Avalanche’s AVAX cryptocurrency broke into the top 20 best cryptocurrencies several months ago. There are many experts who expect this cryptocurrency to become the next Ethereum. So what is Avalanche and what are its benefits? Let’s understand this rising cryptocurrency together.
With Avalanche (AVAX), transaction speed is a priority, as are low costs and environmental friendliness. The ultimate goal is to create a highly scalable blockchain that does not compromise security or decentralization.
In 2020, the Ava Labs team launched Avalanche, which quickly rose to the top of the cryptocurrency charts. Likewise, the total value locked in the protocol has skyrocketed and is now worth over $3 billion.
With an outstanding team, energetic community, and committed backers, Avalanche is a strong contender for the world’s fastest blockchain title. In this guide, you’ll learn everything you need to know about Avalanche, including how it works and what the AVAX token does. So let’s go !
What is Avalanche (AVAX)?
Bitcoin changed the way blockchains evolved. As Bitcoin was the first blockchain, its design also influenced later chains, including Ethereum . Here are a few reasons why this is a problem today:
- Bitcoin transactions are slow and expensive due to proof-of-work consensus.
- PoW chains require a large number of resources to be validated, which prevents decentralization.
- Adoption of blockchain technology is growing rapidly and requires scalable solutions.
Bitcoin was launched in 2009 when relatively few people had used it, so technical limitations didn’t matter much. Today’s blockchain landscape, however, has largely changed due to the decentralization of finance and the use of NFT .
According to some estimates, around 100 million people were using cryptocurrencies at the start of 2021.
AVAX the future number 1 cryptocurrency in the world?
DeFi applications have also seen significant growth and now hold a valuation of over $100 billion. This exponential growth leads to network congestion and outages for blockchains with smart contracts, like Ethereum and Solana .
Today, most Ethereum-based DeFi applications use layer 2 scaling solutions to mitigate the situation. Layer 2 transactions are pulled from the Ethereum mainchain, wrapped in neat packets, and sent back to Ethereum. The result is that Ethereum is no longer under pressure, but security may be compromised due to the added complexity.
In order to maintain security and scalability, the most elegant option is to keep everything in a Layer 1 protocol. But how does Avalanche fit into all of this?
Avalanche founders and developers, Ava Labs, believe they have created the fastest smart contract blockchain platform available. Under the hood, Avalanche has three different blockchains, allowing it to operate at internet scale when cryptocurrency becomes the core technology in the near future.
It would have taken an entire decade for such a vision to materialize just a few years ago. Despite this, a growing community is hosted on Avalanche’s network, backed by a $230 million ecosystem fund.
Is AVAX the fastest cryptocurrency in the world?
Founded in 2019 by Dr. Emin Gun Sirer, Avalanche aims to deliver faster finality time for blockchain transactions. When referring to crypto transactions, finality time refers to the time it takes for a transaction to be considered irreversible and irrevocable. When a transaction reaches finality, it is permanent – it cannot be undone or modified.
Besides finality, other characteristics of the blockchain also contribute to finality, although the finality time varies from blockchain to blockchain. The Ethereum blockchain, for example, takes about a minute to reach finality. In live operations, Avalanche achieves finality in seconds.
With Avalanche’s near-instantaneous finality, is it the fastest blockchain in the world? Finding out will require a closer look at how Avalanche works and what AVAX token staking is.
How does Avalanche work?
The main innovation of Avalanche is that each of its blockchains has three chains instead of the usual chains. Rather than having a single chain perform all functions, this design choice allows each blockchain to focus on a specific task.
By distributing the tasks between the different chains, the Avalanche platform maintains its agility, which allows it to achieve the golden trinity of blockchain characteristics: security, scalability and decentralization.
Exchange Chain (X-Chain)
X-Chain is the blockchain that manages the creation and transactions of Avalanche assets. On Avalanche, AVAX, the company’s native token, is currently the most popular cryptocurrency, but JOE and PNG, tokens chosen for trading on decentralized exchanges, are not far behind.
AVAX is the currency used by X-Chain to pay fees to users. The payment of gas fees on Ethereum is also done in ETH. Therefore, even if you transact in JOE tokens, AVAX fees are still charged.
Chain of contracts (C-Chain)
The most important feature of Avalanche is that of smart contracts . With this feature, developers can build decentralized applications while taking advantage of its scalability and security features.
Smart contracts can be deployed on the C-Chain and are compatible with the EVM (Ethereum Virtual Machine). Thanks to Avalanche’s compatibility with EVM, Ethereum smart contracts can be implemented by anyone. But why is this important? Because existing Ethereum apps, like DeFi titans Aave, can easily turn their products into Avalanche versions.
Developers can deploy Ethereum smart contracts on Avalanche and use the same Ethereum developer tools they are used to.
Platform Chain (P-Chain)
Avalanche’s P-Chain allows anyone to create an L1 or L2 blockchain. You can even create several chains at the same time. In general, subnets are called blockchains in Avalanche, with the P-Chain being the default network shared by all.
Initially, P-Chain managed Avalanche’s subnet landscape by tracking validators, but for the past few years, subnets have also been responsible for validating P-Chain.
Subnets are key to scaling Avalanche
We briefly touched on Avalanche’s subnets in the P-Chain section above. However, it is important to emphasize their importance.
Subnets work similar to Ethereum 2.0 sharding. Simply put, a subnet is a clone of the default blockchain (in this case, Avalanche’s primary network) that is connected to the platform at launch.
However, subnets can be created by users when needed and on demand. Therefore, a subnet can launch another subnet, after its temporary scaling limits are exhausted, in order to meet or exceed network traffic demands and release transactions.
In summary, creating subnets is unlimited (subnets are able to create subnets indefinitely). There is a limit of 4,500 transactions per second for Avalanche P-Chain, which is twice the limit of Visa. However, due to its unlimited ability to generate subnets, there is no practical limit to TPS for Avalanche.
AVAX Token Details
It serves as a common medium of exchange for the ecosystem, also known as the Avalanche Token or AVAX. In addition to using AVAX as currency in the world of Avalanche, AVAX bets secure the network and reward bets with more AVAX.
With the deflationary mechanism of AVAX tokens, the value of staking is compounded. Transaction fees are paid with AVAX tokens, which are permanently burned, reducing the number of AVAX tokens in circulation.
Rewards for AVAX stakes
It is mandatory that validators own and stake AVAX tokens as collateral in all subnets, including the mainnet. However, this does not mean that you have to be a validator to earn rewards for staked AVAXes. You can delegate your stake to a validator in order to earn stake rewards of a certain percentage.
AVAX tokens are staked at around 64% right now. Staking rewards for validators are around 11% APY, and staking rewards for delegates are around 9.53%.
Pay transaction fees with AVAX
As part of the ecosystem, AVAXes are referred to as the common unit of account. Simply put, AVAX is the network’s default currency. AVAX is used for all transaction fees, and it serves as a common currency between subnets.
By implementing AVAX, subnets that would otherwise have their own cryptocurrencies can become interoperable.
Create tokens and subnets using AVAX
The two primary use cases for Avalanche are creating custom tokens and blockchain networks (called subnets). Through the platform, developers are able to develop NFTs, DeFi protocols, and games, among many other options.
The X-Chain can be used to create custom tokens, to run smart contracts on the C-Chain, or to create subnets. Subscription-based AVAX payments for subnets are particularly popular.