Avalanche Crypto Explained

Avalanche Crypto Explained

As blockchain technology advances, it offers new and improved resolutions to scalability, interoperability, and usability issues. With the usage of three different blockchains on its platform, Avalanche has adopted a unique approach and promises to be "the fastest smart contracts platform in the blockchain industry, as measured by time-to-finality," thanks to its native coin AVAX and numerous consensus processes. We'll look at the circumstances that led to this assertion as well as the remedies it offers in this article.

Avalanche (AVAX) is a blockchain platform with smart contracts that focuses on transaction speed, cheap prices, and environmental friendliness. Avalanche's ultimate goal is to create a highly scalable blockchain that doesn't compromise decentralisation or security. Avalanche was launched by the Ava Labs team in 2020 and has quickly risen in the crypto rankings to sit just outside the top ten. Avalanche’s TVL (Total Value Locked in the Protocol) is also rising, with Avalanche dapps, valued at $3 billion as of October 2021.

What is Avalanche (AVAX)?

Because there were so few people using Bitcoin when it first began in 2009, the technical restrictions were less of a concern. However, decentralised finance and the adoption of NFTs have drastically altered the blockchain scene today, and services and apps like C-Trade are taking over the market with their Contract Trading and perpetual derivatives offerings.

Around 100 million people were utilising cryptocurrencies in early 2021, according to some estimates. Similarly, the value of DeFi apps has also risen to well over $100 billion. Smart contract-enabled blockchains like Ethereum and Solana are experiencing network congestion and outages as a result of their exponential growth.

Hosting for Ethereum applications To fix the challenge, the majority of today's DeFi value is deploying layer 2 scaling solutions. Layer 2 separates transactions from the main Ethereum chain, bundles them, and returns the bundles to Ethereum. This relieves demand on Ethereum while also adding levels of complexity that may jeopardise security. The most viable option would be to maintain everything on a scalable, secure, and decentralized layer 1 protocol.

Clearly, finality is an important blockchain characteristic (particularly for financial services), but the time it takes for a blockchain to reach finality varies. Ethereum, for example, reaches finality in under a minute. Avalanche reaches finality in a fraction of a second, which is near-instantaneous in real-world applications.

Is Avalanche the world's fastest blockchain because of its near-instant finality? We'll need to take a closer look at how Avalanche works and explain AVAX token staking to figure this out.

How does Avalanche - AVAX - work?

After raising $18 million from noteworthy investment companies like Andreesen Horowitz and Polychain Capital, the project raised a further $42 million in less than 4.5 hours in July 2020 with the official launch of its AVAX token, with the intended objective of outperforming ETH2.0 in terms of throughput and latency.

The main novelty of Avalanche is that it is made up of three blockchains rather than the traditional one. The reasoning behind this architectural decision is brilliant: rather than having one chain handle everything, each Avalanche blockchain focuses on a certain purpose inside the Avalanche ecosystem. The Avalanche platform can fulfil the golden trinity of blockchain qualities — decentralization, security, and scalability — by allocating tasks across multiple chains.

  1. The Exchange Chain (X-Chain)
    AVAX tokens and other digital assets are created and exchanged on this chain. These assets, like Ethereum's token standards, contain customizable rules that control their behaviour. The Avalanche consensus protocol is used on the Avalanche blockchain, and transaction fees are paid in AVAX.
  2. The Contract Chain (C-CHain)

Avalanche's main feature is smart contracts, and developers can use this capability to create decentralized applications on Avalanche while taking advantage of the platform's security and scalability.

The C-Chain is an Ethereum Virtual Machine (EVM) compliant smart contract platform for the Avalanche platform. Because Avalanche is EVM compatible, anyone can use it to deploy Ethereum smart contracts. What's the big deal about that? Existing Ethereum applications, such as DeFi giants Aave, may quickly release an Avalanche version of their product. When developers deploy Ethereum smart contracts atop Avalanche, they can use the same Ethereum developer tools as before to access the latter's functionalities.

3. The Platform Chain (P-Chain)

This chain connects network validators, keeps track of active subnets, and allows new subnets to be created. Subnets are groups of validators that help customized blockchains reach consensus. Only one subnet can validate a blockchain at a time, but each subnet can validate many blockchains.

Source: Avalanche Hub

When compared to executing all processes on a single chain, Avalanche enhances speed and scalability by assigning various roles to each Avalanche blockchain. This component has been paired with two alternative consensus techniques customised to the demands of each blockchain by the creators. Avalanche's native utility token AVAX connects all of these blockchains and is required by users to stake and pay network fees, providing the ecosystem with a common asset that can be used across multiple Avalanche subnets.

How do Avalanche subnets work?

Subnets in Avalanche perform similarly to sharding in Ethereum 2.0. A subnet is a clone of the default blockchain (in the case of Avalanche, this is the Primary Network) that is connected to the platform at startup. More importantly, users can build subnets on their own time and as needed. Essentially, this means that a subnet can establish another subnet to meet or surpass network traffic demands and free up transactions once its scaling restrictions are temporarily reached.

In a nutshell, the number of subnets you can construct is limitless (subnets can infinitely create subnets). Avalanche's P-Chain has a transaction limit of about 4,500 transactions per second, which is nearly 2x that of Visa. Moreover, Avalanche has no real TPS limit due to its limitless capacity for producing subnets.

Despite the fact that subnets can develop their own rules for how their blockchain runs, all subnets must validate their own blockchain as well as the Primary Network chain. To validate the Primary Network, each subnet must be a Primary Network member, which is granted to those who stake 2,000 or more AVAX tokens.

Avalanche’s consensus mechanisms

The two consensus procedures used by Avalanche have a lot in common. Each one, though, is suited to its own blockchain(s). The network's increased scalability and transaction processing speed are due in part to this dual approach.

Avalanche Consensus Protocol:

Unlike Proof of Work (PoW), Proof of Stake (PoS), and Delegated Proof of Stake (DPoS), the Avalanche consensus process does not require a leader to reach consensus. This factor boosts the Avalanche network's decentralization without sacrificing scalability. PoW, PoS, and DPoS, on the other hand, have one actor execute transactions, which is subsequently validated by others.

Avalanche implements a directed acyclic graph (DAG) efficient consensus system that leverages all nodes to process and validate transactions. The network can process transactions in parallel with the help of a DAG. Validators poll other validators at random to see if a new transaction is legitimate. It is statistically shown that a transaction would be almost impossible to be fake after a given amount of this repeated random subsampling.

All transactions are completed instantly, with no additional confirmations required. This means that instead of blocks (like in typical blockchains), vertices, or parented transactions, are used. The hardware requirements for running a validator node and validating transactions are minimal and accessible, which aids performance and decentralization.

Snowman Consensus Protocol:
The Snowman consensus system is based on the Avalanche consensus algorithm, however, transactions are ordered in a linear fashion. When dealing with smart contracts, this property comes in handy. Snowman, unlike the Avalanche consensus protocol, produces and uses blocks.

Avalanche-Ethereum Bridge for ERC-20 token swaps

Source: Avalanche Bridge

Avalanche is an Ethereum-compatible blockchain platform that uses the Avalanche Bridge to make it simple to migrate your ERC-20 tokens. The Avalanche Bridge is a strategic move from a team that understands that ERC-20 tokens make up the vast majority of tokens.

Avalanche gains immediate exposure to billions of dollars in token liquidity by having a bridge in place for customers interested in trying AVAX with their existing Ethereum tokens. The Avalanche Bridge, like Ethereum, Fantom, and Binance Smart Chain, works with Metamask.

Avalanche Bridge is a two-way token bridge that allows Avalanche and Ethereum to send and receive ERC-20 and ERC-721 tokens. Users can use these Ethereum-based assets with Avalanche dapps by storing them in the ChainBridge contract and minting an equivalent token on the network.

Due to Ethereum's high network fees, consumers are being priced out of the ecosystem as DeFi grows more prevalent. With the price of ETH rising, even simple token swaps on Ethereum are becoming prohibitively expensive for newcomers, while interactions with more complex DeFi contracts might incur fees of more than 0.1 ETH. Furthermore, because Ethereum's gas prices fluctuate, many of these transactions will fail, potentially losing the consumer hundreds of dollars in ETH without ever completing the transaction.

The Avalanche-Ethereum Bridge is a first step toward migrating Ethereum's slow and expensive DeFi infrastructure to the Avalanche network, which is substantially quicker and cheaper. Avalanche's transaction fees are seldom over a few cents, and even complex computations are executed in the single-digit dollar range and are substantially faster - now near-instantaneous.

AVAX token

The Avalanche token, abbreviated as AVAX, is a utility token that acts as the ecosystem's primary medium of exchange. AVAX staking secures the network and pays stakers with more AVAX, in addition to its use as currency in the Avalanche ecosystem. The AVAX deflationary token method adds to the value gained by staking. AVAX tokens used to pay transaction fees are destroyed, reducing the amount of AVAX in circulation forever.

Staking rewards for AVAX

Validators must possess and stake AVAX tokens as collateral in all subnets, including the Primary Network. That isn't to mean that staking AVAX will earn you anything if you aren't a validator. If you want to earn a percentage of the AVAX staking benefits, you can delegate your stake to a validator.

Approximately 64% of AVAX tokens are currently staked. Validators receive little under 11% APY, while delegators earn 9.53% staking incentives.

How to stake AVAX?

By becoming a validator or staking AVAX with a validator, you can earn incentives, and to become a validator, you must stake 2000 AVAX. Because the hardware requirements are so modest, most basic laptops or desktop computers should suffice to start validating. You can also put your tokens behind a validator and get paid if the validator confirms transactions correctly. More about AVAX and AVAX staking can be found on the C-Trade blog.

To get started, however, a new trader can visit platforms like C-Trade to learn more about the different methods of trading on a secure and dedicated derivatives exchange.

In conclusion, blockchains like Avalanche are appealing to Decentralized Finance (DeFi) firms searching for Ethereum alternatives due to their EVM compatibility and low costs. When it comes to scalability and performance, however, DeFi platforms already have a lengthy number of competitors. Since its launch, Avalanche has grown in popularity, but whether it will be able to compete with other blockchains like Solana or Polygon remains to be seen.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. C-Trade, its affiliates, agents, directors, officers, or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.