Avalanche attempts to improve scalability without compromising speed or decentralization. Three blockchains make up its core platform: the Exchange Chain (X-Chain), Contract Chain (C-Chain), and Platform Chain (P-Chain).
The X-Chain is used for creating and trading assets. The C-Chain is for smart contract creation. The P-Chain is for coordinating validators and Subnets.
One of the protocol’s most important breakthroughs is Avalanche Consensus, a method using repeated sub-sampled voting by validators to make consensus fast and affordable.
Avalanche also uses Subnets as a novel method of horizontal scaling, allowing for the creation of customizable, interoperable blockchains. There's no limit on the number of Subnets possible.
As blockchain technology develops, it provides new solutions to the old problems of scalability, interoperability, and usability.
Avalanche has taken a unique approach with the use of three separate blockchains in its primary platform. Powered by its native token AVAX and multiple consensus mechanisms, Avalanche claims to be "the fastest smart contracts platform in the blockchain industry, as measured by time-to-finality".
In this article, we'll look at the factors that lead to this claim and the solutions it provides.
When was Avalanche launched?
Avalanche was launched in September 2020 by Ava Labs, a team based in New York. Ava Labs has raised nearly $300 million (U.S. dollars) in funding, and the Avalanche Foundation has conducted private and public token sales totaling $48 million. The three-person founding team behind Ava Labs consists of Kevin Sekniqi, Maofan "Ted" Yin, and Emin Gün Sirer.
What problems does Avalanche solve?
There are three main problems Avalanche attempts to solve: scalability, transaction fees, and interoperability.
Scalability vs. decentralization
Blockchains have traditionally struggled to balance scalability and decentralization. A network with increasing activity can clog quickly. Bitcoin (BTC) is a good example, as transactions have sometimes taken hours or even days to process in periods of network congestion.
One way to combat this is to make the network more centralized, giving fewer people more authority to validate network activity, unlocking greater speed. However, decentralization is critical to blockchain security. New blockchains attempt to solve this problem with technological advancements, and Avalanche has created a unique approach, which we'll cover later.
Another common issue with larger blockchains like Ethereum is their gas fees, which can get high with high traffic. This ultimately discourages users from these blockchains, but the competition on offer has less established ecosystems. For example, Ethereum's popularity and a historical lack of alternatives have led to high traffic and fees. At certain points, simple transfers cost more than $10, and complex smart contract interactions can exceed $100.
Different projects and businesses have their own needs when it comes to blockchains. Previously, projects would have to work with either Ethereum, another individual blockchain not tailored to their needs, or a private blockchain. Finding the balance between customizability and cooperation between multiple blockchains has been challenging. Avalanche offers its solution with Subnets – custom app-specific blockchains that share the primary network’s security, speed, and compatibility.
How does Avalanche work?
Avalanche uses a combination of methods that make it unique and is actually made up of three primary interoperable blockchains: the X-Chain, C-Chain, and P-Chain.
1. The Exchange Chain (X-Chain) is used for creating and exchanging AVAX tokens and other digital assets. Transaction fees are paid in AVAX, and the blockchain uses the Avalanche Consensus protocol.
2. The Contract Chain (C-Chain) is where developers can create smart contracts for DApps. This chain implements an instance of the Ethereum Virtual Machine (EVM), enabling EVM-compatible DApps. It uses a modified version of the Avalanche Consensus protocol called Snowman.
3. The Platform Chain (P-Chain) coordinates network validators, tracks active Subnets, and allows for the creation of new Subnets. The P-Chain also uses Snowman.
With each blockchain taking on different roles, Avalanche improves speed and scalability compared to running all processes on just one chain. Avalanche developers tailored consensus mechanisms to the needs of each blockchain. Users need AVAX to stake and pay network fees, giving the ecosystem a common usable asset.
How do Avalanche's consensus mechanisms work?
There are similarities between Avalanche’s two consensus protocols. This dual system is a fundamental reason for the network's improved scalability and transaction speed.
The Avalanche consensus protocol doesn't need a leader to reach consensus like Proof of Work (PoW), Proof of Stake (PoS), or Delegated Proof of Stake (DPoS). This factor increases the decentralization of the Avalanche network without sacrificing scalability. In contrast, PoW, PoS, and DPoS end up having one actor process transactions, whose work is then validated by others.
Avalanche implements a directed acyclic graph (DAG) optimized consensus protocol. A DAG allows the network to process transactions in parallel. Validators poll a sampling of other validators to determine whether a new transaction is valid. After a certain number of this repeated random subsampling, it's statistically proven that it would be all but impossible for a transaction to be false.
All transactions are finalized immediately without other confirmations needed. Running a validator node and validating transactions have low and accessible hardware requirements, which helps with performance, decentralization, and climate friendliness.
The Snowman consensus protocol builds on the Avalanche consensus protocol but orders transactions linearly. This property is beneficial when dealing with smart contracts. Unlike the Avalanche consensus protocol, Snowman creates blocks.
AVAX is Avalanche's native token with a capped supply of 720 million. All fees paid on the network are burned as a deflationary mechanism, benefiting the wider-Avalanche community. AVAX has three main use cases:
1. You can stake your AVAX to become a validator or delegate it to a validator. Validators can earn up to 10% Annual Percentage Yield (APY), and set a custom percentage fee of the reward they keep from delegators who back them.
2. AVAX serves as the common unit of account for all Subnets, improving interoperability.
3. Transaction fees and Subnet subscriptions are payable in AVAX.
How do you stake AVAX?
AVAX holders can earn rewards by becoming a validator or by staking tokens with a validator. Becoming a validator requires staking 2,000 AVAX.
The hardware requirements are low enough that most standard laptops or desktops should be suitable to begin validating. You can also stake tokens with a validator and receive rewards when the validator successfully confirms transactions.
Customizable Avalanche blockchains
Avalanche offers similar functionality to Ethereum and other layer-one blockchains. Developers can create tokens, NFTs, and DApps. Users can stake tokens, validate transactions, and use more than 400 DApps. The benefits of Avalanche, according to its proponents, stem from improvements to these capabilities. As an extra feature, Avalanche also allows for the creation of interoperable, customized blockchains called Subnets.
A customized blockchain using a highly scalable subnet is well suited to large enterprise needs, and many are already building Subnets. It's convenient for big corporate and small independent operators of these custom blockchains to interact with others in a rich ecosystem and to leverage the security of Avalanche’s primary network.
Avalanche has its own Avalanche Virtual Machine (AVM), which is EVM-compatible. Developers familiar with Ethereum's Solidity coding language can easily use Avalanche and also port over existing projects.
How is Avalanche different from other scalable blockchains?
The problems and solutions we've brought up aren't unique to Avalanche. Avalanche is competing with other scalable platforms and interoperable blockchains like Ethereum, Polkadot, Polygon, and Solana. So, what is it that makes Avalanche different from the alternatives?
The most significant difference is probably the Avalanche Consensus. However, Avalanche is not the only blockchain with a novel consensus mechanism. Solana has Proof of History that allegedly can handle up to 50,000 TPS (transactions per second), outperforming the 6,500 TPS Avalanche claims. TPS, however, is just one metric for assessing network speed and one that fails to account for block finality.
Transaction speed and finalization
Another noticeable difference is Avalanche's finality time of less than 1 second. What does this mean exactly? Again, TPS is just one metric when measuring speed. We also need to factor in the time it takes to guarantee a transaction is finalized and cannot be reversed or altered. You could process 100,000 transactions in one second, but if there is a delay in finalization, the network will still be slower. Avalanche claims to have the fastest time-to-finality in the industry.
One of Avalanche's biggest claims is decentralization. Considering its size and age, it does have a large number of validators (1,300+ as of April 2022), due partly to its reasonably minimal requirements. However, as the price of AVAX has risen, it has become more expensive to become a validator.
Avalanche's interoperable blockchains are also potentially unlimited in number. This is in direct competition with Polkadot, another project offering customized and interoperable blockchains. Polkadot has limited space auctioned off in Parachain Slots auctions, whereas Avalanche works with a simple subscription fee.
With Decentralized Finance (DeFi) platforms looking for Ethereum alternatives, blockchains like Avalanche are attractive due to their EVM compatibility and low fees. However, DeFi platforms already have a long list of alternative platforms when it comes to scalability and speed.
Avalanche has increased in popularity since its release and has already caught up with Ethereum in total transactions per day, but whether it will be able to compete with other blockchains like Solana or Polygon is yet to be seen.