Avalanche deep dive: race winner or also-ran?

Note: price data taken on the week of 13^th of June 2022.

Here’s something most people in crypto don’t know.

Bitcoin wasn’t the first Proof of Work (PoW) cryptocurrency.

The first PoW cryptocurrency was actually created five years before Bitcoin, in 2003, by Cornell University Computer Professor, Emin Gün Sirer.

Sirer and some students set out to solve the problem of “freeloaders” on filesharing platforms like Napster, Gnutella and Limewire. Remember those?

They proposed a cryptocurrency called Karma that would be paid to people depending on how much work they did to keep the platform going.

Work, in this case, meant how much people were uploading files vs just downloading them.

But it could also represent sharing any kind of resource, “like file share, results of computation etc.”.

The big difference between this and Bitcoin is that Bitcoin also uses PoW for consensus, and not just for minting new currency.

Karma never took off and Emin Gün Sirer mostly forgot about cryptocurrency.

Then the 2007 financial crisis happened.

In 2008 Satoshi Nakamoto published the Bitcoin Whitepaper. In 2009, Satoshi mined the Bitcoin Genesis block.

And the rest is history.

I won’t go over the history of Bitcoin here, because I covered it all in my everything you need to know about crypto in one essay, essay.

But I will say that not only did Satoshi come up with the right idea, but just as importantly, they launched that idea at the exact right time.

As Sirer said himself, in a 2020 interview with coin market cap:

My system did not go anywhere because I didn’t get the timing right, and I didn’t have a vision as big as Satoshi. Satoshi came up and said, “Hey, I want to replace the dollar.” I wasn’t trying to do that. I was starting to come up with a payment system for people who want to share files online.

Well, eventually, Sirer did get back into cryptocurrency. And in September 2020, he launched Avalanche.

Today, Avalanche is the 18^th biggest crypto by market cap and the 4^th biggest by total value locked in DeFi.

And, as I’m sure you’ve gathered, it’s the subject of today’s deep dive. So let’s get on with it.

Market cap category

Here’s how I define cryptos by their market cap ranking.

• Blue chip: 1-10
• Large cap: 10-50
• Mid cap: 50-100
• Small cap: 100-200
• Micro cap: 200+

As I’m sure you know, all cryptos are highly volatile, but the smaller the market cap, the more volatile they can be.

And the smaller the market cap, the more inherently risky a crypto is. It takes much less money to manipulate its price or to attack its network.

It also, naturally, has less scrutiny. So it’s more likely to have flaws or bugs that haven’t been discovered yet.

But it also has more potential for explosive growth.

I put this section first in my deep dives because it’s probably the most important thing to think about.

Avalanche is currently the 18^th biggest crypto by market cap, which puts it square in the large cap category.

Vision

Avalanche (crypto ticker AVAX) is a platform crypto. That means it’s a crypto that developers can build decentralised apps (dApps) and even other cryptos on top of.

In terms of “layers”. It’s kind of a layer-1 and kind of a layer-0. Users can create “subnets” on Avalanche.

These “subnets” are basically the same as parachains in Polkadot (if you read my Polkadot deep dive). They are new layer-1 and layer-2 cryptos that have their own rules and consensus mechanisms.

But unlike with Polkadot, which has limited slots for parachains, Avalanche lets you create as many subnets as you like.

And unlike Polkadot, where you have to win an auction to create a parachain – which have gone for as much as 35.7 million DOT ($255 million at today’s prices)…

With Avalanche, you pay a set price of just 1 AVAX ($17 at today’s prices).

If you’ve ever heard the term “sharding”. These subnets are actually network shards.

Here’s how Avalanche explains it in its Platform Whitepaper:

In Avalanche Borealis, the first form of sharding exists [network sharding] through the subnetworks functionality. For example, one may launch a gold subnet and another real-estate subnet. These two subnets can exist entirely in parallel. The subnets interact only when a user wishes to buy real-estate contracts using their gold holdings, at which point Avalanche will enable an atomic swap between the two subnets.

Now, I hope you’re still with me, because unfortunately Avalanche gets even more complicated.

Basically, Avalanche saw all the issues Ethereum had by trying to do everything on its main network and decided to do things differently.

So Avalanche split its main network into three different networks, or “chains”.

• The exchange chain (X-chain) handles transactions.
• The contract chain (C-chain) handles smart contracts.
• And the platform chain (P-chain) deals with validators and subnets.

Simple.

Let’s be honest, this is anything but simple. It’s about as convoluted as it gets.

But this is where we’re at in crypto development right now.

There are a few different philosophies that crypto projects are taking.

• One, like Ethereum, is to have a slow but secure and decentralised main chain, and faster, less decentralised, less secure layer-2s to handle things that need to be fast and cheap.
• Another is to build a fast enough network that you can just do everything on the main chain, like Solana and Aleph Zero.
• Another is to split the network into smaller networks that do different tasks, like Avalanche.
• Another is to have a network of networks, like Polkadot and Cosmos.

And there are many different approaches besides. These are just the main ones.

There are major issues with each approach. Enough to fill an entire coin confidential issue, and then some. So I won’t go over them all here. But I will say that no one approach has yet to come out on top.

This is an entirely new industry, with new technology, and everyone is fighting it out to see who comes out on top.

That’s why we end up with complicated and convoluted solutions like what Avalanche – and to be fair, just about every crypto project out there – is doing.

Early inventions and prototypes are a mess. As an industry matures, those prototypes get slimmed down and perfected. The end goal is to make something highly efficient and (hopefully) simple.

It’s clear we are not there yet.

So I shouldn’t really give Avalanche too much flack for being messy. Everything in crypto is messy.

But it also feels like something this messy is never going to “win”. Clearly Avalanche is a long way off being the “Apple” of crypto.

I guess you could kind of argue that Ethereum is the “Microsoft” of crypto. But we’re definitely still waiting on crypto’s “Apple”.

Although, to be honest, we might not even have found crypto’s IBM yet, let alone its Microsoft and Apple… which is why it’s such an exciting industry to follow.

Tech

Okay, we’ve already covered a fair bit of Avalanche’s tech in the vision section. But let’s take a deeper dive into the numbers.

Avalanche’s latest documentation says it can process 4,500 transactions per second (TPS).

The consensus whitepaper shows that In “geo-replicated” tests it achieves about 3,400 TPS with an average latency of 1.35 seconds and a maximum latency of 4.25 seconds.

So it looks like they’ve been able to speed it up slightly since that whitepaper was published.

4,500 TPS is a lot faster than Ethereum’s current 25 TPS or so. But it’s a long way off what newer projects are capable of.

The last crypto I did a deep dive into – Aleph Zero – for example, can do 89,600 TPS.

And that 4,500 TPS is also kind of misleading, because it’s only hitting that speed on the X-chain, not the C-chain.

So while payment and exchange transactions might be fast-ish (but definitely not fast enough to be futureproof), smart contract execution is a lot slower.

It’s basically impossible to get a number for the TPS of Avalanche’s C-chain (believe me, I’ve done some digging) but I’m seeing varying estimates from low double digits to low single-digit thousands.

If you really want to get into the weeds, the C-chain is slower than the X-chain because the C-chain is based on a traditional blockchain structure, whereas the X-chain is based on a directed acyclic graph (DAG), like IOTA, Fantomand Aleph Zero.

(Those links all go to deep dives I’ve written into those respective cryptos, if you want to know more about DAGs.)

But like I said, It’s extremely hard to get any real data on the actual speed of the C-chain. All Avalanche’s literature talks about the X-chain.

I guess it’s kind of irrelevant though, because even if it were as fast as the X-chain, the X-chain isn’t even that fast to begin with.

With that being said, Avalanche actually claims unlimited TPS, through its use of subnets.

But that’s like saying Bitcoin and Ethereum have unlimited TPS because you can use layer-2s. It’s not exactly a lie? But it’s not exactly true, either.

Also, Avalanche’s subnets break atomic composability, which you’ll know is a major issue if you read my Radix deep dive.

I realise this sounds like I’m hating on Avalanche. But in truth Avalanche’s tech is no worse than many other “eth killers”.

I’d say it’s roughly as good as Fantom’s. It’s middle of the pack. It’s not bad. But crucially, it’s not next level.

Most of these projects have set out to beat what was out there at the time when they were conceived. And they’ve succeeded. But that’s not enough to be futureproof.

None of them are better than what Ethereum promises to be when it’s completed its Ethereum 2.0 roadmap.

So while I don’t doubt they’ll have their day in the sun, in the and they’re destined to be also-rans.

Case in point, earlier this year, Avalanche fees reportedly hit $14 per transaction, when a game about crabs got popular and clogged the network. What’s the point of moving off Ethereum and sacrificing its massive network effects for cheaper fees… if your fees aren’t even cheaper?

The only projects I’ve seen with features that Ethereum can’t compete with are Radix, Aleph Zero and IOTA.

(My deep dives into all those projects can be found here.)

But none of those projects are anywhere near finished.

Radix and Aleph Zero don’t even have smart contracts yet. And IOTA is still centralised, after five years of promising to be decentralised any day now.

But they’re certainly a lot more promising (technology wise) than any of the current crypto large caps.

But back to the topic at hand…

Team

Avalanche’s team is very strong. I mean, the founder literally invented PoW, five years before Satoshi Nakamoto.

And the rest of the team is what we’ve come to expect from any high-calibre crypto project in today’s world.

It’s filled with impressive people who’ve previously worked at impressive companies. As Avalanche says:

We're a world-class team of experts in computer science, economics, finance, and law with offices in New York City and Miami. We're passionate individuals creating a frictionless world by redefining the way people build and use finance applications.

The Ava Labs team has collective experience from leading Fortune 500 finance and tech companies to high-growth blockchain companies.

They have people who’ve worked at NASA, Google, Microsoft and Cisco, to name just a few.

And they’re very much affiliated with Cornell University, given that’s where Emin Gün Sirer worked as a professor.

Adoption

This is where Avalanche starts to shine.

It’s basically the biggest “real” DeFi platform after Ethereum, as you can see below.

(Ooooh, or it was. Solana just flipped it as I’ve been writing.)

Right now Tron and Binance Smart Chain have more locked value than Avalanche.

But Tron has always been scammy, and right now it’s likely heading for disaster.

And Binance Smart Chain is super centralised. It’s not really a real crypto.

Avalanche has a good niche right now. It’s faster than Ethereum, it’s cheaper than Ethereum, and it’s roughly as good technology-wise as its main competitors.

Solana arguably has much better technology. But Solana is very buggy and its network goes down seemingly all the time.

Given Avalanche’s ranking in DeFi value, you’d expect it should also be near the top in terms of its market cap value.

But crypto values don’t really make sense. And so instead of being squarely in the top 10, it’s down in 18^th place, below memecoins like Shiba Inu and Dogecoin.

How did Avalance get so much adoption? The same way as Solana did, VC money.

It has backing from Three Arrows Capital, Polychain Capital, Andreessen Horowitz (A16z), Galaxy Digital, Dragonfly Capital… you name it, they’re probably invested.

And it even has backing from big-name individual “VC bros” like Balaji Srinivasan, Naval Ravikant, and Ramtin Naimi.

We’ll get more into its VC backing in the tokenomics section. But Avalanche has been smart with all of that VC money and used it to attract developers.

For example, in March 2022, Avalanche committed $290 million into attracting Gaming, DeFi and NFT subnets.

And as you can see from its DeFi ranking, it’s paying off.

As for NFTs. It’s hard to get good data on NFT volumes. But according to crypto slam, Avalanche is ranked about 13^th:

I’d say it’s one of the most widely-adopted platform cryptos out there right now, probably only behind Ethereum and Solana.

Of course, until a few weeks ago Terra was leagues ahead of Avalanche in terms of adoption. But Terra imploded.

So for now, there’s really only Ethereum (and its sidechains and layer-2s), Solana and Avalanche in the race.

It’ll be interesting to see how things stand once the crypto winter is over.

Tokenomics and governance

Avalanche has fairly standard tokenomics for a crypto of its generation.

Avalanche is a proof of stake crypto, with a current reward of around 8.8% a year for delegators.

It has a capped supply of 720 million AVAX, half of which were released at genesis, half of which will be released as staking rewards over about 20 years.

How fast those tokens get released will be decided by on-chain governance…

From the Platform Whitepaper:

The native token, $AVAX, is capped-supply, where the cap is set at 720,000,000 tokens, with 360,000,000 tokens available on mainnet launch. However, unlike other capped-supply tokens which bake the rate of minting perpetually, $AVAX is designed to react to changing economic conditions. In particular, the objective of $AVAX’s monetary policy is to balance the incentives of users to stake the token versus using it to interact with the variety of services available on the platform. Participants in the platform collectively act as a decentralized reserve bank. The levers available on Avalanche are staking rewards, fees, and airdrops, all of which are influenced by governable parameters. Staking rewards are set by on-chain governance, and are ruled by a function designed to never surpass the capped supply. Staking can be induced by increasing fees or increasing staking rewards. On the other hand, we can induce increased engagement with the Avalanche platform services by lowering fees, and decreasing the staking reward.

Now here’s where things get a little weird.

Instead of transaction fees being sent to validators, transaction fees are burned. That’s not all that unusual.

However, as Avalanche has a hard cap of 720 million AVAX, then those staking rewards will run out in around 20 years.

Once the hard cap is reached there will be no rewards for securing and maintaining the network… so people won’t do it. And that would leave Avalanche wide open to attack.

So, does that mean Avalanche only has a 20-ish year lifespan?

No. From what I’ve seen – although there is no official documentation I could find on it – it might be possible to put all those “burned” tokens back into circulation.

So long as you didn’t put more into circulation than had been burned, you wouldn’t exceed the 720 million AVAX hard cap.

Then you could release them to validators all over again. And I guess, in theory, you could keep on doing this forever.

But this would just be a very roundabout way of sending network fees to validators instead of “burning” them. So I don’t know why they just don’t do that in the first place. Weird.

What about governance?

Avalanche has been promising on-chain governance since its first whitepaper. But it’s yet to materialise. Avalanche doesn’t really mention it anymore. But I’m sure it will happen at some point, right?

So, in theory, Avalanche will use on-chain governance for small decisions but not big ones. The idea behind that is it believes network participants want stability.

From the Platform Whitepaper:

Governance is critical to the development and adoption of any platform because – as with all other types of systems – Avalanche will also face natural evolution and updates. $AVAX provides on-chain governance for critical parameters of the network where participants are able to vote on changes to the network and settle network upgrade decisions democratically. This includes factors such as the minimum staking amount, minting rate, as well as other economic parameters. This enables the platform to effectively perform dynamic parameter optimization through a crowd oracle. However, unlike some other governance platforms out there, Avalanche does not allow unlimited changes to arbitrary aspects of the system. Instead, only a pre-determined number of parameters can be modified via governance, rendering the system more predictable and increasing safety. Further, all governable parameters are subject to limits within specific time bounds, introducing hysteresis, and ensuring that the system remains predictable over short time ranges.

Right now though, all that’s just a theory because there is no on-chain governance.

And even if there is eventually, it won’t mean much because most of Avalanche is owned by insiders and VCs, as you can see in the infographic below:

As I mentioned in the adoption section, Avalanche is one of the many cryptos that sold its soul to rich crypto bros and VCs.

This is a double-edged sword. On the one hand, it almost guarantees adoption. On the other, it almost guarantees centralisation and unfair tokenomics.

Here are all the private and public token sales Avalanche held, courtesy of Messari:

From that alone, the allocation doesn’t look too bad. But the Avalanche foundation also gave itself 9.26% of the supply, pinged 5% to “strategic partners” and rewarded 10% to the team itself. (source).

And let’s not forget that only half the supply is in circulation (remember the rest will be released over 20 years or so).

So in terms of circulating supply, those percentages should probably be a lot higher (although they are subject to vesting schedules).

No matter which way you look at it, on-chain governance isn’t going to end up being very democratic.

And then there’s one more trick up Avalanche’s tokenomics sleeve…

This April, Ava Labs (the company that created Avalanche) had a funding round, raising $350 million at a valuation of $5.25 billion.

What did the funders get for their $350 million?

Did they get any AVAX tokens?

Who knows!

Because that information hasn’t been (and as far as I can tell won’t be) released to the public.

Maybe they didn’t get any AVAX. Maybe they just wanted a stake in the company that made it. I have no idea. But I’d imagine they would also want a corresponding stake in that company’s biggest project.

So in terms of tokenomics and governance… it’s all a little murky.

Caveats

I feel like I’ve covered most of Avalanche’s caveats in each individual section. But to summarise:

• Its network gets congested and fees have hit $14.
• It is too complicated – with its three-chain architecture and subnets that break atomic composability.
• It’s transactions aren’t that fast and its smart contract chain is slow… at least it might be, there is no information on its TPS… but as it gets congested then it’s likely not very fast at all.
• It’s very much middle of the pack in terms of its tech right now, and as time goes on it will likely fall to the back of the pack.
• VCs and insiders own a lot of the supply (I guess you could see this as a good thing).
• The tokenomics don’t really stack up… what happens when it reaches its hard cap?
• There’s just a general lack of transparency in its documentation.

Conclusion

Avalanche isn’t a bad crypto. It’s one of the best of the current crop.

Of the big cryptos right now, there’s only really Solana that’s a lot better. And Solana has many problems of its own.

The biggest issues I see with Avalanche are:

1. It’s not futureproof. Ethereum 1.0 + layer-2s are already just as good as Avalanche and Ethereum 2.0 + layer-2s will be better.
2. It’s mainly owned by insiders and VCs.

In the end, I think it will just fade away, like most of the average crypto projects do. Or maybe it’ll just bounce around in the top 50 forever.

Like many cryptos of this generation, it’s just aiming to beat the cryptos that were around when it was first conceived.

But things move incredibly fast in crypto. And pretty soon, Avalanche will be outclassed. Theoretically it already is.

Meanwhile, Ethereum marches on, slowly improving and maintaining its network effects.

That’s not to say I don’t think Avalanche will continue to do well. On the contrary, I think it will (crypto winter aside).

It is a solid project. It’s not a scam. It has a thriving DeFi community. And it has a ton of money at its disposal.

And there’s nothing to say it can’t continue improving like Ethereum.

But in the end, I think Avalanche is destined to be an also-ran.

Useful links

Official website

Official Blog

Whitepapers

Reddit

Twitter

Discord

Telegram

YouTube

CoinGecko page

Okay, that's all for today.

Thanks for reading,

Harry

Full disclosure: At time of writing, I held the following cryptos: Ethereum, IOTA, Radix, Mina Protocol, Aleph Zero.

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