Avalanche is a Layer 0 ecosystem made up of three core Blockchains each optimized for specific tasks within the network. AVAX, the native utility token of the Avalanche Network is used to pay fees for transactions, delegate to secure the network, as well as pair with other assets or stable coins to participate in DeFi products. Avalanche was built specifically with Defi dApps and protocols in mind, focusing on security, low latency & high throughput by utilizing two different consensus mechanisms along a multitude of potential chains running simultaneously. By creating an open source, straightforward way to build both public and private blockchains Avalanche unlocks a huge realm of possibilities for developers to implement custom Virtual Machines in a scalable fashion.

A strong innovation Avalanche network has achieved is the ability to perform cross-chain swaps between the X, P, and C chain(s), the three native AVAX chains; showing how fast and cheap cross-chain swaps can be. This opens the door to many possibilities; AVAX users can swap directly from the X-Chain to the C-Chain, and interact with AVAX through the popular Ethereum interface and dApp layout many Defi users have grown accustomed to. By segregating the three chains completely and connecting them through bridging, each chain can be configured specifically for each major function needed within the network without compromising other capabilities.

Avalanche boasts a number of core innovations that stem from a few major differences from core blockchains such as splitting the essential systems into three separate chains, creating an infrastructure layer (Layer 0) versus a Layer 1 solution, and a unique proof of stake consensus algorithm. Avalanche believes these mechanisms solve the major challenges that Ethereum is currently facing in terms of scaling & the proof of stake conversion set to take place in the ETH2 upgrade while also boasting sub 1 second settlement times and transaction fees well below $1.

X-Chain – Exchange Chain

P-Chain – Platform Chain

C-Chain – Contract Chain

These 3 chains operate side by side with each tuned for flexibility, speed & security giving developers and users a variety of ways to interact with the ecosystem-based on each tailored need/use case at any level. In order to transfer assets from each of the 3 native chains we must interact with the AVAX native wallet where we can then perform a cross-chain swap between the X-Chain, P-Chain & C-Chain(s).

Avalanche allows developers to build not only dApps on top of the three main chains but build out their own Virtual Machines, Custom Blockchains as well as mint native ‘smart’ assets that can be traded with a given set of pre-programmed rules.

Layer 1 vs Layer 0; What's the difference?

Blockchains are changing and improving at breakneck pace, with that growth comes experimentation and a multitude of approaches to a few common problems that the ‘legacy’ layer 1 chains like Ethereum are running into. The basic explanation of a Layer 0 protocols like Avalanche, Polkadot & Cosmos is that they are base layers/ecosystems that connect the various blockchains built in those networks together through various processes. This is usually done to optimize performance for each blockchain since multiple chains can be created for each use case/to perform major tasks within the network and then bridged together to communicate.

Ethereum on the other hand is what we know in the traditional sense as a base Layer 1 protocol where assets can be minted and other dApps/decentralized protocols can be built on the chain itself. Ethereum’s Smart contracts were a huge contribution to crypto and are the core of DeFi. The common issue many users and developers face is the lack of scalability and specialization with the Ethereum network since it has to try and meet all of the user requirements simultaneously which comes at the expense of efficiency & optimization.  

Currently, dApps like Sushi or Uniswap are built on top of the Ethereum network as shown:

Ethereum (Layer 1/Blockchain) -> Uniswap (dApp)

On the Avalanche Network and other similar Layer 0 protocols we typically see a structure such as this, where Pangolin is the equivalent AMM platform on AVAX:

Avalanche Network (Layer 0) -> Ethereum Virtual Machine (Layer 1/Blockchain) -> Pangolin (dApp)

To better understand why Avalanche takes the approach it does, we need to look at both classical consensus & Nakamoto consensus first. Classical consensus can be likened to a democratic system where multiple validators are elected/chosen to represent a group. In this scenario, when transactions are submitted all of the elected validators would have to determine if the transaction is valid and then communicate that to each other validator to determine unanimous consensus or majority consensus (depending on the rule set of the consensus algorithm). This means if we have 5 validators, the time it takes for each transaction to be confirmed is the time it takes for each validator to communicate with each other which would be 5². One main issue we find with classical consensus in decentralized systems is that for every validator we add, this becomes 6² for example which means the time it takes for validators to confirm a transaction increases at an exponential rate. 

Next we look at Nakamoto consensus which was made popular by Satoshi Nakamoto in the design and implementation of the Proof of Work consensus system in Bitcoin today. Nakamoto consensus acts as a randomized lottery where a group of miners work to solve a puzzle and one of the puzzles contains the valid transaction/block to be validated and added to the chain. This is a very unique system and has stood the test of time thus far through Bitcoin’s short lifecycle, however even this has a few limitations for protocols & layer 1 solutions that require a cheaper & faster finality. This type of consensus excels at its primary objectives of being a scalable & decentralized network that can continue to uphold the censorship-resistant needs of a currency like Bitcoin. Avalanche however sees a different way to tackle this problem while still maintaining decentralization & robustness coined the Snowman Consensus Protocol. They employ two variations of the same consensus mechanism to fit the need of the specific chain the validators are securing. 

The basis of these two types of consensus mechanisms consists of random sampling of validators and a ‘confidence score.’ Put simply, once a transaction is submitted a small random group of validators are selected and each validator reports whether the transaction is valid or not. If all the validators agree, a new group is chosen and the process repeats. If not all of the validators agree, the validators will flip to the majority vote one by one and they will slowly all agree. As each group of validators confirms that the transaction is valid and that there are no duplicate TxIDs, the ‘confidence score’ & consecutive successes increase, we can assume that the multiple sets of validators are not acting maliciously. Once both the ‘confidence score’ & consecutive successes are over the set thresholds, the consensus protocol is then complete and the transaction is finalized.

‘$AVAX has a capped-supply of 720,000,000 (720M) tokens. The genesis block will have 360M $AVAX tokens. The rest of the 360M tokens will be minted according to [the minting function specified in the whitepaper]. For a graphical representation, the Figure below shows the token emissions curve between $AVAX and BTC. The principle of the emissions function chosen for Avalanche is simple: reach a capped supply, in a fashion similar to Bitcoin’s emissions curve, and yet maintain the ability to 80 govern the rate at which the system reaches this limit.’

Avalanche Token Whitepaper

Figure.2 (https://twitter.com/CryptoSeq/status/1349389557163315202/photo/1)

We can see a strong correlation between price and volume throughout the whole run up from January to March as well as a sharp drop off in volume as price started to decline just before June. Overall throughout multiple assets strong correlation factors between price and volume are apparent, Avalanche is no different here.

No strong correlation is found between daily sentiment around the AVAX token and increase in tweet volume. The increase in tweet volume is assumed to be attributed to the increase in users during the initial Defi periods and a second spike around the revamp & announcement of the updated roadmap with newly identified focuses for the core team.

Below is a list of the main protocols and projects that are currently being used on Avalanche. You can access the full list of projects within the Avalanche ecosystem.

Pangolin (PNG)

USDT (Tether)

USDC (USD Coin)

Avalaunch (XAVA)

Yield Yak

From a market perspective, Avalanche is the 'new kid on the block', but with the strong push and guidance from the Ava Labs team, they are quickly gaining traction within the Smart Contract Platforms sector. When comparing the leaders in this sector, it's no surprise that Ethereum is way out in front at $624.5B, which is 827% higher than the runner-up Binance Smart Chain ($67.3B). There are 4 other projects on the leaderboard that have ecosystem-wide market caps of $10B or more: Polygon ($30.5B), Polkadot ($27.9B), Solana ($21.3B), and Cosmos ($13.9B). Terra follows in 7th place at $5.6B. It's fair to say that while Avalanche has made great progress in growing up to a $4.2B market cap, there is still plenty of room for growth.

The AvaLabs core team has revamped the roadmap recently and set out a list of goals for Q3 after hearing feedback from the community and getting a better understanding of what users want. The Q3 Major Milestones for Jul-Sep are as follows:

7/14/2021 - DeFi Lending Platform Vee.Finance Closes Multi-Million Dollar Seed Round, Led by Huobi Ventures Blockchain Fund and Avalanche Asia Eco Fund AVATAR

7/13/2021- Forex Trading is Coming to Avalanche with Onomy Protocol

7/12/2021 - Tenderly, a Blockchain Developer Platform, Integrates with Avalanche

7/08/2021 - The Next Generation Avalanche Bridge (AB) is Coming Seamlessly Bridging Avalanche and Ethereum

7/08/2021- DeFi Yield Protocol (DYP) Announces Its Expanding to Avalanche7/01/2021 - Decentralized Liquidity Underwriter KUU Partners with BENQI to Scale DeFi on Avalanche