An Analysis of the Developing State of Avalanche’s Technology

Smart contract platform Avalanche has two pieces of technology still under development — HyperSDK and Avalanche Warp Messaging (AWM). These innovations encourage the use of Elastic Subnets, creating network effects and spurring growth.  In turn, that could enhance value accrual to AVAX, Avalanche’s native token. 

Subnets are the interconnected layer 1 blockchains that Avalanche uses to scale. Since September 2022, Ava Labs, Avalanche's development company, has been shipping new technologies to achieve permissionless validation (Elastic Subnets), high throughput (HyperSKD), and interoperability (AWM). These three essential platform and tooling upgrades could lay the groundwork for the broader adoption of Avalanche’s network technology. This article details the purpose, current state, and mature state of each of Avalanche’s new releases and lays out how their cooperation may potentially impact the Avalanche ecosystem. 

HyperSDK is a software development kit that allows Subnet builders to create customizable and high-performance virtual machines. This enables developers to build blockchains that comply with regulations like know-your-customer and anti-money laundering laws. 

The HyperSDK is currently in alpha, meaning the virtual machines created with it (called HyperVMs) are not yet suitable for production deployment. On mainnet, all popular Subnets currently run on the Subnet EVM. Notable teams like Movement are working on implementing virtual machines associated with other blockchains like Solana VM and Move VM. For comparison, the current EVM-based Subnets can process nearly 400 transactions per second (TPS) while hyperVMs is reported to have sustained about 50,000 TPS in local test environments. 

Once the HyperSDK is fully tested, HyperVMs will become production-ready, providing examples that can be used as templates for further optimization. For instance, developers can use a virtual machine optimized for swaps on a decentralized exchange or use a virtual machine optimized for object-oriented programming. The HyperSDKalso supports open-source modules, making it a growing library of developer tools. 

Avalanche Warp Messaging (AWM) is Avalanche's native messaging layer that enables seamless interaction between projects on different Subnets without relying on third-party bridges. This improves security by avoiding additional vulnerabilities associated with external bridges. 

Currently, AWM can send messages between two subnets but cannot send messages from the C-Chain to a Subnet. This limitation is especially significant for decentralized finance (DeFi) projects on Subnets because most funds are stored on the C-Chain, hindering liquidity access.

For example, if a decentralized exchange (DEX) project wants to move funds from the C-Chain to a Subnet, the DEX must rely on a third-party bridge. 

At Avalanche Summit II, Ava Labs announced Teleporter, a product built on AWM, which will facilitate messaging and asset transfer between Ethereum Virtual Machine (EVM) Subnets, including the C-Chain. Once C-Chain-to-Subnet messaging becomes available, DeFi applications on Subnets will gain access to the main fund pool, benefitting from the speed and cost-saving advantages of Subnets. 

Mature AWM usage goes beyond DeFi as institutional, enterprise, and gaming Subnets will all be able to interact and share data seamlessly. This opens up opportunities for new use cases like unified loyalty point programs, metagames which incorporate elements from other games. 

Elastic Subnets allow anyone to validate a Subnet by staking native tokens on the Avalanche Platform Chain (P-Chain) without approval. This is known as permissionless validation. In return, stakers earn a share of the fees generated by the Elastic Subnet. 

In order for a Subnet to become an Elastic Subnet, Subnet creators must sacrifice their admin keys, so permissions for all users become uniform. Elastic Subnets are a key technology that facilitate AVAX value accrual because they incentivize AVAX lock up (via fee sharing) through validator staking. 

Although Elastic Subnets can be launched, they haven’t seen widespread adoption on the Avalanche mainnet. One obstacle for Elastic Subnet builders is the lack of incentive to sacrifice their admin keys in low-liquidity environments where permissioned subnet validations can be more convenient. The trusted environment of permissioned Subnets, where users implicitly trust the Subnet creator and validators, doesn’t heavily rely on economic security to validate the network, and validator counts can remain low. Low validator counts generally translate to minimal token lockup. 

In late April, Ava Labs announced support for Elastic Subnets so that Elastic Subnet builders can access planning and troubleshooting assistance. 

In the future, Elastic Subnets will enable Avalanche ecosystem users to rely on economic security for network validation rather than trust. An Elastic Subnet financially penalizes malicious network validators (validators that behave independently of the Avalanche consensus protocol) by limiting their access to block rewards. This incentive structure ensures that financially reasonable network participants will adhere to the protocol and secure the network. The more stake locked in an Elastic Subnet, the more difficult it is for a malicious actor to corrupt the network. 

Open-source blockchain projects have the ability to bring new value to an entire network due to their flexible nature. Avalanche, with its newly released set of technologies, can establish network effects in ways that were not previously possible.

The HyperSDK simplifies the creation of high-performing blockchains. It ensures that all Subnets have access to a high-performing execution layer. Additionally, AWM connects these high-performing blockchains, delivering users a unified experience and unlocking the benefits of Subnet scalability, which include low-cost and isolated fees.

Subnet projects can leverage this fast, scalable, and interconnected infrastructure to contribute new value to the ecosystem. Through Elastic Subnets, anyone can secure new valuable projects. These Elastic Subnets democratize access to project-generated fees and attract new validator resources. As more validators join, fledgling projects find it easier to obtain economic security and build upon an expanding foundation.

To better understand the impact of these releases on the Avalanche ecosystem, let's consider building a Lego project as an analogy.

The HyperSDK is like starting with a pre-built base of Lego bricks. The basic structure is already in place, and you can customize it to your liking.

AWM is comparable to building with friends. If you're missing a Lego piece, you can ask questions or trade with your friends. Similarly, integrated Subnets can exchange messages and assets.

Lastly, Elastic Subnets allow you to openly share your project with anyone, enabling them to verify that all the pieces fit snugly, enhancing the security of your project.

By having a head start, collaborating with others, and benefiting from the contributions of a wider audience, these projects can surpass individual efforts in terms of speed, scale, and robustness.

This article provides an overview of the current state of Avalanche technology, its future direction, and how these technologies form a unified vision. While the technology is still in development, Ava Labs has been quickly shipping major releases. Because Avalanche's design enables projects to horizontally scale infinitely through layer 1s, allows each layer 1 to scale vertically, and facilitates interoperability among fast layer 1s, Avalanche will be able to create new valuable projects through network effects in a way that is not currently possible. 

Disclaimer: This report is for informational purposes only and is not investment or trading advice. The views and opinions expressed in this report are exclusively those of the author, and do not necessarily reflect the views or positions of The Tie Inc. The Author may be holding the token or using the strategies mentioned in this report.  You are fully responsible for any decisions you make; The Tie Inc. is not liable for any loss or damage caused by reliance on information provided. For investment advice, please consult a registered investment advisor.  The Tie has been paid by Ava Labs to produce this report.