Avalanche is a newer blockchain entrant that has quickly gained notoriety in the crypto market. Its unique infrastructure, fast transaction times and interoperability features make it a popular choice for both traditional and crypto-native users, hosting a diverse ecosystem with various sector-specific applications.
Avalanche is a versatile blockchain development platform, where users have the flexibility to build applications on its mainchain or create custom networks known as “Subnets”. These Subnets are independent networks with their own nodes and validators, handling transactions and security within the Avalanche ecosystem.
Its architecture consists of three key components: The C-Chain enables the creation of Ethereum-compatible smart contracts, the X-Chain for creating native tokens (like ERC-20 tokens), and the P-Chain for setting up customised blockchains. The C-Chain also allows applications to transition from platforms like Ethereum to Avalanche, offering flexibility, while the P-Chain enables parties to launch private (permissioned) or public (permissionless) networks, appealing to institutions, enterprises and crypto-natives alike.
As more well-established networks like Bitcoin and Ethereum continue to suffer from ongoing congestion issues, Subnets provide a solution by effectively driving traffic away from Avalanche’s mainchain. At the same time, Subnets offer users the option to customise tokens, allowing the use of native tokens or multiple tokens to optimise gas usage. Subnets are also interoperable with each other, allowing validators to collaborate, or “cross-validate”, on a blockchain or a set of blockchains to achieve consensus.
Avalanche has been relatively active throughout 2023, despite prevailing bearish market conditions. The Cortina upgrade, launched in April, was designed to improve network performance and scalability. Avalanche Evergreen was introduced to cater to institutional requirements, and in March, Avalanche’s HyperSDK testnet was released, a framework enabling developers to build high-performance networks known as “Hyperchains”. The testnet hit a major milestone reaching over 143,000 transactions per second (TPS), while Avalanche’s monthly active users doubled to 1.2 million over the course of the summer.
The company behind Avalanche, Ava Labs, is backed by notable venture capital firms like Andreessen Horowitz and Polychain Capital. Franklin Templeton, a market leading asset manager, recently announced plans to use Avalanche for its tokenised money market fund.
Avalanche currently hosts 378 services and decentralised applications spanning over various sectors and use cases, with the most popular sectors being Decentralised Finance (DeFi), developer tools, exchanges & on-ramps, and NFTs. Additionally, 33 projects have announced plans to launch but are still in development.
Avalanche ecosystem by category
Source: Sygnum Bank analysis
The Avalanche network has 25 Subnets that serve different sectors. For instance, there is the Intain Subnet, a tokenised asset-backed securities (ABS) administration and marketplace, the Deloitte Subnet, a platform for streamlining FEMA fund disbursements, and the Dexalot Subnet, an on-chain central limit order book. Intain’s IntainADMIN platform now oversees the administration of USD 5.5 billion in assets.
Avalanche’s DeFi ecosystem has seen several new projects emerge, but the total value locked (TVL) in these protocols has rather flatlined over the year, likely due to the current bear market and declining crypto prices. To date, over USD 500 million worth of AVAX tokens are locked in DeFi protocols, like Benqi, TraderJoe, Aave and GMX.
Earlier this year, Avalanche partnered with Amazon Web Services (AWS) to help scale blockchain adoption across enterprises, institutions and governments, while its collaboration with INX Digital, a company specialised in SEC-registered security tokens is working on the tokenisation of real-world assets (RWA). Luxembourg-based securities platform DEFYCA also announced plans to launch its tokenised private credit protocol on Avalanche, with the aim to bring the USD 1.6 trillion private debt market on-chain.
MasterCard’s recent collaboration with Avalanche, alongside Polygon and Solana, plan to launch a new crypto credential system aims to improve the verification in NFT, ticketing, enterprise and other payment solutions. Other notable partnerships include Esports giant TSM with plans to bring Web3 features to around 30 million gamers through the Avalanched-powered Blitz platform. These initiatives could drive growth potential for Avalanche, if they prove successful.
Supportive industry trends
In the shift toward a collaborative Web3 ecosystem, the demand for cross-chain interoperability is growing. Blockchains that operate in isolation may struggle, especially now that applications look to capitalise on the specialised advantages of multiple chains and may even opt to switch away from those that fail to deliver. Avalanche’s framework attempts to address this challenge by introducing its multi-chain Subnet architecture.
A notable development in this direction is the recent launch of Avalanche Evergreen subnets, which allows institutions to pursue their customised blockchain solutions on private, permissioned chains, while having the option to communicate with Avalanche’s public Subnets through Avalanche Warp Messaging (AWM). Institutions can benefit from using blockchain technology by setting their own custom rules, ensuring compliance with laws and KYC requirements.
Avalanche’s Subnet architecture also isolates network traffic from the mainchain (Primary Network). This means projects can prevent high traffic spikes from third-party applications from congesting the network. That said, however, the ultimate test for Avalanche will be its ability to continuously handle significant network activity on par with the levels of Ethereum and Bitcoin.
Token supply model
There is a maximum capped supply of 720 million AVAX tokens. This means that no additional AVAX tokens will ever be created. Upon its launch, Avalanche issued 360 million AVAX tokens, while the remaining 360 million will be distributed over time as staking rewards. To manage this, Avalanche uses a periodic token unlock system. While this may introduce some inflationary pressure, these unlocks are typically well-planned, allowing the market to adjust. The most recent unlock in August added USD 97.4 million worth of AVAX tokens into circulation but with minimal impact on price. This could suggest that token unlocks do not pose a significant threat to AVAX’s long-term value.
Avalanche has implemented a unique burning mechanism, where 100 percent of transaction fees are burned, creating a deflationary token model in the long-term. To offset this burn rate, the remaining AVAX tokens will be periodically issued. As of September, over 2.6 million AVAX tokens have been burned, worth approximately USD 24.2 million.
The crypto industry’s growing demand for faster, cost-effective and interoperable blockchain networks is becoming a fundamental requirement to achieve widespread adoption. However, these blockchains must prove their reliability during times of high network activity and their ability to securely transfer assets across different blockchains. Like any emerging player, Avalanche needs time to test its capabilities and establish its value proposition compared to well-established chains like Bitcoin and Ethereum.
Despite AVAX’s price decline of over 90 percent from its all-time high (like most crypto tokens), Avalanche’s technological advancements are worth noting, which could lead to potential upside in AVAX’s token value. Meanwhile, the trust it has gained from large institutions and enterprises, along with its presence in popular sectors like RWA tokenisation, may indicate a potential for future ecosystem growth.
Disclaimer: This information was prepared by Sygnum Bank AG. This information may contain forward looking statements and may be subject to change. The opinions expressed herein are those of Sygnum Bank AG, its affilitates, and partners at the time of writing. This is for informational purposes only and contains general material. It does not constitute any advice or recommendation, an offer or invitation by or on behalf of Sygnum Bank AG to purchase or sell assets or securities. It is not intended to be used as a general guide to investing, and it should be used for informational purposes only. When making an investment decision, you should either conduct your own research and analysis or seek advice from an expert to make a calculated decision. The information and analysis contained here have been compiled from sources believed to be reliable. However, Sygnum Bank AG makes no representation as to its reliability or completeness and disclaims all liability for losses arising from the use of this information.
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