The crypto market might have been tanking lately, but a new token, Avalanche, has been doing so well that it’s even managed to close a strategic partnership with ”Big Four” member Deloitte. And after gaining more than 3,000% this year, it just entered the top ten most valuable cryptocurrencies. So have we just encountered another ethereum killer?
What is Avalanche?
Avalanche is a competitor to Ethereum that allows its users to both build decentralized applications (dApps) and deploy custom blockchains that fit their specific needs. It’s a platform of platforms, powered by a unique and innovative consensus protocol (explained in this video). That makes the network very attractive: it’s fast, it’s cheap, it’s secure, and it’s flexible.
It’s fast: One of the best measures of speed in the crypto industry is “time-to-finality”, which measures how long it takes to guarantee that a transaction won’t be altered, reversed, or canceled. According to that measure, Avalanche is the fastest smart contract platform in the industry, with a time-to-finality of less than 2 seconds, compared to bitcoin’s 60 minutes. What’s more, Avalanche allows 4,500 transactions per second, versus 7 for bitcoin and 14 for Ethereum (if still less than Solana’s 65,000), allowing lots of new possibilities for dApp developers.
It’s cheap: It currently costs about one tenth of the price to execute transactions on Avalanche versus ethereum, which has led some long-term ethereum supporters – like the CEO of Three Arrow Capital Zhu Su – to and invest in the project.
It’s flexible: Avalanche is considered by some as a “layer 0” project, because it can run other blockchains on top of it. It creates different “subnets”, each with the capability of having its own virtual machine and consensus mechanism, meaning users will be able to deploy the blockchain that best fits their application needs. Need Solana’s proof of history mechanism? No problem. Proof of stake? Just ask. What’s more, Avalanche allows its users to easily transfer assets between blockchains – an important concept called interoperability. In fact, Avalanche itself is composed of three blockchains, each fulfilling a specific purpose. This flexibility means Avalanche can compete with interoperability projects like Polkadot and Cosmos, as well as with layer 1 solutions like ethereum and Solana.
It’s secure: Validators would need a 51% majority stake to take control of most networks (including bitcoin and Ethereum). But because Avalanche asks a random sub-group of validators to confirm transactions, it makes it much more difficult to achieve that majority, and the network much harder to attack. Add in the extra safety features it’s added, and the safety threshold increases to about 80%. Avalanche also proudly boasts the highest number of validators securing its activity of any proof-of-stake protocol.
Avalanche compared to other Blockchains. Source: Avalanche
Why is Avalanche so hot right now?
As we’ve just seen, it’s architecture is top class and the combination of speed, security, cost, and flexibility truly makes it one of the best alternatives for developers of dApps. Throw in a world-class team and CEO, and you’ve got all the ingredients for a serious contender to ethereum. And while having all the right ingredients doesn’t guarantee a successful dish, investors have been smelling the potential for a Michelin star for a few reasons.
Avalanche’s ecosystem is growing rapidly: Avalanche already has quite an extensive list of use cases – not just in DeFi, but also in creating NFTs and applications for institutions and governments. It already counts two of the best protocols in AAVE and Curve in its ecosystem, as well as DeFi platform Pangolin. But one of its biggest successes yet is the strategic partnership Avalanche’s parent company Ava Labs has just achieved with Deloitte, one of the “Big Four” accounting firms and a widely respected “traditional” organization. According to the press release, Ava Labs has built an Avalanche-powered platform which will help state and local governments make their disaster reimbursem*nt applications to the Federal Emergency Management Agency (FEMA) faster, safer, and simpler. Such a high profile private-public partnership could open many doors, and signals to the rest of the market that Avalanche is a force to be reckoned with.
Its adoption rate is impressive: Avalanche has invested more than $600 million in helping spur growth on its network. Through three initiatives, they’ve managed to convince many applications to move from ethereum to Avalanche, as well as to also jumpstart the number of projects implemented directly on its network. The results are unequivocal: they’re currently the network with the fifth largest number of total-value locked (the number of assets that are currently being staked in in DeFi). And when it comes to cumulative address counts and transaction counts, the trend line looks like a rocket ship well on its way to the moon.
It’s Tokenomics are supportive: Avalanche has a burning mechanism (which removes tokens from the available supply) for its fees and activities, and unlike most of its competitors, it has introduced a fixed hard cap on the supply of its underlying token, AVAX. That makes it similar to bitcoin and could truly make it ultrasound money. And when you combine exponential demand with a fixed supply, you understand a bit better why the cryptocurrency has been on such a tear recently.
What’s the opportunity here?
One thing’s certain: Avalanche is one of the most promising projects out there.
But while its network does have all the ingredients necessary to succeed, it’s still a highly risky bet. So even if you’re convinced by the project, it’s probably not a good idea to mortgage your house and YOLO it all in AVAX. As part of a high-risk high-reward basket of altcoins, however, AVAX probably has its place. But to maximize its long-term potential and avoid exiting on high volatility, I’d argue in favor of using dollar-cost averaging to build your position, not to mention only investing an amount you can afford to lose (both psychologically and financially).
You also need to be aware of the risks and challenges. For one thing, Avalanche’s technology is so flexible that it makes it relatively hard for new users to adapt to, which could ultimately limit its demand. For another, some of its features – like its novel consensus mechanism – don’t convince all the experts. Some criticize its scalability, while others, its security. Third, the technology is incredibly young and hasn’t reached the relatively tried-and-tested robustness of older blockchains like ethereum. And last, while its tokenomics is interesting, its ownership base remains highly concentrated, with insiders (team members and tokens purchased by venture capital firms) owning 42% of the tokens. That puts it at risk of a significant price shock if they want to take profits.
And even if the technology does work as promised, there’s still an incredible amount of competition in the space, with new projects aiming to be the real “ethereum killer” launching almost every month. In any case, taking the crown won’t be easy due to the costs, complexity, and operational risks of switching networks. And on its side, Eehereum hasn’t been waiting cross-handed: it’s working hard on releasing its promising ETH 2.0 upgrade, which should go a long way towards fixing its main weaknesses.
