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Avalanche – should Ethereum brace for impact?

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Avalanche is a Proof of Stake (PoS) blockchain developed by Ava Labs and their CEO Emin Gün Sirer. Sirer is an associate professor of computer science at Cornell University and prolific thought leader in the crypto world.

Avalanche allows finalization of transactions in a matter of 1-2 seconds, thanks to a unique consensus algorithm. The network can process more than 10,000 transactions per second and is highly decentralized. With more than 4000 validators spread around the globe.

More than 240 projects are currently being built on top of avax.network. Signs of a very active developer community. 

Avalanche can bridge blockchains, allowing other tokens to be processed on its native ledger. Similar to Polkadot’s  parachains, but with a different implementation.

The community is made up of level-headed individuals. You won’t find maximalism and bashing there. With the quiet attitude comes a certain lack of headlines and minimal hype. This has kept the project somewhat in the dark. A big push for visibility in the last weeks is changing that now, though.

A rock solid technical foundation and an active community focused on building is worth a lot. The next two years will show if Avalanche is truly moving mountains, or is just a (snow)storm in a glass.

What’s special about Avalanche?

At the heart of every blockchain is the mechanism that governs which transactions to confirm and which to reject, known as consensus algorithm. Bitcoin uses Nakamoto consensus, where miners are incentivized to reject hostile or faulty transactions. If they still include them, the resulting block will not be added to the main blockchain by the majority of other miners. And their effort will be wasted.

Avalanche’s approach is called Snowflake - because a lot of snowflakes can make up an Avalanche. 

Snowflake works like this: A validator receives a transaction and polls 5-10 other validators: Should the transaction be approved or not?

The validator then takes the side of the majority of poll results.On and on, as the snowflake expands its branches and connects to other snowflakes.

This leads to transaction finality within about 13 rounds of polling, usually in less than 1 second. Finality here is probabilistic. A miniscule chance remains, that every validator voted the wrong way. Want to dig deeper: This medium post does a great job.

The algorithm's biggest drawback is that double spends remain undecided. Which is ultimately bad for the double spender. The transaction never clears and the funds remain locked. 

Avalanche is a Proof of Stake blockchain. No specialized mining hardware burning terawatt hours of energy is required. A validating node can be run on cheap, inexpensive hardware. Even smartphones. AVAX is green and easy to keep decentralized.

The protocol can scale to 10+ million nodes, and has proven to be capable of 11,000+ transactions per second.

Avalanche allows tokens from other chains to run on its network. The detailed technical background for ETH to AVAX can be found here: The Avalanche-Ethereum Bridge.

It also supports multiple virtual machines. dApps can be migrated and then profit from the speed of the platform.

Developers can launch their own unique blockchains in the form of sub-chains. Sub-chains profit from the security and scale of the parent chain and can implement custom features like permissioning, where only some users are allowed to inspect or interact with certain addresses and functions. This is a frequent requirement for enterprise adoption.

The ecosystem

Emin Gün Sirer became somewhat famous during the DAO hack in 2015. One of Sirer’s students was the first to point out the flaw in The DAO’s smart contract, known as Reentrancy Attack. 

Sirer looked at the code and convinced the student that while the problem existed, it was unlikely that it would be exploited, a mistake that ultimately led to Ethereum’s split into ETH and ETC. 

With the impact of the DAOs demise still prominent in their memory he and his team refused to launch the token during the heydays of the 2017/18 ICO craze. 

Ultimately AVAX launched in the form of a crowd sale in June 2020, and quickly sold out. It trades on multiple international exchanges like Binance and Gate.io.

Thanks to Ava.Labs focus on professionalism and support Avalanche attracted many developers since 2018 - long before their token launch. A quick glance at their discord chat reveals intense technical discussion and vibrant exchange.

The token

AVAX is the native token on Avalanche, with a maximum supply of 720 million. Half of the tokens were minted in the genesis block and the other half is released according to a distribution curve specified in the white paper here.

Validators need to stake 2,000 AVAX (35k USD) to be able to vote on transactions. Compared to Ethereum’s 32 ETH2 (100k USD) this is a steal. Validators in Avalanche are not slashed when they misbehave, so funds are never at risk. Staking rewards are currently above 10%.

Avax burns tokens as transaction fees, minting fees and when subnets and sub chains are created. This means that Avax is actually deflationary. 

One AVAX was sold for $0,50 at pre-sale, when agreeing to a lock-in of 6 months. The price experienced a wild ride up to almost $60 around February ‘21 and crossed $20 again in the middle of August ‘21.

So where’s the catch?

As you can see Avalanche offers unique technology, fast, cheap transactions and massive scalability at low energy use. Ava.Labs managed to spawn a lot of development effort, especially in the De-Fi and enterprise space.

Apart from its launch and a short peak in February it never grabbed much of the spotlight. Mostly due to the quiet, humble attitude the whole community has. This is a good thing, first and foremost. 

Ava.Labs are clearly putting in an effort to educate the public about the many projects being developed and the beauty of its tech. But the question remains: Will they be able to drive wide-spred adoption? 

This is not necessarily a reason to pass on Avalanche. Like in the tale of the turtle and the hare, continuous, steady execution with repeated good results can win over flashy competitors.

With projects like Pangolin swap, Snowball De-Fi, or Polyient Games NFTs,  I’m optimistic for Avalanche’s future. Lately the team did a terrific job of gaining social media momentum. 

Making money with AVAX.

We’ll outline 3 skill levels, named after chess pieces. From Pawn level (easy) to Queen level (hard).

  • Pawn level: Buy some tokens and stake. More than 10% yield is nice.
  • Bishop level: Dive into De-Fi projects using AVAX.
  • Queen level: Run a validator and stake 2,000 tokens.

Let’s get into more detail on each of the levels.

Pawn level: Buy some tokens and stake.

Buying AVAX is easy, the token is listed on many exchanges. You need a minimum of 25 AVAX to start staking. Open an Avalanche Wallet. Move your AVAX from the exchange and go to the Earn tab. Done, you’re staking. This article shows you how, step by step.

Bishop level: Dive into De-Fi projects using AVAX.

Head over to avax-projects.com and filter for De-Fi. As you can see there’s a ton of cool projects like Aave or Makr to participate in with your tokens. Do some research to find where you can get good yields.

Be cautious to read up on the risks of providing liquidit. Impermanent loss is real, and some pools are scams, often smaller and more out-of-the-market ones. The Defiant has the lowdown.

Queen level: Run a staking validator.

If you’re really bullish on Avalanche, get all in. You’ll need 2,000 AVAX, or currently about $35k. In terms of hardware, this is probably the most frugal chain ever. An old laptop will completely do, as long as it’s able to run 24/7. There’s a well-designed website and good docs taking you through every step to get started.

Nodes can run on Linux, Windows and MacOS. If you run into problems, pop over to their discord, which is active 24/7. With more than 10% staking rewards and half of all AVAX staked your node will be in good company.

Action steps

  • Find a good entry price to get some tokens and stake them. 
  • Head over to avax-projects.com and familiarize yourself with the ones you’re attracted to the most. 
  • Follow Avalanche (@avalancheavax) and Emin Gün Sirer (@el33th4xor) on Twitter for the freshest news.

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