche has sought to make itself indispensable in the decentralized finance (DeFi) space. It has partnered with the major DeFi protocols like Curve Finance, Aave, and SushiSwap in order to increase its adoption.

Avalanche’s native utility coin, AVAX, is used as a payment method, to process transactions, for securing the network through staking, and in the platform’s governance.

AVALANCHE ESSENTIALS

• Avalanche is a smart contract enabled layer 1 blockchain platform that aims to improve network efficiency, speed, and cost-effectiveness.
• In order to accomplish efficiency, speed and cost goals, Avalanche uses a family of novel protocols called “Snow” which use random validator sampling to reach consensus on the network.
• By creating the opportunity for developers to build their own purpose-built subnetworks, Avalanche allows for scaling that makes dapps and DeFi more approachable for an increased number of users.

How was Avalanche developed?

The Avalanche whitepaper was first published in 2018 by the pseudonymous group Team Rocket. This was an apparent nod to the antagonist group in the Pokémon franchise, following in the footsteps of Bitcoin’s founder who called him-/her-/themselves Satoshi—the Japanese name for the protagonist of the franchise.

Soon after the whitepaper was published, three computer scientists—led by Emin Gün Sirer—founded Ava Labs, the company that created and continues to develop the blockchain and its ecosystem. Sirer holds a PhD in computer science and built the first-ever Proof of Work (PoW) cryptocurrency called Karma—years before Bitcoin was created.

Mainnet was officially launched in September 2020 and, prior to this, Ava labs raised $18 million from private investors including big names in crypto venture capital such as Galaxy Digital.

Another $42 million was raised through a public sale of AVAX tokens in July 2020. The project has continued to draw large sums of investment for its project, most notably in September 2021 when the Avalanche Foundation (who handles the project’s finances and acts as a startup accelerator for the ecosystem) announced $230 million in funding led by Polychain and Three Arrows Capital.

How does Avalanche work?

Architecture

The Avalanche platform uses three chains to divide its processes and maximize its efficiency:

• Exchange Chain (X-Chain) – Allows for the creation and trading of digital assets (like AVAX) in the ecosystem.
• Platform Chain (P-Chain) – Enables the creation of subnets and the rules governing them.
• Contract Chain (C-Chain) – Allows smart contracts to be created and operated on Avalanche and is the chain on which dapps can be found.

Subnets

Subnetworks (or “subnets”) are specialized chains (either public or private) running alongside Avalanche’s blockchain and secured by groups of specific validators. When a developer creates their own subnet, they can make up the rules that govern it, such as determining how many validators are allowed or limiting who can run a node. Importantly, all subnet validators must also validate Avalanche’s main chain.

By dividing up its platform into these various subnets which include some (but not all) validators, the team is able to reduce the complexity of the network to allow for different niche chains to exist simultaneously.

Snow consensus mechanism

Avalanche operates its own consensus mechanism, known as the Snow consensus protocol, that is intended to balance transaction speed, network capacity, decentralization, energy efficiency, and security, using Proof of Stake (PoS) as its foundation.

The Snow consensus protocol is considered “leaderless,” meaning that no one blockchain node needs to be the virtual leader who defines a goal for the group. Instead, when a validator node receives a transaction from a user, it asks (or “samples”) random neighbour validators if they agree.

This process repeats with the neighbour’s neighbour validators, and so on, until the entire network comes to a consensus on the validity of the transaction. A set of steps of the Snow protocol are called Slush, Snowflake, and Snowball—with each building on top of the prior one until it turns into an avalanche, which increases conviction and confidence in the state of the blockchain.

How is AVAX used?

AVAX is primarily used for decentralized peer-to-peer (P2P) payments, securing the network via staking, and for governance.

The platform’s development team claims that the network can handle 4,500+ tps, which would put it on par with financial giant Mastercard, making P2P transactions with AVAX both convenient and inexpensive.

Because the consensus protocol is based on Proof of Stake, AVAX must also be staked and used by validator nodes to process transactions and secure the network. Rewards for validators are paid in AVAX.

Token distribution

AVAX’s total supply is capped at 720 million tokens. 360 million tokens were available at launch in 2020 and were subject to variable vesting schedules between 1 and 10 years. Of this 10% was reserved for members of Ava Labs, 10% was sold as a part of public sales, 9.26% was allocated to the Avalanche Foundation for marketing and incentive programs, 7% was allocated to individuals and organizations that were part of developing the network, 6% was a part of private/seed sales, 5% was given to strategic partners, and ~3% was part of the airdrop and TestNet incentive program.

The plan is for the remaining 360 million AVAX to be minted over time at a rate that can be redefined via platform governance. Minting is accomplished through validators putting up a stake and participating in its consensus protocols.

Of note, AVAX used for transaction fees are burned, a process meant to offset the inflation of the minting process.

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