Avalanche (AVAX) is a smart contract platform created by Emin Gün Sirer and developed by Ava Labs. It is extremely fast and scalable, supporting thousands of produced nodes. Avalanche is also fully compatible with Solidity, integrating the Ethereum development tools. All in all, an impressive platform.
The technical functioning of the platform is sometimes difficult to understand, especially when you are just a beginner in the world of crypto and blockchain . That is why we explain step by step how Avalanche works in this article. A technical explanation for beginners! But first watch this video below to see what Avalanche actually means.
- 1 What is Avalanche?
- 2 The team behind Avalanche
- 3 How does Avalanche work?
- 4 Directed Acyclic Graph (DAG)
- 5 The AVAX Token
- 6 Can I discontinue AVAX?
- 7 How do I buy AVAX?
- 8 How can I save AVAX?
- 9 Is it smart to buy AVAX?
- 10 Conclusion
What is Avalanche?
Avalanche is a smart contract platform within the world of Decentralized Finance ( DeFi ), developed by Ava Labs, that allows anyone to easily create their own multifunctional blockchains and decentralized applications (dApps).
It is designed to address some of the limitations of older blockchain platforms, including slow transactions, centralization, and scalability (known as the blockchain trilemma), leveraging several innovations. This includes the unique Avalanche consensus protocol, which promises low latency, high throughput, and 51% attack resistance.
Avalanche launched its mainnet in September 2020, just two months after raising $42 million in a token sale — which sold out in less than five hours. Since then, the price of the AVAX token has already risen sharply. Where Avalanche once started as an unknown project, it has become a very popular project within the crypto world in a very short time.
The team behind Avalanche
Ava Labs is made up of a team of world-class experts. The project’s founder is Emin Gün Sirer, an associate professor of computer science at Cornell University. He is one of the most prolific researchers in the field of distributed networks and is also co-director of the IC3 (Initiative for Cryptocurrencies and Smart Contracts ).
Before co-founding Ava Labs, Kevin Sekniqi was a PhD student in computer science at Cornell, where he researched distributed systems, cryptography, security, and economics. He has previously done research and software engineering at leading organizations such as Microsoft and NASA.
Maofan “Ted” Yin, the third co-founder, has done extensive fundamental research in the field of distributed systems. He is passionate about solving problems such as fault tolerance, consensus inefficiencies, and peer-to-peer systems, and his work includes designing the Snow/Avalanche protocols, and HotStuff (the consensus protocol used by Facebook ‘s Libra).
How does Avalanche work?
Speed, reliability, scalability: these are the keywords for DeFi on Avalanche. The platform will thus allow easy deployment of smart contracts and decentralized applications (dApps), in particular thanks to its compatibility with Ethereum . Let’s take a look at what’s possible, and how it works.
Smart contracts from Ethereum
Avalanche is fully compatible with the development tools for Ethereum. It is therefore possible to develop and implement smart contracts in Solidity with classic software such as Remix, MetaMask, Truffle and others. It is also planned that Solidity will be improved on Avalanche (Solidity ++) to support versioning, fixed point arithmetic and a better input system.
Smart contracts can be used in different ways:
- In-chain verification and out-of-chain execution.
- Parallel execution of smart contracts on different subnets.
The fact that Ethereum smart contracts can be easily used on the Avalanche ecosystem is extremely important. This ensures that developers can transfer their application to Avalanche faster and easier. In addition, other developers can also take over certain applications and develop them further on Avalanche.
The more applications that run on Avalanche, the bigger Avalanche can eventually become. You can imagine that developers are not eager to start rewriting an entirely new application in a completely new and unknown programming language for Avalanche.
A network of blockchains
Avalanche is a network of configurable blockchains. There are three main blockchains, and creating your own blockchain is the main feature of the protocol.
There are three virtual machines on Avalanche:
- The virtual machine that interprets the code of the network’s smart contracts is called the AVM (Avalanche Virtual Machine) or Timestamp VM.
- The one dedicated to Solidity is called the EVM.
- Finally, the Platform Virtual Machine (PVM) makes it possible to convert transactions and prepare them for use.
This structure gives Avalanche full interoperability: the portability of existing blockchains is a basic feature. In the future, the platform will be compatible with multiple systems and virtual machines.
A subnet is a collection of validation nodes that maintain the state – by consensus – of one or more blockchains. Above all, the nodes that form these subnets are part of the Default Subnet. This is the basic network that maintains the state of Avalanche blockchains. So, to participate in the consensus, it is enough to put AVAX tokens in escrow, as in all PoS protocols. We’ll tell you more about Avalanche ‘s consensus algorithm later in this article.
It is also possible to configure the access parameters to a particular subnet, making it possible to create subnets that comply with legal standards. For example, subnet operators can impose a series of conditions, such as geographic location, KYC procedures, or a specific license.
This architecture also makes it possible to create private blockchains. It is also possible to create subnets that are only open to nodes with specific hardware specifications (such as CPU or RAM).
It uses a consensus algorithm that works on the principle of Proof of Stake (PoS), just like Cardano or Ethereum 2.0 . Consensus algorithms based on Proof of Stake are less energy-intensive and more scalable than protocols based on Proof of Work (PoW).
In order to validate transactions, users who want to add blocks to the blockchain must wager money. In practical terms, they place funds in escrow: this is called staking. If they are validators, they are rewarded for that. If, on the other hand, they behave badly, they are punished financially.
A special feature of Avalanche is that to solve the ‘Nothing at Stake’ problem, the protocol does not use the slashing method. The funds are irreversibly locked up until the time period chosen by the striker has expired. A striker cannot therefore stop earlier.
The advantage of this mechanism, aside from the low power consumption, is that it breaks the symmetry between the cost of attack and the cost of defense. With Proof of Work, a lot of energy has to be invested in the security of the network. The cost of an attack is proportional to the energy invested to secure the system. Proof of Stake is a protocol that makes it much cheaper to defend a blockchain than to attack.
The illustration below shows the weight of the transactions. The dark blocks are transactions that have a higher confidence score than the lighter colored blocks.
Limitations of existing consensus algorithms
In general, all existing consensus algorithms are limited. When designing it, a trade-off must be made between the desired qualities – security, decentralization and scalability.
A notable limitation is the number of validating nodes. Conventional algorithms guarantee the finality of transactions with a probability of one, meaning that a transaction is completed when the entire network has reached consensus. Whether it’s PBFT, Hedera’s Hashgraph or other algorithms, many nodes all need to communicate with each other. This is called quadratic communication: it limits the number of nodes the system can consist of, and thus its decentralization.
The Proof of Work algorithm, devised by Satoshi Nakamoto , was, of course, a revolutionary idea. However, this algorithm also has several drawbacks. For example, this algorithm consumes a lot of energy, and transactions are processed slowly.
The Avalanche consensus mechanism
The consensus algorithm developed by Avalanche is called Snow. The idea was to take advantage of the conception of the finality of transactions brought by Satoshi Nakamoto. The Avalanche consensus algorithm makes this trade-off between minimal error and performance: the network can complete transactions in one to two seconds, while still being highly decentralized.
This consensus mechanism is also the most secure of all: it can tolerate 80% malicious nodes, compared to 51% for Bitcoin and 33% for classic PBFT algorithms.
Consensus cannot be reached with this algorithm, but the protocol does ensure the dissemination of the information. This is also used, for example, to maintain the Directed Acyclic Graph of IOTA .
The graph below shows throughput vs. the size of the network. This means that the larger the network, the higher the throughput of the number of transactions. This makes Avalanche extremely scalable.
Directed Acyclic Graph (DAG)
A Directed Acyclic Graph is a data structure for modeling networks of objects (in this case, transactions). DAGs are composed of vertices (or nodes) and edges (the links between these vertices). In a directed graph, the edges are not symmetrical: they have an orientation, and are called arrows.
In this case, each transaction in AVAX is a node (vertex) of the chart. The advantage, compared to the blockchain tree structure, is that it is much faster to distribute and process the data. The shortest path problem – finding the shortest path between two vertices – is thus solved linearly.
Avalanche uses multiple instances where these consensus algorithms are deployed (called Snowballs). The acyclic oriented chart then groups all transactions.
To maintain this, a system is needed to handle conflicting transactions (such as double spend). In Avalanche, the aim is to test the network randomly and repeatedly: this makes it possible to reach an irreversible state very quickly, and to limit the number of processing per nodes.
In the illustration below we see what such a DAY looks like. As you can see, there is no particular order for processing transactions. This partly ensures that Avalanche can be so scalable.
Structure of the Avalanche Default Subnet
The Default Subnet is Avalanche’s subnet used to maintain its three native blockchains.
- X chain . This blockchain is dedicated to creating and staking digital assets. As with the ERC-20 tokens on Ethereum, which can represent stocks, voting rights or commodities, Avalanche allows any asset to be tokenized.
- P chain . This blockchain allows to manage the metadata of the Avalanche network. To create subnets, add validators and create blockchains, it uses its API.
- C-Chain . This blockchain enables the creation of smart contracts in Solidity: it is an instance of the Ethereum Virtual Machine.
Transaction speed of Avalanche
According to the tests, the Avalanche’s capabilities are exceptional. The network can process 3400 transactions per second with 2000 nodes. The time for processing a transaction is 1.35 seconds.
However, the latency can be even lower. During the tests, most transactions were completed in 300 ms. Even in the case of a high percentage of conflicting transactions (25%) the latency does not suffer.
The AVAX Token
The native token used on the Avalanche platform is called AVAX. It is the token of the network that serves as a peer-to-peer payment currency, as well as a means to secure the network, roll out new subnetworks, pay transaction fees, create and exchange assets, control protocol, and reward validators.
AVAX was created with a maximum supply of 720 million tokens, of which 360 million were released with the genesis block of the core network. The remaining 360 million tokens will be issued according to a comparison in the Avalanche white paper.
In the first year, the milestone reward aims to reach a new AVAX token strike rate of 7-12%. While the overall offering of AVAX cannot be changed, it is possible for token holders to change the pace of issuance of new tokens to adapt to changing economic conditions.
Avalanche held an ICO in July 2020, raising $42 million and selling 21 million AVAX tokens at $0.50 each. At the end of November 2020, the AVAX token is a long way from the $11.46 peak reached the day after the mainnet launch. In fact, the price is not far from the low of $3.00 that was reached on November 4, 2020. This is still a very good return for those who invested during the ICO.
In the Avalanche network, each validator node can earn new tokens by staking its existing tokens and actively participating in the network consensus. The strike rate is determined by the percentage of the total supply deployed by the node, the duration of the stake (with a minimum of 2 weeks and a maximum of one year), the uptime of the node and the latency.
Currently, Snow is related to the Byzantine Fault Tolerance (BFT) protocol, with no leaders. This means that staking pools are no longer needed as all active nodes in the network are equally rewarded for their services to the network, minimizing variation in rewards at all times.
In addition, transaction fees are burned rather than distributed to validators, increasing the scarcity of AVAX tokens over time.
By leveraging the flexibility and adaptability of the Snow protocol through its governance, Avalanche seeks to make the most of Austrian and Keynesian economic principles to ultimately achieve steady growth and economic equilibrium.
The graph below shows what the issuance of tokens will look like based on the time elapsed since the genesis block was created.
Can I discontinue AVAX?
As on all PoS networks, Avalanche rewards its money staking validators to secure the system. Initially, all nodes will be rewarded, but in the future nodes must have a good response time to receive tokens. This is how staking works on Avalanche:
- Rewards are proportional to the validator’s effort.
- Validators who lock their tokens for a long time get more rewards.
- Validators are encouraged to stay online and work correctly. The uptime and accuracy also determine the reward.
- AVAX’s total supply is set at 720 million. However, token holders retain control over the release pace: AVAX is therefore also a governance token.
- The operating costs of the network are burned.
You don’t always have to run a node yourself to be able to discontinue AVAX. You have to be able to use quite a bit of AVAX before you can run a node. So there are quite high costs associated with discontinuing AVAX. That is why you can also choose to outsource the running of such a node.
In that case, you send AVAX tokens to another validator node, which will stake them for you. As a reward, you will receive a portion of the proceeds that the validator node earns. Here too, this is not entirely without risk. There are plenty of people who will pretend to be a validator node, but in reality are not.
You can also lose your tokens if a validator node does not do its job well enough (and the node gets a penalty, for example). Therefore, always do good research into a node before you decide to put your tokens through this node.
How do I buy AVAX?
Buying AVAX tokens is anything but tricky. This cryptocurrency is offered on almost every crypto exchange . However, it is not always smart to buy these on just any exchange. This is because of the potential dangers that can come with it.
If you want to buy AVAX in a safe way, it is best to use Binance or Bitvavo . Here you also pay the best price for AVAX. This is because this platform can offer high liquidity. So there are always enough coins that are offered and taken away. High liquidity also means more security. You know for sure that there is enough collateral to buy or sell your coins.
Of course, you can also buy AVAX on a decentralized crypto exchange, such as Uniswap or SushiSwap . However, these exchanges are a lot less secure than Binance and Bitvavo. This is because you have to go through more steps here to perform a transaction. The chance that things will go wrong is therefore many times greater.
How can I save AVAX?
It is important that a wallet supports AVAX before you can store it in it. Think of wallets from crypto exchanges such as Binance and Bitvavo. So you can store the coins here quickly and easily. However, this is not the safest way. There are many known cases of people who have lost their crypto coins after they had stored them in a software wallet.
If you want to store your AVAX coins in the safest way, it is best to choose a hardware wallet . This is a kind of USB stick that you can disconnect from your computer, and therefore also from the internet. The moment the USB stick is not connected to anything, no one can access the crypto coins in the wallet. Of course you still have to store the wallet in a safe way.
The best-known hardware wallets are Trezor and Ledger. Both have proven themselves among crypto traders and can be considered safe.
Is it smart to buy AVAX?
If you think the technology developed by Ava Labs has a good chance of success, it might be smart to buy AVAX. You should of course do good research into this project before you decide to invest large amounts of money in it. This way you reduce the risk you run.
In addition, it is smart to never invest money that you cannot afford to lose. This can only get you in trouble. After all, there is always a risk that you will lose your investment, and not make a profit on it. The prices of cryptocurrencies are extremely volatile, and no one knows for sure whether a price will actually rise. See below the rate of Avax.
Avalanche (AVAX) is backed by an experienced team in this field and the project’s reputation is already high, even before its public launch. With a big name like Emin Gün Sirer at the helm of the project, Avalanche wants to make a name for itself in the smart contracts and blockchain sector. Expectations around Avalanche are high for the cryptosphere, with the team promising to fill the current void in other projects in the same industry.
Avalanche undeniably has the technical capabilities to meet the needs of companies that want to deploy smart contracts, especially in the DeFi sector. This project is groundbreaking in its category, introducing new ideas about transaction management, governance, and a whole host of other elements not available on other platforms.
Each protocol participant has a voice to influence how the protocol develops at any given time, which is made possible by a powerful governance mechanism. Avalanche is highly customizable, making it almost instantly interoperable with other blockchains.
However, Ava Labs is targeting a highly competitive sector, where Ethereum is already rampant, followed by other blockchains like Cardano. The Avalanche project is still in its infancy, but is already well developed in many areas, so AVAX and the Avalanche project can provide some pleasant surprises in the near future.
Thanh Lanh Tran(1989) is Chief Editor from BitcoinUSD.com