In-depth Interpretation of Avalanche: From EVM-Compatible L1 to "Subnet Pioneer"

Written by: Alice Li, Foresight Ventures & Kasper Jao, Avalanche Asia Star Fund

1. Introduction

Avalanche offers an intriguing value proposition to the market with its unique subnet design: it can be viewed as both an EVM-compatible L1 and a heterogeneous network interoperability platform (similar to L0), with L2 also being able to build on Avalanche infrastructure. Since its inception in 2020, Avalanche has evolved into a vibrant ecosystem, currently hosting over 500 Dapps and a total locked value exceeding $5 billion.

The year 2022 will be transformative for Avalanche, as subnets gain more attention, and Avalanche's identity will gradually shift from being just another "Ethereum killer" to a "subnet pioneer."

“Subnets will become the next growth engine in the crypto space… Over the past five years, smart contracts have laid the foundation for astonishing innovation in the blockchain space, and nothing inherits this momentum better than Subnets.” ------ Emin Gun Sirer, Founder and CEO of Ava Labs

This article will provide an in-depth analysis of Avalanche's technical architecture, application scenarios, competitive landscape, and ecosystem to help readers further understand Avalanche subnets.

2. Overview of Avalanche

Avalanche is an open-source platform developed by Ava Labs, providing developers and enterprises with an interoperable and highly scalable ecosystem for creating subnet-based custom blockchains. With its novel Avalanche consensus, it can achieve 4500 TPS and near-instant finality.

Ava Labs is the founding team behind Avalanche, co-founded in 2018 by Cornell University computer scientist and professor Emin Gün Sirer along with two PhD students, Ted Yin and Kevin Sekniqi. The team has years of experience and expertise in distributed systems consensus protocols. Notably, Ted Yin designed HotStuff, a scalable classical consensus algorithm that serves as the consensus mechanism for the Facebook Diem (Libra) project.

(Ava Lab founding team; Source: Ava.Network)

2.1 The Scalability Issue of Ethereum

To understand Avalanche's architecture, we first need to grasp the scalability issues of Ethereum.

Blockchains are like cities; imagine living in a city with limited space. As more and more people flock in, the city becomes crowded, and housing prices rise. The same thing happens in the blockchain space, where people are no longer competing for living space but for block space, and the native inhabitants of the chain are no longer people but transactions.

Based on this, Avalanche proposes two scalability approaches:

1. Vertical Scalability: Avalanche Consensus. Avalanche consensus can scale network performance to 4500 TPS without compromising decentralization and security, making Avalanche one of the fastest and most secure blockchains in the crypto world.
2. Horizontal Scalability: Avalanche Subnet. Avalanche should not be viewed as a single blockchain but as a collection of multiple subnets. Developers can launch their own subnets in a matter of hours, and the Avalanche subnet solution provides infinite scalability possibilities for blockchains.

2.2 Vertical Scalability: Avalanche Consensus

2.2.1 Avalanche Consensus

Next, let's illustrate how Avalanche consensus works with a simple analogy.

Imagine you are in a stadium with thousands of people, and the audience needs to reach a consensus on "which team to support." Because the stadium is large and crowded, to understand the preferences of the majority, you decide to:

1. Randomly ask 5 people nearby about their preferences.
2. If 3 or more people vote for the blue team, you will increase your confidence in the blue team, and vice versa.
3. You repeat this sampling process to increase confidence.
4. At the same time, everyone in the stadium will repeat this small sample sampling to determine the final answer.
5. With each random sampling, the number of people finding the correct answer increases, and eventually, everyone reaches a consensus, just like a snowball rolling down a hill leading to an avalanche.

Avalanche Consensus is a new leaderless BFT protocol built on the metastability achieved through repeated secondary sampling between nodes and passing votes in a DAG. To reach consensus, validating nodes only need to sample a portion of nodes rather than communicate with all nodes. Therefore, it can achieve finality at lightning speed and with high precision, while each node has a voice in the voting process, as validating nodes randomly select sampled nodes.

“The parameters in Avalanche consensus are flexible and adjustable. We can make the probability of arriving at an incorrect conclusion approach infinitesimally small, < .0000000001%.” --- Connor Daly, Founder of Pangolin

In addition to high performance, Avalanche also has the following two characteristics:

1. Decentralization. The number of validating nodes can theoretically be infinite, and increasing the number of nodes does not affect the efficiency of information transmission, as the amount of information each node needs to transmit to reach consensus remains constant.
2. Lightweight and easy to deploy. Anyone with ordinary hardware can become a validator by staking 2000 AVAX to join the mainnet.

2.3 Horizontal Scalability: Avalanche Subnet

2.3.1 Avalanche Architecture

Avalanche has three built-in blockchains: X-Chain, P-Chain, and C-Chain.

• X-Chain is responsible for the creation, management, and trading of digital assets. It is based on a "DAG" model, which is another unique form of consensus model.
• C-Chain is dedicated to smart contracts. It is an EVM copy that supports dApp development based on the Avalanche protocol.
• P-Chain coordinates validators and creates subnets and staking mechanisms.

A subnet is a group of validating nodes that reach consensus on the network state. A subnet can be thought of as the underlying stack, where each blockchain needs a subnet responsible for validating transactions, and a subnet can validate multiple blockchains.

The mainnet is a special subnet: X-Chain, P-Chain, and C-Chain all belong to the mainnet. All members of custom subnets must also stake at least 2,000 AVAX to join the mainnet and jointly validate transactions on the mainnet.

2.3.2 Why Are Subnets Important?

In theory, Avalanche allows for the creation of an infinite number of subnets, which is the secret to its network scalability. Each subnet can be private (permissioned) or public (permissionless). For cross-chain interoperability, blockchains using the same subnet (i.e., having the same set of validators) will be compatible by default. Running custom blockchains using Avalanche Subnet has four main advantages:

1. Cost Control

Deploying applications on a subnet means you can customize your own gas token and transaction fee structure—tokens can be allocated to validators, directly burned, or used for airdrops, etc.

2. User Experience

Developing a subnet means you do not have to share the blockchain network with other applications, eliminating the risk of applications becoming too expensive due to network congestion, thus ensuring developers can provide users with a smooth and reasonably priced experience.

3. Customization

Different blockchains and decentralized applications may require validators to have certain attributes. For example, GameFi may require higher RAM and CPU capabilities; subnet developers can set hardware thresholds for validating nodes to ensure that Dapps do not suffer from poor performance due to slow node speeds.

4. Compliance

Subnets can also set compliance requirements for validating nodes to facilitate the adoption of blockchain technology by mainstream institutions. Examples of compliance requirements include:

1. Validators must be located in specific countries.
2. Validators must pass KYC/AML checks.
3. Validators must hold certain licenses.

3. Subnet Application Scenarios

3.1 GameFi Use Cases

a. DeFi Kingdom: DFK Chain

DeFi Kingdom is a game that combines P2E gaming and DeFi. It started on the Harmony blockchain and began expanding to other chains after a surge in user numbers. DeFi Kingdom announced on April 1 that it would run on the Avalanche subnet DFK Chain. The game's token JEWEL will be used for all transactions on the subnet chain.

(DFK Chain Statistics; Source: @AVAXholic)

Data Performance: As of April 14, the total transaction volume of DFK Chain reached $2.5 million, with a TVL of $215 million. Since its launch, Avalanche's overall daily transaction volume has grown by nearly 30%, and active users have increased by 10%, with overall network performance remaining quite stable.

Virtual Machine: The DFK Subnet uses a customized EVM that incorporates a Directed Acyclic Graph (DAG) model, allowing the blockchain to scale efficiently at a lower cost.

Interoperability: Since Avalanche has not yet announced a native method for inter-subnet interoperability, asset transfers between the AVAX mainnet and DFK Chain are currently handled by the third-party bridge Synapse.

b. Crabada: Swimmer Network

Crabada is an Axie-like play-to-earn game in the Avalanche ecosystem and is a very popular game, previously accounting for 15% - 40% of the total transaction fees on the Avalanche C-Chain.

On May 14, Crabada announced the long-awaited subnet - Swimmer Network. After the launch of Swimmer Network, it significantly reduced transaction fees on the Avalanche C-Chain, and this subnet will also help the Crabada community execute breeding and mining tasks more effectively, allowing players to enjoy lower transaction fees and an excellent user experience.

Crabada's native inflation token $TUS, similar to Axie's SLP, may bring more value to the community in the future. Crabada is exploring the possibility of introducing small games to the subnet, such as Snake City. If more games use $TUS for gameplay in their market, the token and the network itself will generate additional value.

3.2 Subnets with Native KYC Functionality

Avalanche has recently launched subnets with native KYC (Know Your Customer) functionality. This feature is known as precompile, which is an optional feature that developers can choose to enable when creating their own EVM subnets.

This special precompile allows subnet developers to control who can submit transactions to the subnet. By default, transactions from unknown addresses will be prohibited, allowing only whitelisted addresses. Specific administrators can update the whitelist after the genesis.

This is the first step in building KYC/private subnets. Once KYC providers are set as allow list administrators, they can allow verified individuals to enter the subnet.

This feature also has great potential in social-gated communities (e.g., FWB). Subnet creators can view their subnet as a privately writable, publicly readable database. A small number of users can use public metrics and integrations to widely distribute certain data in a well-known format.

3.3 Enterprise Use Cases - Beyond GameFi, Beyond Web 3.0

One of Ava Labs' goals is to apply innovative applications from the web3 space to traditional web 2 companies. By merging these two worlds, Ava Labs believes it can make everyday transactions cheaper and more convenient for people.

“Our partnership with MasterCard gives us the opportunity to bring the benefits of blockchain to everyday consumers.” ------ John Wu, President of Ava Labs. Currently, some enterprises are building on the Avalanche platform, such as the partnership between Avalanche and Deloitte, and these subnet functionalities are still being deployed.

3.4 Other Potential Subnet Use Cases

• Industries with a need to partition and sell assets, such as real estate, where validating nodes need to store asset records off-chain. (Potential Dapp that may adopt Avalanche subnet solutions: Retok Finance)
• For very high-performance applications, subnets may require high-performance validating nodes to provide substantial RAM or CPU capabilities for applications needing 10,000+ TPS.
• Private subnets similar to enterprise blockchains, such as JP Morgan's Quorum, R3's Corda, and Hyperledger, where the content of the blockchain is only visible to certain participants.
• Other public chains can transfer their state to Avalanche and use its consensus mechanism to achieve faster performance, finality, and higher security. Therefore, blockchains like BCH and Ethereum Classic can have subnets and implement POS staking with their own tokens.

4. Competitive Landscape Analysis

4.1 Comparison with L1s: Cosmos, BNB, Avalanche

In fact, the competition for subnet scalability solutions among L1s has begun to heat up:

• BSC announced the launch of the BSC Application Sidechain (BAS) testnet on March 29.
• Avalanche launched its first subnet - DFK Chain on April 1, and Swimmer Network on May 14.
• Polygon launched a new type of dedicated blockchain network called Supernets and will invest $100 million to fund applications on this network. To better understand Avalanche Subnet, we will next compare Avalanche with some L1 competitors.

(Comparison analysis of Avalanche with BSC and Cosmos; Reference: Comparison of heterogeneous blockchain networks.)

As shown in the figure, the three horizontal scalability networks mentioned above have their own design choices and trade-offs:

Network Operating Costs vs. Security vs. Scalability

First, classical consensus protocols (e.g., PBFT, Tendermint/Cosmos) often require all nodes to vote, and communication costs typically increase quadratically (for example, 10 nodes need to transmit 10^10 = 100 messages, while 1,000 nodes need to transmit 100^1000 = 1,000,000 messages). To achieve faster performance and lower messaging costs, blockchains often limit the number of validators, sacrificing decentralization for high performance. For example, BSC has only 21 validating nodes; Cosmos has over 150 validating nodes.

Node Requirements vs. Scalability

To make the system as permissionless as possible, the hardware requirements for running nodes should be relatively low. However, as node requirements decrease, the total computing power available in the network also decreases. Therefore, some blockchains raise node requirements to achieve higher performance. For Solana's validating nodes, hardware costs often reach thousands of dollars, as validators need to have devices with 12-core CPUs, at least 128 GB RAM, and substantial storage; BSC validating nodes also require at least 48 GB of RAM and 12 CPU cores.

Avalanche's Advantages

Avalanche provides solutions to the above two dilemmas:

1. Regarding the decentralization dilemma, the number of validating nodes in Avalanche can theoretically reach infinity, as the amount of information transmitted to reach consensus in Avalanche consensus remains constant, thus the speed of consensus is not affected regardless of how many participants are in the validating network.
2. In terms of node requirements, Avalanche validating nodes only require moderate hardware specifications (2 cores, 4 GB RAM) to ensure high performance of 4500 TPS under ordinary hardware conditions.

In addition to these two advantages, Avalanche also has the following benefits:

• Strong compatibility. Avalanche supports EVM, AVM, and WASM, allowing subnet developers to effortlessly port most existing codebases to new projects. Subnets can also build their own VMs using the Avalanche virtual machine. Although developers can create new VMs, they may still choose to create subnets instead of a separate L1, as Avalanche can help solve the most challenging aspects of launching a new blockchain: consensus engines, security, and network effects, providing a sort of "turnkey protocol."
• Avalanche Subnet is currently the only subnet that has implemented real-world applications. Other public chains like BSC and Polygon have also launched sidechain solutions, but Avalanche is the only one that has implemented real-world applications that have been tested in practice, while other networks are still in testing phases.
• The overlapping architecture of subnet validating nodes. Currently, most L1s like Avalanche, Solana, and Cosmos attract validators by offering staking rewards. The question is, after 50 years, as staking rewards gradually decrease, how can we ensure that there will still be people willing to maintain this chain? One possible answer is to use network transaction fees to incentivize validating nodes. For Avalanche, its unique design allows the mainnet to be maintained by subnet validating nodes in the long term—because any validator of a subnet must join the mainnet. This unique architecture also gives Avalanche greater design space and interoperability potential in the future, which is not available in other L1 networks.
• A deflationary monetary model. Avalanche has many favorable factors such as Avalanche Multiverse, Avalanche Rush incentive programs, the Blizzard ecosystem fund, and the launch of Avalanche subnets. These factors will promote the large-scale application of the Avalanche network and create strong demand for AVAX. In terms of supply, the launch of subnets will lock in the liquidity of AVAX, while higher on-chain transaction volumes will lead to more AVAX being consumed as gas fees, further reducing circulating supply.

Future Challenges

Of course, Avalanche also has its shortcomings:

• Avalanche's development tools are not as convenient as those of Cosmos (Cosmos SDKs) and BSC (Modular SDKs). Essentially, all web 3.0 public chain players are competing for a limited pool of development talent, and providing ready-made modular SDKs will be a very attractive value-add for developers.
• Native interoperable bridging methods have not yet been announced. In contrast, both Cosmos and BSC have their own universal protocols for inter-chain communication. While there are no clear winners among the bridging solutions available in the market, cross-chain interoperability remains a significant issue limiting the scalability and development of Avalanche Subnets.

4.2 Comparison with L2 Rollups

In addition to competition among L1s, scalability issues also involve competition between different layers. L2 scalability solutions have received a lot of attention: L2 Rollups move transaction computation off-chain while storing transaction data on the Ethereum chain, meaning that the security of Rollups can be protected by L1.

(Comparison analysis of Avalanche with L2; Reference: Ava.Network, Arbitrum.Network; @StarkWareLtd|Twitter, @zkSync|Twitter)

The biggest difference between Avalanche Subnet and L2 is the learning cost for developers.

Avalanche supports all virtual machines, including EVM, AVM, WASM, or custom virtual machines, allowing developers to effortlessly port code from other chains.

Optimistic Rollup is EVM-compatible because OVM can implement arbitrary smart contract logic.

For ZK Rollup, things are a bit more complicated. Since EVM was not designed with ZK in mind, ZK's EVM compatibility does not yet have a direct solution. People have been working to solve this problem for years. There are two main players in ZK Rollup: StarkWare and zkSync. StarkWare currently deploys CairoVM, which requires developers to write code in a new language (Cairo) and has launched a transpiler (Warp) to help developers translate Solidity into Cairo. zkSync has launched its 2.0 testnet, which deploys a ZK Rollups-friendly zkEVM and is expected to be EVM-compatible. The performance and usability of zkSync 2.0 are yet to be further tested.

Another advantage of Avalanche is ease of deployment. Developers can create a chain in a matter of hours using Avalanche; currently, there are 19 blockchains on the Avalanche mainnet and over 300 chains on the Fuji testnet. In contrast, ZK rollups have higher deployment costs because zero-knowledge cryptographic proofs require substantial computational resources. Even with node service providers, developers need to learn a new language (or use a transpiler) to build Dapps in ZK.

Compared to Avalanche Subnet, L2 does not sacrifice the security of the main chain, as it still relies on the main chain as a backup to verify transaction execution.

Avalanche does not have such a shared security model, but in many cases, shared security is not an ideal feature. If you do not want your chain to risk stopping operation every day, it is not advisable to intertwine your faith with others. L2 should not do this, and sidechains with independent finality should not do this either.

Another key difference between Avalanche Subnet and EVM L2 is whether liquidity is unified or fragmented.

L2s are no longer a complete chain but distribute liquidity across multiple different systems. Users now have to interact differently with each of these chains. In this case, certain combinations become impossible, such as dYdX being unable to interact with flash loans elsewhere.

L2 not only has fragmented liquidity, but the protocols themselves are also different, making it impossible to automatically transition from one protocol to another.

In contrast, Avalanche Subnet has unified liquidity; funds do not remain in one subnet and can interoperate between subnets, and each cross-chain transfer will use the C-Chain and burn AVAX. For example, transferring funds from Swimmer Net to DFK Net requires AVAX, which is also a healthy use case for the AVAX token model.

As Avalanche Subnet grows, a new validator economy will emerge.

In Avalanche, you can have a subnet composed of a small number of validators, or you can have a subnet with a large number of validators. As Avalanche Subnet grows, a thriving validator economy will emerge, and people will start to provide additional incentives to attract the diverse set of validators they need, leading to more people willing to offer customized validating node services.

Subnet developers can decide for themselves which services they need to use. The needs of each blockchain may vary; some may require millions of validating nodes, while others may only need a few validating nodes to run a chain. In Avalanche, all of this is achievable.

5. Avalanche Ecosystem

Next, here are some brief introductions to new projects in the Avalanche ecosystem.

5.1 Shrapnel

Shrapnel is the world's first blockchain-supported modifiable AAA extraction-based first-person shooter game, developed by experienced experts who have worked on some of the biggest games in the industry—Halo, Call of Duty, Star Wars, etc. Shrapnel also provides a powerful set of creation tools that players can use to create custom maps and skins.

This FPS game has decided to run on Avalanche Subnet, operating completely independently of the main chain. The subnet allows the project to define its own parameters and fee structures, providing Shrapnel with high customization and flexibility to capture diverse needs. It may also allow other game developers to build games on top of their subnet—similar to L1-as-a-Service.

5.2 Arrow Market

Arrow Markets is a decentralized options protocol built on Avalanche. Arrow's options creation and settlement mechanism is based on a dual-pool structure. There are two pools: a trading pool and a market-making pool. A dynamic hedging engine is embedded in the system to hedge the net increment of options contracts in the trading pool. Options are cash-settled in stablecoins.

Avalanche is the ideal foundational layer for Arrow because it offers fast throughput, near-instant finality, near-zero transaction costs, and leading censorship resistance. Subnets can be created in the Avalanche ecosystem to meet the demands of DeFi protocols for MEV resistance and speed, and subnets can also be customized to allow institutional users to participate in the protocol in a compliant manner.

5.3 Dexalot

Dexalot aims to bring transparency, user-friendliness, and modern trading to the Avalanche community. They hope to provide users with a trading experience comparable to traditional centralized exchanges through decentralized applications on Avalanche.

Dexalot is not the first DeFi project to establish a subnet, but it will be one of the earliest. The purpose of creating the subnet is to increase trading speed by at least 10 times, reduce trading costs to negligible levels, and improve user experience, community engagement, and capital efficiency.

The House of Chimeria compares the Dexalot subnet with the current AVAX C-Chain Dexalot exchange according to their vision. The following features are a good sign for the community.

• Faster settlement times, allowing users to trade assets easily.
• Lower trading costs, which can even be negligible, to enhance financial inclusivity.
• The subnet will use $ALOT as gas, adding utility to the native token.

6. AVAX Valuation Analysis

Returning to the analogy at the beginning of the article, we consider blockchains to be like cities or countries. The core value of a blockchain network lies in the ecological innovation capability of the entire system, which can be reflected in data metrics such as the number of active addresses, daily transaction volume, developer ecosystem, and TVL.

According to the calculations in the above figure, different colored metrics reflect different valuation multiples. Deep red indicates that people are relatively FOMOing and are willing to pay a higher premium for each unit of value captured by the network, while deep blue indicates the opposite, reflecting low market sentiment and lower corresponding prices for each unit of value captured.

We can see that since the fourth quarter of 2021, the valuation multiples have been relatively low. The primary reason for this phenomenon is that the recent market sentiment has continued to decline due to the Luna crash, with all coins except Bitcoin and Ethereum experiencing rapid declines; another reason is that Avalanche has experienced rapid growth in total transaction volume, user numbers, TVL, and revenue since Q3 2021, making the valuation multiples in Q3 and Q4 more reasonable than in Q1.

7. Conclusion

Overall, we are confident in Avalanche in the upcoming scalability solution competition, as Avalanche is currently the solution that best balances scalability, deployment costs, and security, and it has already implemented a practical EVM scalability solution. It boasts the novel Avalanche consensus, thoughtful technical architecture design, and an excellent leadership team.

With the successful launch of DFK Chain and the deepening of collaborations with Crabada and traditional web2 companies, we have ample reason to believe that Avalanche will one day become what the founding team envisioned—a platform of interoperable blockchains that digitize all assets in the world.