7 min readAvalanche is one of the protocols that cryptocurrency price tracker CoinMarketCap believes could compete with Ethereum. Unique features, primarily a multi-pronged approach to overcoming the blockchain trilemma and the ability to set up custom blockchains for individual projects, have helped it break into the top 10 protocols by total value locked and attract attention from some of the finance industry’s biggest players including Deloitte, JP Morgan and Citi.
Key Figures
History
In May 2018, an anonymous group calling itself ‘Team Rocket’ published a whitepaper outlining the idea for Avalanche. Shortly afterward, Emin Gün Sirer, Kevin Sekniqi, and Ted Yin founded AVA Labs to develop and launch the protocol. Sirer was a professor of computer science at Cornell University in upstate New York, while Sekniqi and Yin were PhD students. Sirer was already a blockchain pioneer, having created Karma, a virtual currency designed to support peer-to-peer file sharing, in 2003. By using a proof of work (PoW) consensus mechanism, Karma paved the way for bitcoin and other PoW cryptos.
After releasing multiple testnets (networks used to test the blockchain) between April and August 2020, the Avalanche mainnet (the functioning blockchain) went live in September of that year.
Avalanche has closed four rounds of funding to date. The first, a private sale of the native token, AVAX, in June 2020, raised $12 million. This was followed by a public sale a month later, which generated $42 million in just four and a half hours. The protocol held another private sale in June 2021, raising $230 million from high-profile crypto venture capital funds including Polychain and the now-defunct Three Arrows Capital. The latest and biggest round brought in $350 million in April 2022, valuing Avalanche at over $5 billion.
The supply of AVAX is capped at 715 million to make it anti-inflationary, with 447.64 million in circulation as of December 3rd 2024. The token serves several purposes, including settling transaction fees and staking to participate in the protocol’s consensus mechanism (covered in the next section).
AVAX peaked at more than $130 at the end of 2021, driven by a partnership with big four accounting firm Deloitte, a report published by Bank of America citing Avalanche as a viable alternative to Ethereum, and crypto custodian Bitgo announcing it would support the token. But the price fell below $20 in 2022 as the bear market, sometimes referred to as a ‘crypto winter’, took its toll on the protocol’s user activity and total value locked (TVL), a metric used to measure the volume of funds deposited in decentralised finance (DeFi) apps.
AVAX experienced a bull market again in late 2023, although it was less potent this time, rallying to $60 by March 2024. Catalysts included partnerships with JP Morgan and Citi to tokenize real-world assets and a recovery in TVL and developer activity, another key metric of a protocol’s health because it signals demand for apps among users.
According to DefiLlama, Avalanche is currently ranked 8th in terms of TVL, with $1,47 billion (as of 27 November 2024. Its most popular dapps are Benqi ($692 million TVL as 27 November) and Aave ($500,6 million TVL as of date), liquidity platforms that allow users to lend, borrow and earn interest on their holdings.
Protocol
Avalanche is unique because it consists of three chains, a model designed to overcome the limitations of the blockchain trilemma (the challenge of achieving scalability, security and decentralisation):
Digital assets, including AVAX, are created and transacted on the exchange chain (X-Chain)
Smart contracts, digital agreements that automatically fulfil when certain conditions are met, execute on the contract chain (C-Chain)
The platform chain (P-Chain) coordinates validators and subnets
Avalanche’s consensus mechanism, the Avalanche Consensus Protocol (ACP), operates on the X-Chain. ACP is a variation of the proof of stake mechanism used by Ethereum and other popular networks. When a transaction takes place, one validator selects a group of validators to decide whether it should be accepted or rejected. This process, known as repeated random subsampling, continues until the protocol achieves the required degree of consensus. While this feature enhances speed and scalability, it also bolsters security because hackers need to remove 80% of the network’s validators to gain control. The contract and platform chains use a modified version of ACP called the Snowman Consensus Protocol, which is more suitable for smart contracts.
To participate in ACP, validators have to lock up or stake at least 2,000 AVAX (worth $85,210 as of 27 November) for a minimum of two weeks and a maximum of a year. They must also maintain an uptime of 80%. The higher the value staked, the better chance a validator has of getting chosen and the greater the rewards earned- up to 7.65% of the total amount, according to the Avalanche website. These rewards are the only way new AVAX come into circulation. However, unlike other PoS protocols, validators don’t receive transaction fees, which are ‘burned’ (removed from circulation) to preserve AVAX’s scarcity.
Another unique feature of Avalanche is the ability for users to build custom blockchains. Known as subnets, they improve scalability by diverting activity from the main chain, referred to as the Primary Network, which reduces congestion and keeps transaction fees low. For instance, a DeFi app could launch a chain with its own fee structure and compliance requirements. As of 27 November 2024, the protocol hosts 139 subnets, including the Primary Network.
CoinShares Analysis
Strengths
Blockchains like Ethereum and Bitcoin use Merkle Trees to organize data, but as the blockchain grows, this approach becomes increasingly slow and inefficient. Managing state efficiently is a major challenge for scaling blockchains to a global level. Firewood addresses this issue by minimizing the costs associated with inserting, updating, storing, and deleting Merkle-based data. Unlike traditional systems that rely on generic key-value stores like LevelDB or RocksDB, Firewood uses a Trie structure directly as an on-disk index, eliminating the need for compaction. Additionally, Firewood automatically clears outdated data without requiring manual pruning.
Weaknesses
Currently, only about 57% of the token supply is in circulation, while a relatively high inflation rate of 7% poses challenges for investors seeking returns above inflation. The limited float percentage also leads to increased token price volatility.
Opportunities
The Etna Upgrade introduces significant advancements through the adoption of various Avalanche Consensus Proposals (ACPs), allowing for the creation of independent Layer 1 blockchains that can operate with any virtual machine, such as Ethereum Virtual Machine, Solana Virtual Machine, MoveVM, and HyperVM. Etna also introduces a pay-as-you-go model for validation, where validators pay a flexible fee on the P-Chain and are no longer required to stake 2,000 AVAX or validate the Primary Network. These Layer 1 chains remain interoperable and can adopt permissionless validation, significantly lowering the financial and operational barriers for launching and maintaining an Avalanche Layer 1 blockchain.
Threats
Avalanche might be losing momentum and the narrative needed to drive further developer and user adoption, which could hinder its broader growth and adoption.
