Nansen: Analyzing the Potential for Avalanche from Data, or Sparking a New Gold Rush

Original Title: "Nansen: Avalanche Protocol Sparks a 'Gold Rush', Analyzing Avalanche's Potential from Data"
Original Source: Nansen
Original Translation: DeFi Dao

Introduction

Avalanche is an EVM-compatible Layer 1 platform focused on speed and low transaction costs. It aims to address the scalability issues currently faced by Ethereum. It achieves its vision through several core features, such as sub-second transaction finality, a unique consensus protocol upgrade via Snowball++, high transaction throughput, and a network validated by over 1,200 full block-producing nodes. In short, Avalanche offers products that users are familiar with and love at an extremely low cost.

In the trend of a multi-chain future, Avalanche has established one of the best bridging experiences through their Avalanche Bridge. It makes transferring assets from Ethereum safer, cheaper, and faster, facilitating over $27 billion in token transfers in and out of the Ethereum network. It is also important to note Avalanche's shared security model, which is handled at the subnet level and allows applications to choose the level of security they require. This is a key distinction from Ethereum, where applications often pay too high a price for security.

In just over a year since its inception, Avalanche has a vibrant ecosystem of native applications and popular protocols based on Ethereum. Many activities were launched under the $180 million liquidity mining incentive announced in July, but we have already seen sustained growth and activity in TVL, trading volume, cross-chain bridge activity, and many other metrics. In terms of TVL alone, Avalanche has grown from less than $200 million in July to well over $13 billion today—an increase of 65 times in less than six months.

Ranking DeFi applications by TVL, six of the top ten applications are native to Avalanche. These applications are typically forks of their Ethereum counterparts and offer yield farming incentives. The popularity of these native applications highlights the community forming around Avalanche as a premier Layer 1. Notably, Trader Joe is a native AMM product that allows users to trade, farm, stake, and even receive LP token pairs with just one click using Zap. Trader Joe has consistently ranked in the top 5 among all DEXs, with an average daily trading volume of around $750 million. The features and user activity on Trader Joe, along with its $2.5 billion TVL, demonstrate the growing developer community and profitable LP environment within Avalanche.

Major Ethereum projects like Aave and Curve have also migrated to Avalanche through yield farming incentives, further driving traffic on the chain. Avalanche is rapidly becoming a hub for DeFi, crypto dApps, and enterprise solutions.

Avalanche Ecosystem Map and Leading dApps

The Avalanche ecosystem is robust, covering all major aspects of blockchain, including DeFi, NFTs, DEX, P2E, and more. CCK Ventures provides a breakdown of the ecosystem in the image below.

Source: CCK Ventures

Due to its EVM compatibility, major Ethereum DeFi projects like Aave and Curve have been able to easily migrate to Avalanche, further driving traffic on the chain. All Avalanche projects have a combined TVL of over $13.9 billion, with Aave holding the largest share at 25.82%, amounting to $3.59 billion. Following closely are Trader Joe and Benqi, both of which are native to Avalanche and also very popular.

Other notable Avalanche native dApps include Wonderland (the most successful OHM fork project, with over $2 billion staked), and Crabada (a play-to-earn casual and battle game set in an underwater world filled with fierce battles).

Avalanche Bridge

In the multi-chain future, an important feature of L1 and even L2 is accessibility. It is crucial for users to be able to transfer tokens from one blockchain to another quickly, securely, and at low cost. This can be accomplished through so-called blockchain bridges, which allow tokens or arbitrary data to be transferred from one chain to another, enabling interoperability between networks.

For the transfer of ERC20 tokens from Ethereum to Avalanche's C-Chain, users can utilize the Avalanche Bridge. It is a trustless bridge that supports various ERC-20 tokens, most notably WETH, USDC, and WBTC. Transfers take a total of 10-15 minutes, with fees under $3 (from Ethereum to Avalanche). More detailed information about fees and other FAQs can be found here.

Avalanche bridge activity can be monitored on Nansen Dashboards. After the Avalanche Foundation announced $180 million for DeFi in mid-August, we saw a surge in transaction volume on the Avalanche Bridge, reaching over $370 million on August 27 alone. With more dApps launching, along with support from reputable venture capital firms and liquidity mining programs (Curve, Aave, Trader Joe, Benqi), Avalanche is becoming increasingly popular—bridge activity continues to grow and maintain high volumes, peaking at over $600 million on September 23.

Avalanche Bridge Transaction Volume (Ethereum to Avax only)

Source: Nansen.ai | As of December 3, 2021

Transactions and Gas Fees

Scalability issues are a major constraint on the growth and adoption of many blockchain networks. On the Ethereum network, high gas fees caused by congestion have prompted many developers to migrate to other L1 chains and L2 solutions. When the cost of completing a simple transaction exceeds the value of the asset being transferred, high gas fees become very prohibitive. High gas fees penalize retail participants and make business models financially unviable, eroding business models. Large token holders and bots are pricing retail out, forcing them to bear high gas costs and congestion at the base layer (along with a poor user experience). This certainly limits the growth of the network, stifling innovation across the broader crypto space. The following chart shows the rise in gas prices over the past two years, easily accessible on Nansen's gas tracker dashboard.

Ethereum Median Gas Price (Gwei)

Source: Nansen.ai | As of December 3, 2021

Avalanche's transaction throughput exceeds 4,500 tps, with transaction finality in under 2 seconds. This is very promising compared to other blockchain networks.

Transaction Throughput and Finality Comparison

Source: https://www.avax.network/ As of December 3

The following chart highlights how daily transaction volume on the Avalanche network has steadily increased over the past six months. This appeal corresponds to the growing number of projects joining the ecosystem, from DeFi primitives (such as DEXs, money markets, asset management protocols) to NFTs and enterprise adoption.

Daily Transaction Volume

Source: Nansen.ai | As of December 3, 2021

A significant increase in daily transaction volume can be observed in early August. This coincided with the launch of the "Avalanche Rush" program—a DeFi incentive program worth up to $180 million that attracted blue-chip DeFi applications to deploy on Avalanche. Additionally, another significant growth can be seen in November, as major announcements such as the partnership with Deloitte were made during this period. Furthermore, with the recent collaboration with leading digital asset custody and settlement solution provider Fireblocks, a significant increase in daily transaction numbers is expected in the coming months.

Daily Gas Fees Paid | Ethereum vs Avalanche

Source: Nansen.ai | As of December 3, 2021

From the above chart, we can also observe that in August, the daily gas paid on Ethereum began to rise significantly. This was primarily due to the surge of NFT projects deploying on Avalanche during the summer. The high gas prices on Ethereum forced many projects to seek expansion on other networks where deploying projects would be cheaper and more accessible.

Avalanche is capable of creating fast, low-cost dApps that are compatible with Solidity. As a result, various NFT projects have leveraged the network for deployment. Examples include the Topps NFT marketplace (designed for the scale and speed of global sports fans), Kalao (an NFT ecosystem that unleashes the full potential of metaverse experiences), Venly Market (a peer-to-peer, blockchain-agnostic NFT marketplace), and Crabada (a play-to-earn NFT game). Additionally, part of the $200 million recently raised by the Avalanche Foundation will be specifically allocated for NFT and cultural applications. However, it is worth noting that the most active applications on Avalanche remain DeFi dApps, such as Trader Joe and Pangolin (both DEXs), which account for 23% and 7.5% of all on-chain activity, respectively.

The transaction ratio between Avalanche and Ethereum has been significantly increasing, especially since August.

Ethereum vs. Avalanche Transactions

Source: Nansen.ai | As of December 3, 2021

This ratio rose from 1% in early August to a peak of 54% on November 26. To highlight Avalanche's performance, let’s refer to the previous chart showing daily gas costs. On November 26, the daily gas paid on AVAX was $1,311,682, while on Ethereum it was $51,389,748. Although the transaction volume on AVAX that day accounted for more than half of Ethereum's transaction volume, the cost of processing those transactions was over 20 times cheaper than its Ethereum equivalent. This comparison highlights the performance of the Avalanche network at a fraction of the cost.

Conclusion

Given the growing demand for block space, many Layer 1 and Layer 2 solutions have been exploring new scalability design approaches. Some defining characteristics of scaling solutions revolve around different consensus mechanisms and execution environments, leading to higher performance and lower fees.

Typically, liquidity mining incentives are used to encourage users to utilize these chains as a mechanism to bootstrap liquidity. As we have seen time and again, liquidity is not loyal. It will be interesting to see which participants in the market will stand out once these incentives run out. Avalanche has gained tremendous traction over the past 12 months, and we are excited to see the role it will play in the future of cryptocurrency.