What is Avalanche (AVAX) and how does it work?

Launched in 2020, Avalanche (AVAX) is currently on the list of the world's largest cryptocurrencies based on market capitalization. Like Ethereum, Cardano and Binance Smart Chain, Avalanche is a so-called "smart contract platform", i.e. a decentralized digital platform on which it is possible to build other blockchain-based apps. Avalanche is also a so-called “layer 1” blockchain because it acts as the main blockchain for its own ecosystem and has its own cryptocurrency that is used to pay for transactions in this ecosystem. Other such “layer 1” blockchains are Bitcoin, Ethereum and Cardano.

Avalanche's associated cryptocurrency, i.e. token, is also called Avalanche, but is called AVAX.

Avalanche is a blockchain platform that focuses on high transaction speed, low fees and environmental friendliness. The platform is built by the company Ava Labs, and they allow anyone to build their own multifunctional blockchains and decentralized applications (dApps) on the platform. Like most other blockchains, Avalanche also tries to solve the well-known blockchain trilemma, i.e. achieving both scalability, decentralization and security.

Avalanche thus hopes to be able to deliver a highly scalable network without compromising decentralization or security, and wants to win over its competitors by solving this problem in a better way.

Avalanches consensus mechanism is, very simply, that validators "gossip" with each other. Just as a single snowflake can turn into a snowball, a single transaction can eventually turn into an avalanche.

Three reasons why AVAX is valuable:

Avalanche has a limited supply of 720 million AVAX tokens. Half was distributed at launch and the other half is "minted", or created, as rewards for those who strike.
Like Ethereum, Avalanche is a Proof-of-Stake blockchain, and the blockchain is powered by participants staking their AVAX. How much you get in reward is based on how long you strike (Proof of Uptime) and to what extent you have historically complied with the protocol's rules (Proof of Correctness). This creates is system where the circulating supply of AVAX is low, even though the demand for the token is high.
When you send crypto over blockchains, you always pay a fee. With many blockchains, such as e.g. Bitcoin, these fees are distributed to those who secure the network and confirm the transactions. This does not happen at Avalanche. Instead, the fees are burned, which means that they are removed completely. This means that there will be fewer AVAXs, which in turn can push prices up and ensure the lifetime of the network.

Firi Explains: What is the Blockchain Trilemma?

In the crypto world, the so-called "blockchain trilemma" is often the biggest problem developers face. The concept was first discussed by Ethereum co-founder Vitalik Buterin and describes three challenges that developers face when building blockchains: decentralization, security and scalability. In the process of developing a blockchain, there is a trade-off where developers generally have to sacrifice one of the three aspects in favor of the other two.

How to buy and store Avalanche (AVAX)?

An easy and cheap way to buy and hold AVAX is through a crypto exchange like Firi. Firi makes it easy to both buy, sell and store your AVAX and other cryptocurrencies.

When you create an account with Firi, an AVAX wallet is automatically generated for you. In practice, this means that Firi safely stores your cryptocurrency for you.

You can access your AVAX wallet by logging in to your user account with e-mail or Vipps, and by verifying yourself with BankID. You can easily send and receive AVAX to your wallet at Firi from other exchanges or other AVAX wallets.

How does Avalanche work?

As mentioned, Avalanche is a blockchain that focuses on smart contracts, and the platform supports both decentralized applications (dApps) and autonomous blockchains. Primarily, there are four aspects that distinguish Avalanche from other blockchain projects:

Three blockchains for optimizing the network

Avalanche is built around a system of three interoperable blockchains: Exchange Chain (X-Chain), Contract Chain (C-Chain) and Platform Chain (P-Chain). This is to optimize the network and minimize the limitations that the blockchain trilemma brings with it. Digital assets can be moved between these three chains to perform different functions in the ecosystem.

X-Chain is the standard blockchain on which tokens, such as AVAX, are created and exchanged.
C-Chain makes it possible to create smart contracts. This is based on the Ethereum Virtual Machine (EVM), which allows smart contracts on Avalanche to benefit from cross-blockchain interoperability.
P-Chain coordinates validators and makes it possible to create and manage what they call Subnets. We will return to this.

Ava Labs itself says that by dividing the architecture on three different chains, Avalanche can optimize flexibility, speed and security without the three coming at the expense of each other. This makes the platform attractive to both individuals and companies, as developers have great flexibility in the types of applications they can build.

Avalanche Consensus Protocol: The consensus mechanism

If you have read a bit about blockchain and cryptocurrency, you already know that the vast majority either use the Proof-of-Work or Proof-of-Stake consensus mechanism. X-Chain on Avalanche uses a new consensus mechanism based on Proof-of-Stake, but they call it the Avalanche Consensus Protocol. When a transaction is initiated by a user, it is received by a validator node that queries the state of the blockchain from a random set of other validators. The validators perform this sampling procedure repeatedly and they "gossip" with each other to eventually reach consensus.

In this way, a validator's message is sent to other validators, who gossip with more validators, who gossip with even more validators. This is done repeatedly until the entire system agrees on an outcome, and the more AVAX tokens a validator stakes, the more likely it is that other validators will believe the gossip. In the same way that a single snowflake can turn into a snowball, a single transaction can eventually turn into an avalanche.

This structure makes Avalanche highly resistant to 51% attacks and potential hackers would have to destroy 80% of the network validators to succeed, making it expensive to implement.

C-Chain and P-Chain use what they call the Snowman Consensus Protocol. This is a modified version of the Avalanche Consensus Protocol that is chain optimized and thus better suited for smart contracts. The Snowman Consensus Protocol is powered by the Avalanche Consensus Protocol.

Subnets allow individual projects to build on Avalanche

As previously mentioned, P-Chain makes it possible to create and manage so-called subnets, or sub-networks. Subnets allow individual projects built on Avalanche to remain connected to the Avalanche network via individual chains, without taking up space on the mainnet. By redistributing traffic in this way, subnets allow Avalanche to avoid transaction speed issues and high fees as it scales up in size. Consensus on these chains is achieved by subnetworks, which are groups of nodes that participate in validating a designated set of blockchains. All subnet validators must also validate Avalanche's primary network.

In March 2022, the Avalanche Foundation announced a $290 million incentive program to get Web3 developers to build their own subnets using the technology. Among the first beneficiaries of this program was the popular Play-to-Earn game Defi Kingdoms originally built on the Harmony network. Their project "Crystalvale" runs on the "DFK Chain" subnet built on P-Chain.

What Avalanche wants to achieve with subnets is of course scalability and that the system can be compared with other scaling solutions such as Polkadots Parachains and Ethereum 2.0's shards. Which solution is ultimately left as the winner, or whether they will live happily side by side, remains to be seen.

The speed of Avalanche is high compared to Bitcoin and Ethereum

Speed is the last point that separates the Avalanche from many of its competitors. Ava Labs itself says that the platform can handle around 4,500 transactions per second - compared to around seven per second for Bitcoin and 15 per second for Ethereum. The network is also capable of achieving "transaction finality" (finality) in less than three seconds. This makes Avalanche well suited for massive scaling of decentralized applications, which is a bottleneck for many of its competitors.

Tokens and staking on Avalanche

As a Proof-of-Stake platform, Avalanche relies on validators staking AVAX to earn rewards. Although developers can issue their own tokens on subnets, AVAX is the primary token of the Avalanche network. In total there are 720 million tokens, of which 360 million were sold at launch through private and public sales. The remaining 360 million AVAX have been set aside for staking rewards distributed over the coming decades. It is the AVAX users themselves who control how quickly new coins are minted, i.e. created. Participants can control the frequency of new coins by adjusting how much AVAX is paid as a reward for staking.

Validators, i.e. those who secure and operate the network, can get a return of up to 11% annually when they stake their AVAX, but this figure varies and is adjusted according to how fast the validators are, the inflation in AVAX, as well as how many staked tokens there are. The minimum requirement to become a validator is to stake 2,000 AVAX.

Pros and Cons of Avalanche (AVAX)

Like all other blockchains, Avalanche has both advantages and disadvantages. Here we take a closer look at some of them.

The advantages of Avalanche:

Fast processing times for transactions.
Since it is a Proof-of-Stake blockchain, participants can be rewarded for operating the blockchain.
Can support many blockchain-based projects
Collaboration with Amazon can open up opportunities

The disadvantages of Avalance:

Tough competition from more popular and larger platforms, such as Ethereum
Avalanche validators must stake a full 2,000 AVAX tokens. That is quite a lot, as 1 AVAX today is around NOK 160, which means that you have to stake NOK 320,000 to participate.
When staking other cryptos, such as ETH, dishonest validators are penalized by losing (part of) their staked funds. This is called slashing, and is the primary method of incentivizing validators to do what is best for the blockchain. AVAX does not use slashing against dishonest validators, and they get back all their staked funds when the staking period is over. You therefore lose this extra layer of security against attacks on the blockchain.
AVAX took a hit after the rumor that Ava Labs was trying to destabilize competitors.

The history of Avalanche and AVAX

Here's a timeline of how Avalanche (AVAX) has evolved:

May 2018:The idea of Avalanche was shared on the InterPlanetary File System (IPFS) knowledge protocol.
- The group that shared the concept went by the pseudonym "Team Rocket".
- Avalanche is being developed by a group of researchers from Cornell University, led by Emin Gün Sirer, professor of computer science and software engineering, and assisted by graduate students Maofan "Ted" Yin and Kevin Sekniqi.
- Later in 2020, Ava Labs will be founded by these three researchers to further develop the network.
March 2020: The AVA codebase for the Avalanche consensus protocol becomes publicly available via open source. This means that anyone can see and contribute to changes to the platform's code.
September 2020: Avalanche launches its mainnet and cryptocurrency Avalanche (AVAX)
August 2022: Whistleblower "Crypto Leaks" publishes a report accusing Ava Labs of secret deals with a law firm aimed at legally destabilizing Avalanche's competitors. Ava Lab's CEO, Emin Gün Sirer, denies this.
January 2023: Avalanche and tech giant Amazon announce a partnership. This is said to improve Avalanche's infrastructure and ecosystem for decentralized applications. Although such partnerships are not entirely unusual, they can be of great importance and not least give a lot of positive publicity, which can help the project going forward.

Lasse Schultz27/03/2023