Avalanche: An Ethereum Replacement? The AVAX Deep Dive
Have you tried to buy an NFT lately? Ethereum users have been crippled by high gas fees and slow transactions.
One of the original dreams of cryptocurrencies was transactions. That was the “point” of internet money. Yet, making a transaction on Bitcoin or Ethereum takes ages. And costs you a fortune. Major NFT traders like the Defiant have spent $45K on gas fees in one year.
While maximalists want to sit on their hands and wait for ethv2 to arrive, others are doing something about it. Emin Gun Sirer, a professor of Computer Science at Cornell University, is one.
Some people with substantial capital agree with what he is doing. His crypto, Avalanche, has a $28B market cap. For comparison, Zillow has a $16B market cap. Upstart has a $12B market cap. Avalanche is as big as Zillow plus Upstart, and many of you know very little about it.
One of the reasons Avalanche has gone under the radar is that so-called, “layer 1” competitors to Bitcoin and Ethereum seem “boring.” A lot of the attention stays with Bitcoin and Ethereum.
But players like Solana, Cardano, and Avalanche are coming for Ethereum’s crown as the king of the “programmable” blockchains.
Indeed, when looking at performance of cryptocurrencies in 2021, after the gaming cryptos SAND, AXS, and MANA, the “ethereum killers” MATIC, LUNA, FTM, SOL, and AVAX were the top performing assets of the year.
One of these platforms is going to launch a generation of new applications that eat entire industries, just as software built atop the internet ate industries over the last twenty years.
So let’s take a look at one of the hottest players on the market. Avalanche has one of the best technologies, teams, and stories, in addition to its phenomenal recent performance. We want to stay on top of companies like this.
Chamath Palahipitiya recently predicted that finding players like this that will eat away at the traditional payment rails of Visa and Mastercard represents the “greatest spread trade of this generation.” The young billionaire usually has a good idea of what to pay attention to.
So you don’t miss out on this topic. Join me as we explore:
The Visionary Leader
The Tech Behind the Platform
Can Avalanche “Kill” Ethereum?
The Visionary Leader
One of the most unique aspects of Avalanche is the gravitational pull exerted by its CS professor leader, Emin Gun Sirier.
I may be biased, as my father is a professor of Computer Science, but, whatever the case, it can be agreed that these folks tend to prioritize technological progress first and foremost. That is exactly the type of person you want running your layer 1 blockchain.
And Emin is no normal academic.
https://twitter.com/el33th4xor/status/999230726942920704
He is not just an academic setting out to write papers, his goal is to change the world. How is Avalanche trying to change the world?
In March, 2019, Emin let us in on his motivations, with a tweet about credit cards.
https://twitter.com/el33th4xor/status/1104021393782525952
The tweet packs a lot of punch. Let’s break it down. As the video shows, crooks have concealed technology atop the ATM to steal your credit card information. This has happened to both me in Peru in 2015 and my wife in Ireland in 2017. These things happen regularly. Emin’s tweet is from 2019.
The fact is: credit cards are not secure technology. They share your “private key” in crypto-land. That is one of the primary reasons we want a centralized entity mediating them. Both my wife and I were protected because we worked with our credit card companies to cancel our cards, and they refunded the fraudulent purchases.
But being centralized is problematic for a litany of reasons. Not least of which because centralized authorities can revoke access to the system whenever they want. Centralized rails are the tools for Visa and Mastercard to have a combined $1 trillion market cap, not to empower the impoverished to get the benefits of financial products.
So, Emin has set out a bold vision for what Ava should be. The goal is to create a decentralized alternative to credit cards: a high speed, low cost, eco-friendly blockchain. Emin wants to create a blockchain that changes the world.
There are four key elements to the plan of how Emin hopes to achieve this:
Support many different types of coins
Enable many scripting languages
With many different platforms coexisting
And stakers benefiting from the value generated by these coins
Let’s dig in to understand each.
“Support many different types of coins.” Emin’s vision is to create “the internet of money.” This would be a single network powered by the core native Ava token. That provides the core system security. Then tokens can be created for new asset classes atop the core token.
“Enable many scripting languages.” Like Ethereum and other smart contract oriented blockchains, Avalanche aims to provide an internet-based computer. This computational power encoded in public chains can enable large markets like NFTs, play-to-earn gaming, and DeFi that we see on Ethereum today.
For Avalanche, this happens through scripting languages. They capture the unique properties of asset classes. For example, real-estate obsys different rules compared to tokens and gold.
“With many different platforms coexisting.” The idea is there can be many platforms. They will be differentiated by nodes. One node might provide extra storage, another privacy guarantees, etc. Avalanche aims to enable a marketplace of nodes that provide additional, differentiated services.
“And stakers benefiting from the value generated by these coins.” Fundamentally, Avalanche values the decentralized ideals of blockchain. To reward those people storing their value in the currency through “staking pools” to enable dapps computation, there are rewards, similar to many other cryptocurrencies.
So now that we understand a bit about Emin and what he is after, how does Avalanche go about achieving its mission?
The Tech Behind the Platform
At the highest level, Avalanche is a platform for creating custom blockchain networks and decentralized applications. The team is building it like any other modern technology: it is evolving. They are constantly releasing new features to help achieve its goals.
The headline features to note as the platform is today sit across the transaction and tokenlayers.
First, on the transaction front, Avalanche has a transaction throughput of 4.5K transactions per second. Solana is currently doing 2.8K transactions per second. So Avalanche is super fast.
Of course, Visa and Mastercard do about 10x Avalanche. But Avalanche has not reached a place where it is currently maxing out its transactions per second.
Second, on the token layer, its native AVAX token has a capped supply of 720 million. Those tokens are used for staking and paying network transaction fees.
So those are the headlines, but what is the deal with decentralization?
The Staking Setup
The big complaint with Solana is that it is not decentralized. One way to measure this is: how many unique people are spending money to verify transactions on the network? These are known as validators, and they are the people who get the staking rewards we mentioned earlier.
Solana has about twice the market cap of Avalanche and has 1,359 validators. Avalanche has 1,151 validators. Ethereum, with 5,272 nodes, is even more decentralized. But overall, for its market cap, Avalanche has a fairly high number of validators.
Furthermore, it is growing fast. It has $26B of locked-in value in its ecosystem. In August, that number was $10B. The growth has been incredible.
Avalanche, can we say, is paying for that. Whereas Solana has a 5.97% reward, Avalanche’s is at 9.32%. That is, however, below Polkadot, Binance Smart Chain, NEAR, and Cosmos.
So, to summarize the technology so far: it is a fast network, with a capped supply, that is pretty decentralized. All good, but specifically what makes its technology special?
Multiple Blockchains
Avalanche has a unique architecture. At its core is a sub-network known as the subnet. This is a group of transaction validator nodes that coordinate to reach consensus.
What’s unique about Avalanche is that they do so across three built-in blockchains. It has one blockchain for exchange, another for contracts, and a final for creating and trading crypto assets.
The chain for contracts is particularly interesting. It enables the creation of new, additional subnets. These subnets can have different requirements and properties from others. For instance, one could imagine a subnet that requires KYC/AML verification to better comply with regulatory requirements.
These three blockchains come together to form the AVM, the Avalanche Virtual Machine. The key thing to round out this section with is that Avalanche is built with flexibility. Consensus can be driven using multiple methods, even the Directed Acyclic Graphs of IOTA or something new in the future.
The DeFi Applications
Avalanche was designed to enable fast building and deployment of decentralized apps (dapps) atop the blockchain. Since the main language Smart Contracts developers are used to is Solidity, they can use that to program atop Avalanche.
There are many traditional finance use cases that Avalanche is being built in mind to enable, including Borrowing & Lending, Derivatives, Insurance, Payments, and Trading. This use case focus has paid off to the tune of nearly $12B locked in value of Avalanche specifically for DeFi.
Like everything with Avalanche, the growth there has been incredibly fast.
Nearly 25% of this value is in borrowing & lending using the Aave protocol. Aave is the largest decentralized lending protocol, which allows users to borrow or lend crypto assets. Aave is also deployed on Ethereum and Polygon.
The second biggest bucket is Trader Joe. Trader Joe is a decentralized exchange. It has nearly $2B of total locked in value. For comparison, Uniswap, Ethereum’s leading player, has $8B.
The third large bucket is the Avalanche Bridge, which helps move money from Avax and into other currencies. There is over $1B total locked in value. It is called BenQi. Transaction fees are much lower than Ethereum and faster.
So, overall, there are some strong DeFi applications are already up and running in the key areas on Avalanche.
Can Avalanche “Kill” Ethereum?
Maybe. Certainly, the team has the potential to build a very attractive layer 1 blockchain.
If the ultimate vision for blockchain is decentralization, this may also include decentralization at the layer 1 level. Avalanche may become one of the leading layer 1 options for builders in the future.
The team itself is not interested in killing Ethereum. Like the Solana team, the Avalanche group believes the ocean is big enough for everyone. So the real question is, can Avalanche survive? It hopes to co-exist with, not kill, Ethereum.