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Avalanche Network (AVAX): How Does It Work?



Introduction


Avalanche is a blockchain platform that is smart contract-capable. It aims to deliver a scalable blockchain solution while maintaining decentralization and security, focusing on lower costs, fast transaction speeds, and eco-friendliness. Launched in 2020 by Ava Labs, Avalanche quickly became popular in the cryptocurrency space, with Avalanche TVL currently worth $8.41 billion and still rising across Avalanche decentralized applications (DApps)


Avalanche is powered by its native token Avalanche (AVAX) and multiple consensus mechanisms. With Avalanche, users can create an unlimited number of customized and interoperable blockchains. To operate a blockchain on the Avalanche coin (AVAX), one must pay a subscription fee.


Goals and Principles


Avalanche is a high-performance, scalable, customizable, and secure blockchain platform. It targets three broad use cases:

– Building application-specific blockchains, spanning permissioned (private) and permissionless (public) deployments.

– Building and launching highly scalable and decentralized applications (Dapps).

– Building arbitrarily complex digital assets with custom rules, covenants, and riders (smart assets).


Properties


By construction, Avalanche possesses the following properties:


Scalable: Avalanche is designed to be massively scalable, robust, and efficient. The core consensus engine is able to support a global network of potentially hundreds of millions of internet-connected, low and high-powered devices that operate seamlessly, with low latencies and very high transactions per second.


Secure: Avalanche is designed to be robust and achieve high security. Classical consensus protocols are designed to withstand up to f attackers, and fail completely when faced with an attacker of size f + 1 or larger, and Nakamoto consensus provides no security when 51% of the miners are Byzantine. In contrast, Avalanche provides a very strong guarantee of safety when the attacker is below a certain threshold, which can be parametrized by the system designer, and it provides graceful degradation when the attacker exceeds this threshold. It can uphold safety (but not liveness) guarantees even when the attacker exceeds 51%. It is the first permissionless system to provide such strong security guarantees.


Decentralized: Avalanche is designed to provide unprecedented decentralization. This implies a commitment to multiple client implementations and no centralized control of any kind. The ecosystem is designed to avoid divisions between classes of users with different interests. Crucially, there is no distinction between miners, developers, and users.


Governable and Democratic: $AVAX is a highly inclusive platform, which enables anyone to connect to its network and participate in the validation and first-hand in governance. Any token holder can have a vote in selecting key financial parameters and in choosing how the system evolves.


Interoperable and Flexible: Avalanche is designed to be a universal and flexible infrastructure for a multitude of blockchains/assets, where the base $AVAX is used for security and as a unit of account for an exchange. The system is intended to support, in a value-neutral fashion, many blockchains to be built on top. The platform is designed from the ground up to make it easy to port existing blockchains onto it, to import balances, to support multiple scripting languages and virtual machines, and to meaningfully support multiple deployment scenarios.


Architectural Overview of the Avalanche Platform


Subnetworks: A subnetwork or subnet is a dynamic set of validators working together to achieve consensus on the state of a set of blockchains. Each blockchain is validated by one subnet, and a subnet can validate arbitrarily many blockchains. A validator may be a member of arbitrarily many subnets. A subnet decides who may enter it, and may require that its constituent validators have certain properties. The Avalanche platform supports the creation and operation of arbitrarily many subnets. In order to create a new subnet or to join a subnet, one must pay a fee denominated in $AVAX.


The subnet model offers a number of advantages:

– If a validator doesn’t care about the blockchains in a given subnet, it will simply not join that subnet. This reduces network traffic, as well as the computational resources required of validators. This is in contrast to other blockchain projects, in which every validator must validate every transaction, even those they don’t care about.

– Since subnets decide who may enter them, one can create private subnets. That is, each blockchain in the subnet is validated only by a set of trusted validators.

– One can create a subnet where each validator has certain properties. For example, one could create a subnet where each validator is located in a certain jurisdiction, or where each validator is bound by some real-world contract. This may be beneficial for compliance reasons.


Virtual Machines: Each blockchain is an instance of a Virtual Machine (VM). A VM is a blueprint for a blockchain, much like a class is a blueprint for an object in an object-oriented programming language. The interface, state, and behavior of a blockchain are defined by the VM that the blockchain runs.


The following properties of a blockchain, and others, are defined by a VM:

The contents of a block

– The state transition that occurs when a block is accepted

– The APIs exposed by the blockchain and their endpoints

– The data that is persisted to disk


Use Cases of Avalanche



Decentralized Finance (DeFi): DeFi is rapidly growing beyond the limits of one chain. Avalanche is fully compatible with Ethereum assets, apps, and tools with faster speeds, higher throughput, and lower fees.

- Asset Issuance

- Automated Market Makers (AMMs)

- Borrowing & Lending

- Decentralized Exchanges (DEXs)


Institutions, Enterprises, and Governments: Avalanche is the best verifiable platform for institutions, enterprises, and governments. Launch assets, build applications and create subnets with complete control over your implementation with compliance, data security, and other rule sets built into the foundation.

- Asset Issuance & Trading

- Central Bank Digital Currencies (CBDC)

- Debt Financing

- Digital Identity

- Document Tracking


Digital Collectibles: Mint your own digital collectibles in seconds for fees less than a cent. Digitally prove ownership, and streamline value flow. Create and share art, collectibles, and more with all the benefits and none of the downside.

- Art

- Certifications and Licenses

- Collectibles

- Credentials


What’s Possible with Avalanche?



Build fast, low-cost, Solidity-compatible dApps: Launch Ethereum dApps that confirm transactions instantly and process thousands of transactions per second, far beyond any decentralized blockchain platform today.


Launch customized blockchains, private & public: Deploy blockchains that fit your own application needs. Build your own virtual machine and dictate exactly how the blockchain should operate.

Scale to millions of validators with minimal hardware: Stake, or lock up, your AVAX to help process transactions and further secure the platform–providing security guarantees well above the 51% standard. You probably have the hardware required to join the platform.


What is Avalanche used for?


The native token AVAX is a utility token. AVAX serves as the Avalanche ecosystem’s medium of exchange. In other words, the token is used as currency within the network, typically for fee collection in transactions, incentives, and many other use cases.


It is also used for staking AVAX, which serves to secure the network. Stakers are then rewarded with more AVAX. Some users stake AVAX to earn passive income on the network.


Smart Contracts in $AVAX


At launch, Avalanche supports standard Solidity-based smart contracts through the Ethereum virtual machine (EVM). We envision that the platform will support a richer and more powerful set of smart contract tools, including:


– Smart contracts with off-chain execution and on-chain verification.

– Smart contracts with parallel execution. Any smart contracts that do not operate in the same state in any subnet in Avalanche will be able to execute in parallel.

– An improved Solidity, called Solidity++. This new language will support versioning, safe mathematics and fixed-point arithmetic, an improved type system, compilation to LLVM, and just-in-time execution.


If a developer requires EVM support but wants to deploy smart contracts in a private subnet, they can spin-up a new subnet directly. This is how Avalanche enables functionality-specific sharding through the subnets. Furthermore, if a developer requires interactions with the currently deployed Ethereum smart contracts, they can interact with the Ethereum subnet, which is a spoon of Ethereum. Finally, if a developer requires a different execution environment from the Ethereum virtual machine, they may choose to deploy their smart contract through a subnet that implements a different execution environment, such as DAML or WASM. Subnets can support additional features beyond VM behavior. For example, subnets can enforce performance requirements for bigger validator nodes that hold smart contracts for longer periods of time, or validators that hold contract state privately.


Uses of $AVAX Token


Payments: True decentralized peer-to-peer payments are largely an unrealized dream for the industry due to the current lack of performance from incumbents. $AVAX is as powerful and easy to use as payments using Visa, allowing thousands of transactions globally every second, in a fully trustless, decentralized manner. Furthermore, for merchants worldwide, $AVAX provides a direct value proposition over Visa, namely lower fees.


Staking - Securing the System: On the Avalanche platform, Sybil control is achieved via staking. In order to validate, a participant must lock up coins, or stakes. Validators sometimes referred to as stakers, are compensated for their validation services based on staking amount and staking duration, amongst other properties. The chosen compensation function should minimize variance, ensuring that large stakers do not disproportionately receive more compensation. Participants are also not subject to any “luck” factors, as in PoW mining. Such a reward scheme also discourages the formation of mining or staking pools enabling truly decentralized, trustless participation in the network.


Atomic Swaps: Besides providing the core security of the system, the $AVAX token serves as the universal unit of exchange. From there, the Avalanche platform will be able to support trustless atomic swaps natively on the platform enabling native, truly decentralized exchanges of any type of asset directly on Avalanche.


People Behind Avalanche


The three people behind Avalanche are Kevin Sekniqi, Maofan “Ted” Yin and Emin Gün Sirer. A pseudonymous group called Team Rocket first released fundamental information about the protocol in May 2018 on the InterPlanetary File System. A group of researchers from Cornell University then developed the technology, led by Cornell professor of computer science and software engineer, Emin Gün Sirer. He was assisted by two of his doctoral students: Maofan “Ted” Yin and Kevin Sekniqi.


The AVA codebase for the Avalanche consensus protocol became open-source in March 2020, making it available to the public. Avalanche’s initial coin offering (ICO) ended in July of 2020, followed by the launch of Avalanche in September of the same year.


Benefits of Avalanche (AVAX)


The main benefits of Avalanche can be found primarily in the way it was built. Avalanche founders found a way to address the common problems of blockchains through the network’s unique structure.


Interoperability: Only a few blockchains accommodate the trading of various forms of cryptocurrency and data with other platforms. Avalanche facilitates interoperability by allowing different blockchains to share data and effectively “interoperate” with one another.


Scalability: Mining Bitcoin, for example, requires tremendous energy and computing power. Ethereum can only process 15 transactions per second. While powerful and highly valuable, these blockchains are difficult to scale because of such limitations. Avalanche, on the other hand, was built to be scalable and boasts sub-second transaction times and incredible processing capacity.


Usability: One of the concerns in adopting any technology is usability or the extent to which the software or technology is easy to use and implement in various applications and use cases. Avalanche has proven useful in various cases and is picking up speed in the crypto community at a pace that can rival Ethereum.


Fees Structure of $AVAX Token


The fee structure in the Avalanche platform carries several differentiating features that distinguish it from other existing and upcoming platforms –


Staker Fees: Unlike other protocols that pay all fees to the elected leader, such as in Bitcoin, in Avalanche fees are simply burned. Therefore, payment is global and for the good of the entire ecosystem. Fee burning increases the scarcity of tokens in the system. The minting process offsets the transaction fee burning, therefore there is no danger of the system grinding to a long-term halt due to the gradual destruction of coins.


Transaction Costs: In Avalanche, transaction fees differ depending on the type of transaction. Instantiations of new subnetworks carry the heaviest fees. In contrast, other types of transactions, such as simple payments of $AVAX, carry a little cost. For other subnets, transactions pay fees in that subnet’s native token, as well as some amount in the $AVAX token. A transaction native to a subnetwork may specify its own transaction fee structure, and it is up to the creator of the subnet to choose a fee structure that incentivizes validation for open, permissionless subnetworks.


Sliding Cost Function: Transaction fees carry a sliding-cost function. The fee is not set by the issuer of the transaction, but rather by a globally verifiable fee-function. As the congestion in the network increases, fees increase. At the end of some specific period of time, the function is recalculated to accommodate natural increases in transaction volume in the network.


Transaction Tiers: Unlike in a model such as Ethereum’s, where every transaction invocation must pay some gas, Avalanche adopts a different model that incorporates two types of transaction processing mechanisms. All keys with positive account balances will be able to immediately interact with the platform, where the fees will be based on an allotment mechanism, functionally similar to a tiered payments model adopted in cloud computing platforms. Every transaction will name a sender address (i.e. the invoker), which will be checked for current invocation allotment. If the address still has free invocations left, the transaction does not have to carry any fees attached by the sender. Past a certain amount of calls, the sender will need to attach some fees based on the resources used to compute the transaction. Additionally, users may opt instead pay for their transactions using computation. To that end, future releases will support free frequency-limited transactions, which do not require fees in coins but require some pre-computation. Whenever a new transaction is generated, the user will compute and attach a valid PoW on the transaction, which can be checked by all other parties.


Where and How to Buy AVAX


Uphold: Uphold is one of the top crypto exchanges in the United States that facilitates trading needs across various cryptocurrencies including AVAX. The platform also offers easy-to-use features that allow users interested in buying AVAX to do so intuitively. Uphold has both desktop and mobile apps and a customizable trading view for users to feature the assets they trade the most. New traders, in particular, prefer using Uphold because of its simple, modern interface that facilitates easy navigation across both desktop and mobile.


Binance: Known globally as one of the most trusted cryptocurrency exchanges, Binance allows users to purchase AVAX easily. Users who wish to purchase AVAX on Binance can enjoy lower exchange fees, as well as increased liquidity that makes it easier to buy and sell quickly. Binance users in Australia, Canada, the United Kingdom, Singapore, and other international locations can purchase AVAX. Currently, US residents are prohibited from purchasing AVAX on the platform.


BitPanda: BitPanda is well-known in Europe as a reputable exchange for buying and selling Bitcoin. Currently, the platform also offers to trade various cryptocurrencies and purchasing assets such as precious metals. AVAX is the easiest to purchase on BitPanda, but it is currently open for European Union residents only.


Gate.io: Gate.io is another reputable trading platform that provides a user-friendly interface that even newbies to trading can easily use. It also offers advanced charts for more technical traders. The platform is a cryptocurrency exchange that carries a wide range of altcoins including AVAX. Gate.io is notably known for its staunch stance against market manipulation. It is open to US residents, except for those residing in New York and Washington State.


News on Avalanche


Recently, Oddz Finance, a crypto derivatives trading platform announced its mainnet launch on Avalanche. This significant milestone and collaboration for both companies will aim to increase the adoption of derivatives trading on the network, massively aiding the users of the Avalanche network.


In November 2021, Synapse Bridge announced that they had prevented a hacker from draining approximately $8 million USD from the Avalanche Neutral Dollar (nUSD) Metapool.


In September 2021, Vee Finance, the DeFi platform, reported $35 million in losses in an exploit, just a few days after launching its mainnet on the Avalanche network.


In August 2021, Avalanche announced a $180 million liquidity mining incentive program “Avalanche Rush,” which aims to encourage more applications and tokens to move to Avalanche’s DeFi platform.


Conclusion


Avalanche innovates up the stack, and introduces simple but important ideas in transaction management, governance, and a slew of other components not available in other platforms. Each participant in the protocol will have a voice in influencing how the protocol evolves at all times, made possible by a powerful governance mechanism. Avalanche supports high customizability, allowing nearly instant plug-and-play with existing blockchains.


 

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