Avalanche – should Ethereum brace for impact?

TL;DR

Avalanche is a Proof of Stake (PoS) blockchain network developed by a Ava.Labs, under CEO Emin Gün Sirer. Sirer is an associate professor of computer science at Cornell University, and co-director of IC3, the Initiative for crypto currencies and (smart) contracts.

Avalanche employs a unique consensus algorithm that allows rapid finalization of transactions.

The Avalanche network can now process more transactions per second than Visa and is highly decentralized, with more than 4000 validators spread around the globe.

It hosts a very active developer community, with more than 300 projects currently being built on top of the platform. Avalanche can bridge multiple blockchains by allowing other tokens to be wrapped and processed on its native ledger. An approach similar to what Polkadot achieves with parachains, although the technical implementation is vastly different.

The Avalanche community seems to be made up of unusually level headed individuals that rarely engage in maximalism and bashing. While this is attractive to many projects that want to build valuable projects, mostly in the De-Fi space, it allows for fewer headlines and keeps the project as a dark horse and possible-runner-up. 

The technical foundation is exciting and an active community is certainly worth a lot.

We will see in the  next two years, if Avalanche is truly moving mountains, or is just a happening in a remote valley. 

What’s special about Avalanche?

At the heart of every blockchain is the mechanism that governs which transactions to confirm and which to reject, known as consensus algorithm. Bitcoin uses what is now known as Nakamoto consensus, where miners are incentivized to inspect transactions carefully and reject hostile or faulty additions to a block. If they still do include these, the resulting block will not be added to the main blockchain, and their block reward rendered worthless.

Avalanche takes another approach. They call it Snowflake – because a lot of snowflakes can make up an Avalanche (duh!).

Snowflake works like this: A validator receives a transaction and polls 5-10 other validators from a list at random: Should the transaction be approved or not?

The validator then takes the side of the majority of poll results.On and on, as the snowflake expands its branches and connects to other snowflakes.

This leads to a high probability of a final transaction within just a few rounds and near certain finality at about 13 rounds of polling, usually in less than 1 second.

The algorithm’s biggest drawback is that double spends can remain undecided. Which is bad for the double spender, since the transaction doesn’t clear. Instead the funds remain locked, and ultimately lost to the double spender.

Here’s a link to Gün Sirer explaining it in detail.

From Snowflake to Avalanche – Emin Gün Sirer

Avalanche is a Proof of Stake blockchain. This means no specialized mining hardware burning terawatt hours of energy is required. In contrast to some other PoS chains, Ava.Labs emphasizes that validating can be done on cheap, inexpensive hardware. Even smartphones. This means Avalanche is as green as blockchains get. And as easy to keep democratized and decentralized.

At the same time the protocol can scale to more than 10 million nodes, and has been shown to offer the capacity for more than 11,000 transactions per second, engaging the more than 4,000 validators online now. On par with Visa and Mastercard.

The next interesting technical innovation is that Avalanche allows tokens of other chains, and even smart contracts to run on Avalanche. The detailed technical background can be found here: The Avalanche-Ethereum Bridge: What You Need to Know | by Avalanche | Avalanche | Medium

Avalanche also supports multiple so-called virtual machines. This means dApps relying on other blockchains can be migrated to Avalanche and profit from the speed of the platform while maintaining desired functionality.

Developers can launch their own unique blockchains, with specific feature sets, as part of Avalanche. Profiting from the security and scale of a global distributed ledger while being able to implement custom features. This can include permissioned chains, where only some users are allowed to inspect certain transactions, and others not, a frequent prerequisite for enterprise adoption.

The ecosystem

Emin Gün Sirer became somewhat famous during the DAO hack that nearly took down Ethereum in 2015. One of Sirer’s students was the first to point out the flaw in The DAO’s smart contract, now known as Reentrancy Attack. Sirer looked at the code and convinced the student that while the problem existed, it was unlikely that it would be exploited, a mistake that ultimately led to Ethereum’s split into ETH and ETC. 

Rattled, Sirer doubled down on his research and decided to head the development of what is now Avalanche. He and his team, with the impact of the DAOs demise still prominent in their memory, refused to launch their token, Avax, during the heydays of the 2017/18 crypto boom. They wanted to get it right this time.

Ultimately Avax launched in a crowd sale in June 2020, and was quickly sold out. It now trades on multiple international exchanges like Binance and Gate.io.

Thanks to the clear, no bullshit communications, thorough documentation and low barrier to entry Avalanche attracted developers since their initial release in 2018 and long before their token launch. Currently more than 300 projects build on the platform and a quick glance at their discord chat reveals intense technical discussion and a vibrant exchange often missing in other projects.

The token

Avalanche network’s native token is called Avax. It has a maximum supply of 720 million tokens. Half of the tokens were minted in the genesis block and the other half is released according to a distribution curve specified in the white paper here.

Validators need to stake 2,000 Avax to be able to vote on transactions. This compares to Ethereum’s 32 ETH2 for becoming a staking node. Validators in Avalanche are not slashed when they misbehave, so funds are never at risk. Staking rewards are 11%.

Further some Avax are burnt as transaction fees, minting fees and when subnets and sub chains are created. This means that Avax is actually deflationary. Burning also creates another incentive for staking, as the stake becomes more and more valuable, in addition to growing through staking rewards.

Avax was sold for 0,50 USD at the pre-sale, when agreeing to a lock-in of 6 months. The price experienced a wild ride up to almost 60 USD around February ‘21 and as of this writing in the beginning of July ‘21 is hovering around 12 USD.

So where’s the catch?

As you can see Avalanche offers unique technology. Fast, cheap transactions and massive scalability. Low energy use and innovations such as interoperability with other chains, which is a great asset for De-Fi developers.

Ava.Labs managed to activate and engage a lot of development effort, especially in the De-Fi and enterprise space.

However, Avalanche never grabbed much of the spotlight in comparison to projects like Polygon/MATIC or Polkadot. This is partly due to the quiet, no bullshit attitude the whole organisation projects. While this is a good thing, it could also be an impediment to further adoption. Without buzzy projects that Polygon and especially Ethereum offer, the question remains how Ava.Labs will drive wiede-spred adoption.

This is not necessarily a reason to pass on Avalanche. Like with the turtle and the hare, continuous, steady execution with good results can win over flashy competitors..

And Avalanche has its share of great projects like Pangolin swap, or the Snowball yield farm. I’m cautiously optimistic for Avalanche’s future. Especially if the team manages to engage end users better and create a more profound momentum for adoption.