Avalanche

Introduction

Within the landscape of blockchain technology, Avalanche has emerged as one of the pioneering platforms that promises to reshape the world of decentralization and blockchain technology. With its unique consensus protocol, innovative network structure, and high customizability, Avalanche has become a promising platform for the developments of all kinds of blockchains and decentralized applications. In this article, we will delve deep into the various aspects of Avalanche, providing a comprehensive overview that covers its history, the core values behind its development, the network architecture including the unique consensus protocols, and the governance structure. Finally, we will also look at the advantages and disadvantages, in order to explore whether Avalanche lives up to the promises it makes or not.

Whether you are a blockchain enthusiast, a developer, or an investor, this article equips you with the knowledge to navigate the exciting world of Avalanche and its potential impact on the future of decentralized systems.

Short history of Avalanche

The initial development

The development of Avalanche was driven by a team of researchers from Cornell University, led by Emin Gün Sirer. He specialized in computer science and software engineering, in which he also was a professor. 

After the research stage, the startup company Ava Labs was founded to further develop the network. At this stage, the main aim was to develop a blockchain network that would meet industry requirements from the finance sector.

First time accessible to the public

The AVA codebase for the Avalanche consensus protocol first became open-source and available to the public in March of 2020. Avalanche’s initial coin offering ended on July 2020, after which the mainnet launched in September of the same year.  That month, the network also issued its native token, the AVAX.

Development of user base

In its early stages, Avalanche attracted developers and projects looking for a platform to build decentralized applications (dApps) and financial protocols. The network’s robustness and performance capabilities were appealing to developers seeking a scalable solution. Several notable projects and protocols, including DeFi applications and cross-chain bridges, have been built on the Avalanche platform.

Avalanche has also seen growing adoption among users and investors. The native cryptocurrency, AVAX, has gained traction and has been listed on various cryptocurrency exchanges. The availability of AVAX on multiple trading platforms has contributed to increased liquidity and market accessibility.

The Avalanche ecosystem has experienced continuous growth, with the launch of new projects, partnerships, and collaborations. Avalanche’s community has expanded, including both developers and users who actively contribute to the platform’s growth and development.

Growth of the Avalanche ecosystem

The Avalanche network has a booming ecosystem that incorporates dApps and protocols both native to Avalanche or originating from outside the network. Featured applications cover most aspects of a smart contract layer 1 protocol, DEX’s, DeFi protocols, NFT marketplaces, wallets, bridges and play to earn (P2E) applications are all present. Additionally, Avalanche has a partnership with the popular decentralized oracle network ChainLink, to make use of real-time price data for its finance applications.

The Avalanche birdge

An important milestone for the ecosystem was the Avalanche Bridge that launched in July of 2021. This is a blockchain bridge which connects different networks to each other so that tokens can be transferred between them. Specifically, this bridge allows the transfer of some ERC-20 tokens from Ethereum to the Avalanche c-chain, replacing the older Avalanche-Ethereum Bridge. The upgraded bridge processes transfers significantly faster.

Avalanche Rush

Followed by the Avalanche bridge was the launch of a DeFi incentive program consisting of multiple phases, called Avalanche rush. The idea was to attract more applications and assets into the Avalanche ecosystem, by providing AVAX as mining liquidity rewards for some protocols. The main focus was to onboard popular lending and borrowing protocol Aavee and automated market maker (AMM) protocol Curve into the ecosystem. Furthermore, a mining incentive was performed in partnership with a liquidity protocol native to Avalanche, called Benqi. The DEX Pangolin also partnered up with Avalanche via the rush program.

Projects and partnerships

Some notable projects on Avalanche include Trader Joe, a decentralized trading platform that offers an AMM exchange, staking services and allows for yield farming, among others. YetiSwap, a DEX and NFT marketplace that is native to the Avalanche blockchain. ( https://www.yetiswap.app/ ) Avalanche furthermore houses Ryval, a marketplace for initial litigation offerings (ILO’s). This is a way to obtain litigation funding when the resources to do so would otherwise be lacking. If the party that is funded wins its case, then the parties that provided funding have an economic right to a part of the financial recovery. With the ILO’s, this economic right is tokenized and converted to a digital asset in the case of victory.

There is also Avalaunch, a launchpad that aids struggling developers with decentralized fundraising for their projects. The developers discount their product so that investors can get in early at a cheap price, while Avalaunch arranges the capital that the developers need to continue with their project.

Similar to Etherscan, the Avalanche network hosts the SnowTrace protocol, which helps network users to explore various aspects and data of the blockchain.

At the end of 2021, Deloitte, a multinational professional services network, teamed up with Avalanche to provide a disaster recovery platform, hosted by Avalanche, where governments can apply for federal emergency funding in a fast and easy way.

Another partnership was established with decentralized data storage network Arweave, in early 2022. From April onwards, developers and users of Avalanche could use the permanent storage capabilities of Arweave.

Collaboration with Amazon

In January of 2023, it was revealed that Ava Labs will collaborate with Amazon Web Services, the largest public cloud platform in the world, to increase the adaptation and acceptance of blockchain technology by companies, institutions and governments. After this announcement, the rate of Avalanche immediately increased by over 20%. It is expected that this collaboration might stimulate further growth of the Avalanche platform.

Core values

In the rapidly evolving and growing landscape of blockchain technology, the ideology behind the development of the Avalanche platform is a combination of the often heard desire of decentralization, individual sovereignty and democratic values, with ambitions to provide greater scalability. These motivations behind its development are rooted in the value of democratized decision-making and resistance against censorship by central entities. Additionally, creating a platform that is secure, even in the event of a large attack, is also an important reason driving the development of Avalanche.

Decentralization as a way towards greater individual freedom

Similar to the development of other blockchains and cryptocurrencies, the desire for decentralization comes from the dominance of central authorities in many of our traditional financial systems. Banks, central banks, and governments hold the power in these systems, which is often paired with a lack of transparency, and vulnerability for fraud. By distributing control across a network of nodes, decentralized systems foster resilience, transparency, and eliminate the need for trusting a third party. Decentralization also mitigates the risk of single points of failure, reducing vulnerability to attacks and censorship. 

In addition to this, it was of particular importance to the Avalanche developers that their platform was designed in such a way that it avoids division between classes of users that have different interests, and that there is no distinction between miners, developers, and users.

Democratic values

An inclusive, democratic governance environment is another core value of the Avalanche network. As highlighted in the Avalanche whitepaper, the platform embraces a highly inclusive approach, where any token holder can actively participate in key decision-making processes. This includes voting rights to select crucial financial parameters and contribute to determining the system’s future direction. By granting token holders the power to influence the platform’s governance and evolution, Avalanche empowers a diverse community of stakeholders to collectively shape the platform’s trajectory. This democratic ethos ensures that the platform’s development remains responsive to the needs and aspirations of its users, promoting a more equitable and inclusive blockchain ecosystem.

Greater scalability

A key aim for Avalanche is to ensure a high scalability, specifically focusing on the ability to process a large number of transactions and have low latencies. The structure of the consensus mechanism, which enables parallel processing of transactions, plays a key role in this. 

The developers wanted to create a large platform that would work as seamlessly and fast as possible, thus providing optimal user experience. Furthermore, greater scalability generally leads to lower transaction fees and a shorter processing time.

High level of security

In addition to the desire to create a platform with higher scalability, the developers behind Avalanche also opted for a high level of security. This motivation is rooted in a commitment to safeguarding the integrity and trustworthiness of the blockchain ecosystem. The utilization of a probabilistic leaderless Byzantine fault tolerance (BFT) algorithm in the consensus protocol bolsters the platform’s resilience against malicious actors and potential attacks. Moreover, even in the event of an attacker exceeding the 51% threshold, Avalanche maintains a remarkable extent of security. By employing a randomized leader selection process and leveraging the consensus algorithm, the platform effectively mitigates the risk of collusion and enhances its resistance to attacks, including the double-spending problem.

Interoperability and flexibility

Finally, the Avalanche developers wanted a platform with great interoperability and flexibility, capable of accommodating a multitude of blockchains and assets. This should empower developers to build upon the Avalanche platform, fostering innovation and enabling the creation of tailored blockchain networks and all kinds of decentralized applications. 

Overall, the overarching aim of Avalanche is to provide a platform that unifies the creation, transfer, and trade of digital assets in a smooth and secure way. The three main uses of the platform are the building of blockchains, building and launching decentralized applications with high scalability, and building complex digital assets with customized rules, covenants and riders. In the following section, we will dive deeper into the uses of the Avalanche network.

Architecture of the network

Avalanche functions as a heterogeneous network, meaning that the functionality of a layer 1 smart contract platform is separated into multiple chains. For Avalanche, the functions of transactions, smart contract execution, and validator maintenance/consensus are split up into different chains. The architecture of the platform consists of four fundamental components: virtual machines (VMs) instances, consensus engines, subnets, and blockchains.

VM’s are essentially pieces of code that enable consensus rules to produce data structures which synchronize across numerous machines. These data structures occur most often in the form of blockchains, but, as we will see later on, they can also come in the form of a DAG. 

Every chain on the Avalanche network is a distinct copy of a VM, called an instance. The protocol over which the communication between VM’s and the Avalanche platform goes is called RPC (remote computer call). This is an agnostic program, meaning that developers can build applications with languages and frameworks of their choice. The VMs themselves can also be developed using different coding languages. 

Consensus protocols

Regarding consensus engines, Avalanche’s primary network uses two consensus mechanisms, both stemming from the Snow family of protocols. The first is the Snowman protocol, which uses a blockchain as data structure. The other protocol is called Avalanche consensus. It enables a Directed Acyclic Graph (DAG) structure, which is an alternative to a blockchain. In a blockchain, data is stored in a block, and they are connected in a linear way. In case of a DAG, the data is contained in vertices (often depicted as circles) and connected by edges (often depicted as lines). The edges have specific directions and do not lead back to a vertex, meaning no feedback loops are formed.

The Avalanche mainnet consists of the primary network and numerous subnets, each one able to contain multiple blockchains whose consensus is managed by a set of validating nodes. As a consequence, each subnetwork may validate as many blockchains as desired, but each blockchain is only validated by one subnet.

Primary network

The most significant subnet is called the primary network, or default subnet. This subnet consists of several pre-defined blockchains. It has the special property that every validator on the entire Avalanche network must participate in it. 

The pre-defined blockchains are three-fold. They are called the Platform-, Exchange- and Contract Chain, or denoted as respectively the P-, X- or C-chain. 

The Platform Chain is an instance of the platform VM and its main tasks are to coordinate the set of validators, to keep track of active subnets, and to secure the network. Furthermore, via the API (application programming interface) of the P-chain network, participants can create new subnets, new blockchains or assign validators to subnets. Staking operations are also managed by the P-chain. This chain uses the Snowman consensus mechanism. 

The exchange chain is an instance of the Avalanche VM (AVM) and it is responsible for the transaction layer of the platform. It enables the Avalanche consensus protocol and the X-chain, abd thus it uses the DAG structure, making it the fastest chain on the network. The X-chain handles the operations on the Avalanche native tokens, a group of digital smart assets, which are representations of real-world resources, and that include the AVAX token itself. This happens via the API of the X-chain. Straight-forward operations include the trade and creation of Avalanche native tokens and cross-subnet transfers.  Finally, the contract chain is an instance of the Coreth (core Ethereum) VM. This is an implementation of the Ethereum VM (EVM) which, among other uses, supports solidity smart contracts. The C-chain is thus responsible for the creation and deployment of smart contracts via an API. It uses the Snowman consensus protocol.

Subnets

Regarding the subnets, every node is free to validate whichever subnet it wants to. They are not constricted to a limited amount nor is it required that they validate every subnet that exists on the entire network. However, the creators of a subnet can decide what criteria nodes need to adhere to in order to validate it – that is, the creator decides who may enter it. Among the criteria are those that would ensure that the subnet is compliant with regulations. Furthermore, the creators may specify the consensus algorithm used in the subnet, as well as its tokenomics and fee structure. Different blockchains in a subnet may be managed with customized VM’s. 

There is no limit to the amount of subnets there can be, but a fee must be paid each time a subnet originates. This fee is denominated in AVAX. The fact that different subnets can be created that all have their own rules ensures that the Avalanche network can be used for a vast variety of purposes, both permissioned and permissionless. Therefore, Avalanche can be used to build applications that are highly decentralized or, on the contrary, centrally controlled by a government or an agency.  What’s more, Avalanche enables the process of network sharding through its existing subnets. The network is split into smaller pieces such that latency and data overload are reduced. If an interaction needs to happen between two separate chains, then this is accomplished via an atomic swap. Otherwise, the subnets live in separation from each other.

Testnet

Additionally, avalanche has an official testnet, called the Fuji testnet. The architecture of Fuji is completely analogous to the Avalanche mainnet that was just discussed. It is used by developers to test and fine-tune their applications, using demo-smart contracts. But it can also be used by curious users who would like to test out the Avalanche platform for free.

The consensus engine

As stated before, the Avalanche network uses multiple consensus mechanisms that are part of the Snow family of consensus protocols. It aims to combine the best parts of the classical consensus model and the Nakamoto consensus model. The Snow family is a collection of Byzantine Fault Tolerance (BFT) protocols built upon each other. One of the evolutions in this line is the Avalanche consensus mechanism, which is a DAG based protocol. The version of this protocol that is compatible with linear blockchains is called Snowman.

Snowman consensus protocol

Let’s first examine the Snowman protocol. Consensus is reached by letting validating nodes perform repeated network sampling, called querying. Imagine a network user that wants to perform a transaction. The transaction is created and sent to a validating node. Via what is called “network gossiping” the transaction is sent out to the other nodes in the network. This gossiping is a protocol where computers share information with each other on a random, peer-to-peer basis. Next, it is checked if the transaction is valid. An invalid transaction occurs when a network user submits an amount that exceeds that user’s balance. Valid transactions are added to a list while invalid transactions are simply ignored. 

In the case where a double-spend occurs, the network has to deal with conflicting transactions. The Snowball protocol handles this double spending by letting each node query a small subset of nodes, chosen at random. So, every participating node both performs a query and gets queried by other nodes. If a node receives a significant majority in favor of a specific transaction, then from that point onward it subsequently changes its response in favor of that transaction when it is queried by remaining nodes. The number of positive responses needed to favor a transaction is called the quorum size. This procedure of querying a random subsample of the nodes continues until the network as a whole agrees as to which transaction is the correct one, so when it reaches consensus. This happens when the confidence threshold is met, which takes place when the validators that are sampled reply with the same response for a sufficient number of consecutive rounds. The correct transaction is deemed as accepted. Any transactions that are in conflict with an accepted transaction are rejected. 

In the Avalanche network, the number of validators that is sampled is 20, no matter how many nodes participate in the consensus protocol. This makes Snowball a very scalable consensus protocol. Furthermore, the quorum size is equal to 14 and the confidence threshold is set at 20. In Snowball, a favorable response to a block is equivalent to being in favor of all of its ancestors. Meaning that one vote is in actuality multiple votes condensed into one. This is called transitive voting and significantly increases transaction throughput.

Avalanche consensus

The Avalanche consensus mechanism differs somewhat from Snowball but the key concepts − subsampling and transitive voting − remain. The big difference, however, lies within the DAG structure of the Avalanche protocol. As discussed before, a DAG consists of vertices connected by edges. The edges can be conflicting, and the same algorithm used in Snowball allows nodes to determine which edges are to be accepted.

In other words, the Avalanche protocol consists of numerous single-degree Snowball instances that combine to form a DAG structure that contains all the valid transactions. If there is a vote on a transaction, then every transaction that is connected via edges from that specific transaction all the way back to the genesis vertex are voted on. This means that, for a given single-degree instance, a validator can only respond approvingly of a transaction if the entirety of its ancestry is the preferred one. If the transaction is deemed as correct by a majority of nodes, then the transaction obtains a chit. Since the whole path of transactions is reviewed each time a node is queried, the validators determine the confidence of a transaction by the total number of chits in the progeny of that transaction.

Sybill control mechanism

A Sybill control mechanism is implemented to prevent what is known as a Sybill attack: an attack where a single network participant can create numerous identities of malicious intent that attempt to invalidate the network. The Snow family of consensus protocols can be coupled with numerous Sybill control mechanisms, but in the case of the AVAX token, the Proof of Stake (PoS) control mechanism is used. The Avalanche network as a whole, however, allows for both Proof of work (PoW) and PoS to be chosen as mechanism for individual subnet control.

Proof of Stake

If a node wants to contribute to validating the network, it has to lock up, or stake, something of value. In the case of the Avalanche network, this is the AVAX token. If staking was not required, then it would be significantly easier for a malicious user to succeed in committing fraud. This is because malicious nodes could be added to the network with no limit and the safety of the network would be compromised completely. To compensate for the influence that they can exert on the network, validators thus need to stake their AVAX. 

Furthermore, the network sampling discussed earlier is not entirely random, but is weighted by the amount of AVAX staked. In order to become a validator, nodes first have to complete a stake transaction with the validator chain, which contains all the details about that specific round of staking. The stake is then locked up until the end of the staking period, and once the staking condition is accepted it cannot be undone anymore. The validator can determine the time period during which they want to stake, but they have to adhere to a minimum time. The longer a validator stakes, and the higher the staked amount is, the larger the amount of influence they have on the system, as well as the larger the reward. Numerous parameters involved in the staking process are determined by governance.

Proof of Responsiveness and Proof of Uptime

Besides the amount of AVAX that validators stake and the time period that they stake for, the rewards they receive are also based on proof-of-responsiveness and proof-of-uptime. Uptime, in this context, means the time that a machine has been operating, relative to the total time it could have been active. When one node samples another node, the node that performs the sampling preserves a bit of data of the other node. This data includes 1) whether the node responded during the sampling (proof-of-uptime) and 2) the timestamp of the sampling response (proof-of-responsiveness). This thus incentivizes nodes to operate accurately and make sure that they remain online. Another consequence that this mechanism has is that no so-called leader or limited group emerges that gets to collect the majority of the rewards.

Slashing

In the case that a validator behaves incorrectly, the stake is not taken away from them, which is a process that is called slashing. This in contrast to numerous layer-1 protocols that do employ slashing as a penalty for nodes not acting according to protocol. According to the platform’s whitepaper, the decision to not slash nodes does not influence the security of the network. Safety and liveness should be guaranteed as long as a sufficient part of the stake is held by correct nodes.

Bootstrapping

The process of starting to participate in the network is called Bootstrapping. It starts by connecting to seed anchors, which are servers that contain seed-IP addresses from which other network members can be located. When the new validators are connected to the seed anchors, the node wants to obtain the latest set of state transactions, denoted as the accepted frontier. They do so by performing a query. Subsequent synchronization with the sampled nodes allows for the extraction of the correct state. Furthermore, the current set of validators is discovered by synchronizing with the validator chain.

Different types of nodes

On the Avalanche network, three types of nodes exist.

There exists three different types of nodes on the Avalanche network. To record the platform’s history, needed for bootstrapping new nodes, there are specific nodes that store the entire history of the AVAX-, staking- and smart contract subnets. These nodes are called archival nodes and they often possess high storage capabilities to fulfill this objective. In addition to the data listed above, they can store the full history of other subnets as well, if this is desired. 

Besides archival nodes, there are nodes that actually partake in the validating process, called the full nodes. These nodes only store the current UTXO set, so the active state of the network. 

Lastly there are light nodes, they participate in the consensus process without having any network history. They merely partake in the repeated sampling that takes place during the consensus protocol.

Token distributions

To start distributing the AVAX token, and to raise capital to fund further development of Avalanche and its ecosystem, an ICO (initial coin offering) was conducted on the 15^th of July of 2020. But before this public sale took place, a seed- and private sale occurred. When conducted, a seed sale is typically the event where a project receives its initial funding, outside of investors. A private sale is meant for institutional investors, employees or other people closely involved with the project. For AVAX the seed sale took place in February of 2019, with a token value of 0.33 USD per AVAX. The private sale happened during May of 2020, where the token value was 0.50 USD. Both sales came with a vesting schedule, meaning that the sold tokens need to be locked up for a certain period of time, as part of the buying agreement. During the course of the lock-up period, parts of the tokens are unlocked incrementally, and not all at once.

This is coordinated so as to prevent an enormous amount of liquidity hitting the markets at once, which would likely result in a significant drop in price of the token. The vesting period of these two sales both had a one-year duration. 

Finally, the public ICO took place two months after the private sale. There were three options that buyers had during this ICO. The first came with a token value of 0.50 USD and a lock-up period of one year. The second option was to also pay 0.50 USD per AVAX but now a one-and-a-half-year lock-up period was demanded. There was a lot more supply available for the latter option compared to the first. The final option came with no lock-up conditions, but with a higher price per token, namely 0.85 USD. 

During the ICO, around 37,5 million USD was raised, where approximately 10% of the total token supply was sold. Taking also the seed- and private sale into account (2,5% and 3,5% of total supply sold, respectively) the amount of dollars raised becomes more or less 56 million, leading to 16% of the total supply being distributed to investors. Half of the maximum supply was deemed to be obtained as staking rewards for network validators over time. The team obtained 10% of the tokens, coupled to a vesting period of four years, while a bit more than 9% went to the foundation, accompanied by a ten-year lock-up period. Besides these parties, 7% was allocated to the Avalanche community and development (one year vesting), 5% to strategic partners and 2,5% was distributed via an airdrop (both four-year vesting). Finally, around 0.25% went to a testnet incentive program, with a lock-up period of one year. 

Major upgrades

The Apricot upgrade, phase 1

Around two months after the launch of the mainnet, Avalanche announced phase one of the Apricot upgrade. The Apricot upgrade as a whole aims to optimize the Avalanche network, and consists of multiple phases released incrementally over time. An important implementation was the addition of epochs onto the network, which incorporated the concept of time onto the x-chain. This enabled the possibility of verifiable pruning, meaning that nodes do not need to store the entire transaction history anymore. Phase one consists, among other things, of reduced gas costs on the c-chain, leading to a 50% reduction in transaction fees.

The Apricot upgrade, phase 2

The second phase allowed for more support of Avalanche Native tokens on the C-chain. Furthermore, it activated a group of updates which allows for new transaction types and influences some gas costs, called the Berlin EIPs.

The Apricot upgrade, phase 3

The third phase focused on the implementation of dynamic fees to Avalanche, which happened with the use of an algorithm called Moderato. The idea is that a “target utilization” is set for the network, which is an amount of transactions that can be handled for a distinct fee rate. Additionally, the minimum transaction fee is adjusted based on whether or not the network activity surpasses the target utilization.

The Apricot upgrade, phase 4

The fourth upgrade was quite significant, as it included the switch from Snowman to Snowman ++. This upgrade significantly reduced the contention of the network, meaning the conflicting blocks produced at the same block height* of the chain. This is accomplished by enlarging, over time, the number of validators that can produce a block at a specific block height. Furthermore, the implementation of Snowman ++ allowed for more fee reductions on the C-chain. 

Lastly phase four also adds a block fee whenever new blocks are produced faster than the target rate.

*With block height a specific point in a blockchain is meant, determined by the number of confirmed blocks that come before this point (Investopedia).

The Apricot upgrade, phase 5

The fifth phase enabled direct transfer of assets from the P- to the C-chain. Before this only transfers between the P- and X-chain and between the C- and X-chain were possible. 

This phase also included an increase in atomic transactions that can take place at the same time per block. Furthermore, the Moderato algorithm was adjusted so that gas fees were reduced even more and transactions were processed faster.

Governance of Avalanche

Avalanche is a decentralized, open-source platform with no central entity to govern the network. However, because the network will face natural evolution and will require updates to keep up with the user’s desires and developments in technology, some form of governance is necessary to streamline its continuous development. The native currency of the platform, the AVAX, plays a central role in the network’s governance structure. Therefore, we will first elaborate on AVAX and its uses before taking a look at how Avalanche organizes its governance processes.

Avalanche’s native currency: the AVAX

Serving as the fuel for the Avalanche ecosystem, the AVAX plays a crucial role in securing the network, organizing participation in on-chain governance, and facilitating transactions.

AVAX’s role in securing the network

AVAX is a central element in securing the Avalanche platform through its role in the consensus mechanism. As mentioned before, Avalanche operates based on a proof-of-stake consensus mechanism, relying on active involvement of users. Holders of AVAX can stake their tokens as validators to contribute to the network’s security by validating blocks and transactions.  

In Avalanche’s whitepaper, it is stated that the chosen function for compensation of stakers should minimize variance, which ensures that large stakers do not receive disproportionately more compensation. Furthermore, participants are not subject to any luck-factors. A reward scheme constructed in such a way should discourage the formation of mining or staking pools, which in turn ensures truly decentralized participation in the network.

On-network payments

In addition to providing security to the platform, AVAX, ofcourse, functions as the main medium of exchange within the Avalanche network, playing a vital role in facilitating transactions among participants. Additionally, AVAX can be integrated into smart contracts, enabling more payment functionalities and the development of DeFi applications on the platform. 

One important selling point of AVAX is the ambition that its transaction fees are lower than that of VISA.

Flexibility of AVAX

An important feature of AVAX is that the currency is designed to adapt to changing economic conditions. For example, if staking amounts are low, a way in which staking can be included is by increasing the fees for transactions, or by increasing the staking reward. In contrast, engagement in transactions and with services on the platform can be stimulated by lowering fees or decreasing the staking reward.

The goal of this is to maintain a balance between high enough incentives for users to stake their tokens on one side, but not such high incentives that it significantly decreases the active use of AVAX in transactions to interact with the services available on the platform.

The role of AVAX in governance

Finally, AVAX plays a key role in the governance of Avalanche. The currency provides token holders with the power to participate in decentralized decision-making. Collectively, holders of AVAX contribute to shaping the future direction of the platform. This not only ensures a decentralized way of decision-making, but also stimulates active community engagement in maintaining the network.

The governance structure of Avalanche

Decentralized governance

As noted earlier, Avalanche, like any network, requires continuous updates and developments to keep up with user’s desires and advancements in technology, economy, and regulation. The governance of the network happens through participation of AVAX holders, who can vote on changes to the network and settle decisions regarding network upgrades in a democratic way. The voting power is typically proportional to the number of AVAX tokens held, ensuring that larger stakeholders have a greater influence.

Any node that participates in the network is allowed to issue proposals. Transaction fees, staking times, and staking amounts are also subject to governance, as is the nominal reward rate, though there are pre-established boundaries in place. In order to maintain a predictable and safe system, Avalanche also does not allow unlimited changes to arbitrary aspects of the network. 

Through these decentralized governance mechanisms, Avalanche aims to foster community engagement, consensus-driven decision-making, and the continuous evolution of the platform.

Tokenomics and fee structures

Supply cap of AVAX

The AVAX supply is capped at a limit of 720 million tokens. Half of them were available from the launch of the main network, on the genesis block. The remaining half is distributed as staking rewards according to the minting function, which represents the total tokens available at a certain year. The minting function depends on the unminted supply of tokens in that year, the total amount of stake that a validator has, the time that the validator stakes his tokens, and two governable parameters, denoted by the Greek letters lambda and gamma. The minting function is thus both directly and indirectly influenced by the network participants that partake in governance. The former is influenced via the two parameters, and the latter according to the minimum staking amount and the minimum and maximum staking time that can be set via voting. This is done by design; the idea behind this minting function is to reach a capped supply in a manner analogous to Bitcoin, whilst preserving the possibility to influence how this maximum is attained via governance. This also means that the restrictions on the governable parameters are designed in such a way that the maximum supply of AVAX is never surpassed.

Fee structures of the Avalanche network

Regarding the fees on the network, multiple categories of fees exist that all have differing fee structures associated with them. First up, there are fees that come into play with the staking protocol. These fees are burned, which has a positive consequence for the network. Namely, the scarcity of the token increases, which is expected to have a positive impact on the price of AVAX by reducing supply. 

The transaction fees in subnets are typically partly paid in the native token of the subnet and partly in AVAX. Moreover, the subnet can determine what kind of fee structure is used for their transactions. 

The amount of a transaction fee in Avalanche is determined by a sliding cost function: fees become higher when the network gets more crowded.

Transaction fee processing

The model that Avalanche uses for the processing of its transactions is two-fold. Fundamentally, the sender address that the transaction carries is checked on invocation allotments. If a sender address has free invocations left, then no fees need to be paid. When they are used up, a fee needs to be paid, the amount of which is based on the computing power that the transaction needs. Instead of this, the sender can choose to pay directly in computing power. This is done via a Proof-of-Work (PoW). This PoW is then computed by the sender and attached to the transaction. 

The attachment of a PoW to a transaction is something that can be used to combat network congestion that may arise due to the low transaction fees on the platform. A participant is disincentivized from spamming transactions on the network by increasing the difficulty of the PoW after each subsequent transaction.  

Advantages of Avalanche

Unique consensus engine and network structure

Arguably the best features of Avalanche stem from the combination of their unique consensus engine and network structure. As mentioned before, the consensus protocol aims to combine the best properties of classical and Nakamoto consensus. This results in the Snow protocols being low in latency, high in throughput, quite secure and robust, and thus suitable for large scale, decentralized usage. Another advantage of the Avalanche network is that it prioritizes security over liveness.

Decentralization maintained when scaling

Numerous blockchain protocols work or scale in such ways that the transactions need to be checked afterwards to ensure they are in fact valid. This is the case for protocols that elect leaders and are longest-chain based, for example. This introduces both security risks as well as extra resources spent on potentially reversing invalid blocks. With Avalanche’s leaderless consensus protocol, every network participant checks the transaction when it is added to the chain. Transactions are thus irreversible. This occurs while still reaching block finality under a minute, and maintaining the ability to scale to up to millions of users. Avalanche thus does not compromise decentralization in order to scale, which is the case with some of its competitors. With sharding, side-chains, optimistic roll ups or layer-2’s, decentralization is reduced in order to scale more. The throughput that Avalanche can reach is supposedly over 4500 TPS. If developers require a higher TPS, then they can simply sacrifice decentralization on a single subnet without influencing the decentralization of the entire network.

Use of PoS: Environmental friendly

The usage of POS over POW as Sybill control mechanism makes Avalanche a much more environmentally friendly platform than some of its competitors, such as Bitcoin, that operates on a PoW consensus mechanism that requires significant amounts of energy.

Avalanche wants to maintain equality

Avalanche wants to keep the playing field regarding validation as equal as possible and therefore choose to be lightweight; hardware requirements to run a node are significantly lower compared to numerous competing layer one protocols. By employing a leaderless consensus algorithm, a large number of people are enabled to participate directly in staking. This is done to be more inclusive than some PoS competitors. What is often seen on such platforms is that one single leader is chosen based on stake, and subsequently collects all the rewards of that round. With Avalanche, it is the chance for a node to get subsampled that is correlated to stake, enabling multiple validators to participate in transaction confirmation. Every one of them is rewarded equally based on stake.

Another advantage of being leaderless is that MEV issues are highly reduced. These issues refer to the negative impact on the network that emerges as a consequence of transaction insertion, censoring and reordering by validators in order to maximize their profits.

Extensive customization options

The complete customizability of subnets is another great feature of the Avalanche network. It allows for public and private enterprises to build their applications in a regulatory compliant and possibly centralized way, while still allowing for complete decentralized applications to run on the same network. This opens up the possibility for all types of applications in both DeFi as well as TradFi coming to the Avalanche network. Even the amount of security that applications need is customizable at the subnet level, so there is no need to overpay for security, something that does occur on some competing chains.

Additionally, the C-chain is EVM compatible so that projects can easily move over if desired. Furthermore, other VM’s can be utilized as well on Avalanche, extending this benefit outside of Ethereum based chains.

Benefits of the AVAX token

The AVAX token has some benefits as well. To start off, the combination of a fixed maximum supply and different types of fees being burned results in high scarcity of the asset. These fees thus benefit the entire network instead of just some validators. The AVAX token provides utility in numerous ways across the network. Furthermore, all of the primary network is secured by the entirety of the AVAX stake on the network.

Disadvantages of Avalanche

Despite the many great aspects of Avalanche, the platform also comes with some downsides.

High validator costs

Even though validation is designed in such a way that many can participate, it is still highly costly to become a validator, namely 2,000 AVAX. As the price of Avalanche increases, this becomes even more expensive. However, this amount is governable and can thus be adjusted in the future.

No slashing

Another possible concern is that there is no slashing when a validator misbehaves. Of course, this can also be viewed as something positive, since staking now comes with less risk. But the punishment for acting maliciously is severely reduced this way, and this is not appreciated by every crypto user.

Influence of AVA Labs

As discussed earlier, Avalanche is designed in a decentralized manner. However, AVA Labs still has a lot of influence on the network, which lessens the decentralization in a way. This is an issue not native to Avalanche however, as most layer-one protocols have the same, Bitcoin being the exception here.

Still, the risk of centralization undermines the core principles behind decentralized networks.

Lower guarantee of network liveliness

Before, we discussed how it was beneficial that Avalanche prioritizes security over liveness, but this automatically means that it comes with the downside of lesser liveness guarantee on the network. So, in the case of conflicting transactions, there may be some delay until nodes agree on the status again.

Not as democratic as promised

Despite emphasis on their more inclusive validation protocol, the governance on Avalanche is not quite that democratic, since the voting power is proportional to the amount of AVAX that stakeholder have. This makes it possible for large investors to have significantly more influence over the network than the average stakeholder. Theoretically, this would allow private companies to buy up network control, as an example. Again, this concern is not native to Avalanche, but is shared with most POS based blockchain protocols. However, because high democratic values are such a key element in the ideology behind Avalanche’s development, it is disappointing that the network does not appear to be as democratic as presented.

Fierce competition

Finally Avalanche faces enormous competition from numerous layer-one protocols. Despite that Avalanche clearly has a lot going for it, there is no guarantee that the network will keep on growing, as applications can just as easily be moved away from their ecosystem as they have moved in. But considering the various partnerships, network activity, total-value locked in the ecosystem and demand for AVAX, it does not seem likely that the chain will cease to exist anytime soon. 

Conclusion

Avalanche stands as a revolutionary blockchain platform with the potential to play a significant part in the decentralized landscape. Throughout this article, we have explored the network’s history, core values, unique consensus engine, advantages, and disadvantages. While Avalanche presents many strengths that set it apart from its competitors, there are certain aspects that warrant further attention and consideration.

One of its most prominent advantages lies in the combination of its unique consensus engine and network structure, allowing Avalanche to maintain decentralization even when scaling to millions of users. Additionally, its use of PoS instead of PoW makes it more environmentally friendly and inclusive for validators. The platform’s extensive customization options empower developers to build a wide range of applications on both the decentralized and regulatory-compliant fronts, solidifying its versatility.

However, we must address certain shortcomings. High validator costs and the absence of slashing may hinder broader participation. While Avalanche strives for decentralization, the significant influence of AVA Labs on the network poses a risk of centralization, which goes against the core principles of decentralized systems. Although shared with numerous blockchain projects, one of the most crucial issues is the lack of true democracy in the governance of the AVAX token. Despite the emphasis on inclusivity, voting power proportional to the amount of AVAX held grants disproportionate influence to large stakeholders, possibly undermining the democratic values espoused by the platform. 

In conclusion, Avalanche’s innovative consensus protocol, scalability, environmental friendliness, and extensive customizability make it a promising platform for the future of decentralized systems. By addressing the remaining concerns of the platform, either by coming up with new ideas to counter them or through implementation of beneficial developments out of the entire blockchain sector, Avalanche could enhance its network even further. It is not hard to see that Avalanche has a lot of potential to help lead the way towards a decentralized and democratized future.