Robert has reported for a variety of international publications including the Associated Press, The Guardian, Vice, and Decrypt. Current areas of interest include the political economy of technology, cryptocurrencies, and privacy. Robert has a Bachelor of Science from UCL, and a Master's degree from the University of Oxford's Internet Institute.
You might see the term “ layer-one blockchain bandied about. It’s a complicated way of saying “blockchain”. Bitcoin, Ethereum Solana and Avalanche are all examples of these: decentralised ledgers backed by a network of anonymous computers.
Avalanche is a smart-contract enabled blockchain that launched in September 2020. Smart contracts are self-enforcing bits of code that power decentralised financial applications as diverse as crypto art, gambling markets and lending protocols.
The most popular smart contract platform is called Ethereum. Its coin is the second-largest cryptocurrency after Bitcoin (which does not support smart contracts). Blockchains like Cardano, Solana and Avalanche sprung up after people started finding Ethereum too expensive and slow to use.Buy and Sell Bitcoin, Ethereum, and over a dozen other cryptocurrencies with Wealthsimple. Sign up and Trade here.
Upgrades to improve Ethereum are on the way (the major one is called Ethereum 2.0), but the keen entrepreneurs who are building these rivals were quick to spot that it won’t be ready for a few years.
While Ethereum can process about 14 transactions per second in its current state, and a single transaction can cost close to a hundred US dollars, Avalanche claims to be able to process up to more than 4,500 transactions per second and transactions cost under a dollar. It takes less than two seconds to complete a transaction. And it’s available today.
What’s more, while just a few pools control enough of the Bitcoin and Ethereum networks to overpower the network (although, in practice, this would still be very difficult), Avalanche has thousands of different nodes processing transactions.
What’s under the hood
Avalanche accomplishes this by using three different blockchains: the X-Chain, C-Chain and P-Chain.
The X-Chain manages assets and the Avalanche consensus protocol. It hosts the AVAX coin, which is analogous to ETH on Ethereum, and then Avalanche tokens that are backed by Avalanche and run on its blockchain. These are comparable to ERC-20 tokens, like Shiba Inu token (better known as SHIB) or Aave, the governance token for the decentralised lending protocol by the same name. Transaction fees on Avalanche are always paid in AVAX.
The C-Chain is used to create smart contracts—the technology that powers decentralised applications. Examples include Penguin Finance, Yield Yak and Canary Exchange. Anyone can create smart contracts.
Avalanche is compatible with Solidity, the smart contract language that powers Ethereum protocols. That means that Ethereum protocol developers can hook up their applications to Avalanche without too much trouble or cost. Developers can also create other blockchains within the platform, and have those blockchains interoperate with the Avalanche protocol.
Last is the P-Chain, which coordinates validators that confirm transactions on the Avalanche blockchain. You can also create subnets on the P-Chain. Subnets are groups of validators that confirm transactions on other blockchains backed by Avalanche. A subnet can validate lots of different blockchains at once. Both the C-Chain and the P-Chain Chain use a consensus protocol called Snowman.
The point of all having three chains isn’t simply that they make Avalanche very fast, but that it can stay just as fast if the network keeps on growing. Blockchains that are very fast are usually either not very decentralised (meaning that just a few entities are validating transactions) or struggle when lots of people start to use them.
AVAX’s consensus mechanism isn’t quite like proof-of-stake or proof-of-work, terms you may have heard applied to Bitcoin or Ethereum. Instead, it uses something called a directed acyclic graph (DAG), where histories of blockchains are expressed as graphs of hashes, called hashgraphs. Other examples of blockchains that run on DAGs include Hedera Hashgraph and Fantom.
Each of the more than 1,000 nodes on Avalanche works in tandem to randomly confirm the transactions of other validators on the network. The idea behind this is that if you check up on the validators often enough, it’s statistically very likely indeed that the validators are good at their jobs and that they’re not processing false data.
No more transaction confirmations are needed with the Avalanche consensus protocol. This means that there aren’t ‘blocks’, or batches of transactions that are chained together, as seen in conventional blockchain networks like Ethereum or Bitcoin. Instead, transactions have parents known as vertices, and you can work out the flow of money by checking these graphs. This is how Avalanche gets its transaction times down. The Snowman protocol, which powers the C-Chain and the P-Chain, does use blocks.
Using a directed acyclic graph also cuts down on the costs each validator needs to expend in order to confirm transactions. That’s very different than, say, Bitcoin, where miners need to spend thousands of dollars on powerful computer hardware just to turn a profit.
Avalanche was created by Ava Labs, an American company led by Emin Gün Sirer, Kevin Sekniqi and Maofan “Ted” Yin. According to Crunchbase, the company has raised $290 million, as of November 9, 2021. A lot of this funding has come from just a handful of venture capital companies, namely Polychain Capital (founded by Coinbase’s first employee, Olaf Carlson-Wee) and Singaporean crypto hedge fund Three Arrows Capital.
What is AVAX?
AVAX is the native token of the Avalanche blockchain network. It’s easiest to compare it to something you might already know, like Ethereum. If you’ve ever used an Ethereum-based decentralised finance protocol, or even shifted funds between wallets, etched into the recesses of your memory will be the transaction cost that you had to pay to push that transaction through. Things are the same on Avalanche, only here you pay with AVAX and fees are generally under a dollar.
You can earn AVAX by becoming one of those validators. As of this writing, there are 1,138 validators. You do this by staking your tokens (either directly, or by delegating your tokens to someone who has already set themselves up as a validator). Avalanche’s site claims that you can earn up to 11% a year (paid out in AVAX tokens, so 11% of whatever they are worth) by doing this.
If you’re delegating tokens, you’ll earn less, because a percentage of your rewards will go to the people who set themselves up as validators. It takes 2,000 AVAX to become a validator. As of this writing, that’s $179,260. Blockchains that want to be backed by AVAX can also use the coin to pay for their subscriptions to the network.
Like Bitcoin, the supply of AVAX tokens is fixed. There can only be a maximum of 720 million AVAX tokens in circulation; once they have all been released, no more can be issued. When you pay fees on Avalanche, the network burns these tokens to reduce the supply (this is similar to what happens on Ethereum right now, at least until the network transactions to Ethereum 2.0).
Although AVAX launched in September 2020, the coin was pretty stagnant until 2021. It started the year at about $3, and by February had risen to $55. Then it sunk, and by June it had fallen to $10.53. Then AVAX rose again, and on November 8 hit about $90. (This piece was written a day later, on November 9). Trading volumes have boomed as a consequence, peaking at around $2.8 billion in September 2021. AVAX’s rise rivals that of Solana, another blockchain that rose to prominence in 2021. This is because both attempt to beat Ethereum at its own game and become the smart contract blockchain du jour.
Avalanche must also rival the upcoming upgrade to Ethereum, Ethereum 2.0. This upgrade transitions the blockchain to a proof-of-stake blockchain, where those with the most coins are responsible for confirming transactions. It also increases throughput on the blockchain, with co-founder Vitalik Buterin predicting that it could read well over a hundred thousand transactions per second within a few years.
As of this writing, Avalanche is smaller than Solana. AVAX’s market cap is $19 billion and Solana’s is $74 billion. As the thirteenth-largest coin, it is also smaller than rivals like Caradano ($77 billion) and Polkadot ($55 million). And all those rivals combined account for less than half the market cap of Ethereum, $568 billion. (Note that all these values are highly volatile).
How to buy AVAX
There are plenty of places to buy AVAX, but as of this writing, Wealthsimple is not one of them. (However, you can buy and sell rivals like Solana, Polkadot, Fantom and Cardano, as well as the coin they’re all trying to beat, Ethereum).
AVAX is widely available at most major cryptocurrency exchanges. The largest market is on Binance, where the USDT pairing accounts for 31.88% of all trading volume. USDT is a stablecoin pegged to the value of the US dollar. It is backed by reserves of US dollars and cash equivalents, although the exact destination of its investments is unclear, and a point of major contention for regulators and investors.
The next most popular currencies against which to trade AVAX are Bitcoin, BUSD (Binance’s US dollar stablecoin) and the US dollar. When choosing a trading venue, there are a couple of factors that could sway your choice. The first is whether it is legal to trade there. Binance, for instance, does not operate in Ontario. Some Canadian exchanges, like Newton or ShakePay, are well integrated with the Canadian banking system, although neither offer AVAX as of this writing.
Another thing to consider is the fees. Binance’s fees are lower than Coinbase for smaller trades, and these centralized exchanges are sometimes cheaper than decentralised exchanges (again, for smaller trades), which will charge you Avalanche’s transaction fees on all trades.
Another important factor is the security of the exchange. Exchanges are backed by different levels of security and hold different insurance policies. Some may collapse and take your money with you, while others will reimburse you. Protocols like Pangolin and JellySwap are popular decentralised exchanges on Avalanche, meaning that they do not hold custody over your funds. However, the exchanges are subject to what’s known as smart contract risk, which refers to bugs in the code that may compromise your money.
To sign up for a centralized exchange, you usually have to submit some identification, like a driver’s license or a passport. To sign up for a decentralised exchange, you don’t have to do that; you just connect a cryptocurrency wallet that is compatible with Avalanche and filled with a little AVAX to pay for transactions.
Centralized exchanges often let you trade cryptocurrencies directly for fiat currencies, like the US dollar, as well as coins from other blockchains. decentralised exchanges only let you swap other tokens that are compatible with their blockchain.
Centralized exchanges like Coinbase and Binance will let you trade in a couple of different ways. The first is when they act as a brokerage, meaning you buy and sell directly from them (like Wealthsimple). This often comes with additional ‘convenience’ fees. The second is trading on the exchange’s order books, directly with other users. This is usually cheaper but slightly more technical. To trade at the market price, you’re looking for ‘spot’ trades.
decentralised exchanges usually operate a little differently. Instead of buying and selling tokens from other users, you swap in and out of pools of assets that other people have invested in. Those people are known as ‘liquidity providers’, and they earn a cut of your transaction fee each time you trade. This structure is known as the ‘automatic market maker’, and was first popularised by an Ethereum protocol called Uniswap.
Once you have bought your AVAX, you have to store it. It’s generally advisable to store it in your own wallet, either in a browser-based wallet, or in a hardware wallet like a Ledger or a Trezor. Hardware wallets look a little like USB sticks and let you trade while connecting to the internet as little as possible.
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