Growspace Research: Avalanche (AVAX)

Introduction

Avalanche is a high performance, proof of stake, customizable blockchain platform for building real world products and services. Ethereum’s scalability issues gave way for many layer 1 and layer 2 projects to fill the void created by its high fees and low speed. Avalanche has emerged as a dominant blockchain network from that group.

How does it work?

Avalanche’s platform comprises 3 built-in blockchains:

Source: https://docs.avax.network/overview/getting-started/avalanche-platform

1. Exchange Chain (X-Chain): Enables creation and trading of smart digital assets.

2. Platform Chain (P-Chain): Needed for staking AVAX and coordinates validators.

3. Contract Chain (C-Chain): Enables creation and execution of smart contracts. Important for deploying dapps.

X-chain uses the Avalanche Consensus Protocol, while P-chain and C-chain use the Snowman Consensus Protocol. Consensus mechanism refers to the methodology by which transaction validators achieve the consensus on whether a transaction is valid or not. Avalanche has a unique consensus mechanism that works as follows:

Source: https://docs.avax.network/

According to the Avalanche developer documentation, Snowman consensus protocol is powered by the Avalanche consensus protocol and is optimized for high throughput.

Value Proposition

According to Avalanche’s whitepaper, it targets 3 broad use cases:

1. Building of application-specific blockchains, for both private (permissioned) and public (permissionless) deployments.

2. Building and deploying scalable decentralized applications (dapps).

3. Building complex financial digital assets following custom rules and covenants.

Tokenomics

AVAX is the native token of the Avalanche network used for paying transaction fees and for securing the network via staking (and earning AVAX rewards in return). AVAX supply is hard capped at 720 million tokens. Note that the fees paid on the Avalanche network are burned, consequently increasing scarcity of the token (good for AVAX holders).

The initial token allocation was as follows:

Source: Messari

Half of the total supply (=360 million tokens) were minted and were allocated to various parties shown above, and the other half was locked to be distributed as staking rewards in the coming decades.

Competitive Analysis

Following is the comparison of Avalanche’s performance against key competitors in the infrastructure category.

1. Total Fees Generated

Source: Token Terminal

Avalanche has been the dominant blockchain in terms of the amount of fees generated, a sign of network activity. However, since mid June 2022, Solana and Polygon have overtaken Avalanche.

2. Total Value Locked (TVL)

Source: https://www.gokustats.xyz/dashboard

Since mid 2021, Avalanche has almost always stayed at top among competitors in terms of the total assets locked in the blockchain’s smart contracts.

3. Active users

Source: Token Terminal

Although Polygon (our 3rd largest holding at Growspace) dominates on this metric, Avalanche is neck-to-neck with Arbitrum.

Key Metrics

1. Network Growth

Source: https://snowtrace.io/chart/address

Network growth, in terms of the total number of unique addresses on the Avalanche C-chain, is clearly visible from the above chart.

2. AVAX Burned

1,961,199 AVAX tokens have been burned, equivalent to $33,713,048 (at the time of writing), putting deflationary pressure on the AVAX economics.

Growspace Thesis

1. Avalanche is a leading infrastructure platform offering ultra-high speed (upto 4500 transactions per second).

2. Avalanche significantly captures growth of the NFT market (ranks 7th among blockchains in all time NFT sales volume).

3. Technologically, Avalanche offers best of all worlds: high transaction speed of blockchains like Solana and interoperability (through subnets) of blockchain networks like Polkadot and Cosmos.

4. Avalanche has been aggressively building more and more partnerships, and has had engagements with firms like Mastercard and Deloitte.

5. Avalanche has a thriving dapp ecosystem with 264 projects (at the time of writing), and has almost always ranked in the top 5 blockchains by TVL (Total Value Locked) since Q4 2021.

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