Subnets: Avalanche’s Scaling Solution

Avalanche’s success and meteoric growth has been no secret. Early, the team distinguished themselves through the introduction of a new consensus protocol – Snow*. 

This novel architecture combines the best qualities of both classical and Nakamoto consensus mechanisms. Over time, it has grown competitive with the best established protocols, both modular and monolithic. While monolithic designs do have some advantages, it's my opinion that the drawbacks outweigh those advantages significantly. 

From increased centralization due to operation costs, to potential network halts, the realities of scaling monolithic systems are bleak. A more forward-thinking design makes use of a system where each subchain built on top of the primary chain is completely secured by dynamic validation. Avalanche has incorporated this modular vision in what they call subnets.

Considering the adoption of subnet-driven economics is directly tied to Avalanche’s value accrual, it’s worth exploring what makes subnets unique and appealing.  

Subnets permit Avalanche to scale by allowing a multitude of validators to actively participate in consensus. A chain is validated by exactly one subnet, but a subnet can validate many chains. Each subnet has its own governance, and may require its validators to have specific properties (i.e.: KYC/AML check, country location, licenses). Validators stake AVAX tokens in order to join the Primary Network, and this network validates Avalanche’s built-in chains. These built-in chains include:

The X-Chain is a decentralized platform for creating and trading AVAX assets. This chain runs on the Avalanche Virtual Machine (AVM). The C-Chain allows for smart contract interaction and creation and is run on the EVM. The P-Chain keeps track of all active subnets and enables the creation of new subnets.

Subnets do not share their network loads with the main-net, enabling lower latency, higher transactions per second (TPS), and lower transaction costs. So thanks to subnets, as transactions throughput increases, validators CPU and disk usage does not increase.

Assets can move freely between subnets because of the high level of interoperability; this means no beacon or relay chain. Subnets also have the freedom to choose which virtual machine to run on. Here’s a chart that breaks down the difference between the Avalanche Virtual Machine and Ethereum's Virtual Machine.

At this point, you’re probably wondering: “What is the difference between L2 solutions and Subnets?” For starters, L2s are not interoperable with one another and liquidity splitting begins to occur. For example, liquidity pools across Ethereum and its L2s, Arbitrum or Optimism, are entirely separate. 

Transferability of assets is of primary importance when it comes to developing a network that will be used en masse. That’s a big part of why we are currently witnessing a fight for dominance among DeFi protocols. Avalanche subnets, on the other hand, offer a proactive approach to scaling. 

Subnets also offer a very lucrative proposition for validators. These days, it's incredibly difficult to be an “early adopter” and acquire a stake in a project, largely due to the increased number of market participants. Fresh projects launching on new subsets need validators from the primary network, allowing one to constantly be able to expose themselves to new and exciting opportunities. Avalanche expects new projects to utilize this “Initial Subnet Offering”, combined with gradual token releases, in order to attract validators. In this sense, validators are set to become the new scarce resource.  

On the other hand, subnets only share Avalanche’s security if all the subnet validators also validate on the P-chain, which involves increased levels of hardware requirements. 

Avalanche subnets are already making a name for themselves as one of the largest GameFi (play-to-earn) projects, DeFi Kingdoms (DFK), has launched on the Avalanche EVM subnet. GameFi is a rapidly growing space, and with DFK launching on an Avalanche subnet, more projects are destined to port over. In fact, yesterday, Terra announced a $100 million partnership with Avalanche.

Another big GameFi project running on an Avalanche Subnet is Crabada, who decided to create a subnet dedicated to gaming called the Swimmer Network. Through their move, Crabada anticipates up to ~85% reduction in operational costs for players. A key innovation of the Swimmer Network is their “fee-cover model.” This feature is meant to reduce on-boarding friction by allowing players to game without having to acquire gas tokens, sort of like contemporary free-to-play enterprise structures. Games will subsidize gas on behalf of the players up to the game maker's discretion. The Swimmer Network is still in alpha, so it will be interesting to see how the GameFi community reacts to this novel on-boarding system.

As the scarcity in block-space continues to rise, secure scaling solutions that are committed to the ideals of decentralization are more important than ever. To that end, Avalanche has taken a massive leap with the implementation of their subnet design. DFK's switch over to Avalanche opened the floodgates, projecting Avalanche as more than just another blockchain. 

Now, we are witnessing loads of impressively unique projects being built. One that I’m personally very excited about is DeepSquare, a high performance computing ecosystem. Essentially, this project aims to build a decentralized super-computer, enabling efficient neural network modules. Recently, I had a chance to sit down with the team at DeepSquare and learn about their thought process.

I was curious what drove them to launch on a nascent system like Avalanche Subnets, as opposed to a more mature platform. Head of Business Development, Diarmuid Daltùn, emphasized, “we set out to create a system that was as decentralized as possible. Adding, "subnets allow for a cost-effective platform to build on. In addition to that, we sought a platform that prioritized energy efficient, as our core philosophy is to create a cluster supercomputer completely around renewable energy.”

This is just one of many forward-looking projects that are being developed on Avalanche and if this is any indicator, I think we can expect an avalanche (pun intended) of novel projects dedicated to the Avalanche Subnets.

TThis 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 cryptocurrencies 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.