January 2024

Avalanche and its Growing Ecosystem

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Avalanche is a layer-1 ecosystem that is growing in stature and popularity. While it is known for having strong technical capabilities by offering high throughput, scalability and flexibility, a more recent narrative surrounding the ecosystem is its appeal to enterprise and institutional users.

Avalanche-connected chains have been adopted by the likes of Citi and JP Morgan. This month we are going to dive into what Avalanche is, how its ecosystem is gaining critical mass and how the institutional adoption of Avalanche subnets will impact the digital asset space.

The Avalanche project began in early 2018 when a pseudonymous group called “Team Rocket” released a set of consensus protocols known as Snowflake, Snowball, and Avalanche. As a quick refresher, a consensus protocol is the beating heart of a blockchain; it is the set of rules that enables participants of a decentralized network to agree on the state of the system. While unconfirmed, it is widely believed that Cornell Professor, Emin Gün Sirer, was the lead of Team Rocket and the creator of this new system. He subsequently went on to co-found Ava Labs and formalize these protocols into what is now Avalanche. In May 2019, the core team began open-sourcing portions of the codebase for testing and on September 21, 2020, the Avalanche mainnet went live.

From a technical perspective, Avalanche’s architecture consists of multiple dynamic and interconnected blockchains. This is like Cosmos, which also has a multi-chain architecture with many connected chains. In Avalanche, there are many sovereign networks called “subnets” which define their own rules regarding membership and token economics. There are then many blockchains, each of which is validated by one subnet. All the subnets combined make up the Avalanche mainnet.

At the heart of the system is the “Primary Network” (itself a subnet) which hosts all the validators responsible for validating every subnet. Alongside the Primary Network are three other chains: the Platform Chain (P-Chain), the Exchange Chain (X-Chain), and the Contract Chain (C-Chain).

The three core chains each have different roles:

  • P-Chain: this oversees the management of validators in the network, staking operations, the delegation process, subnet creation and other platform-level operations.
  • X-Chain: this is tasked with functions such as asset creation, trading and overall asset management. Specifically, assets created on X-Chain are known as Avalanche Native Tokens and represent real-world resources such as equities or bonds. These assets can be bound by rules that govern token behaviour, such as “this token cannot be traded until 9am GMT”. AVAX, the native token of the Avalanche ecosystem, is native to this X-Chain.
  • C-Chain: this focuses on executing smart contracts and deploying dApps. It is an implementation of the Ethereum Virtual Machine (EVM).

The design philosophy behind Avalanche is one of horizontal scaling. Rather than housing a single monolithic chain that can be subject to network congestion and high gas fees, Avalanche houses many subnets. Each subnet can undergo independent upgrades and modifications, without impacting the entire network, and can optimize for its own use case. The performance of a subnet is also isolated from other subnets, meaning that increased usage of one subnet will not impact another. All subnets are interoperable and use Avalanche Warp Messaging to communicate with each other.

In terms of arriving at consensus, in line with most modern blockchain platforms, Avalanche uses proof-of-stake (PoS) as its consensus mechanism. This is secure, efficient, and environmentally friendly. Avalanche can deliver near-instant transaction finality with less than 2 seconds for transaction settlement. The PoS system that Avalanche has created is built upon Directed Acyclic Graph (DAG) optimization, which supports 4,500 transactions per second per chain. As a result, the platform is highly scalable, and applications can live on their own subnets to ensure high transaction throughput if needed. Compatibility with the Ethereum Virtual Machine (EVM) means that any application running on Ethereum can easily port over to Avalanche.

The subnet design of Avalanche makes it uniquely suitable for certain application verticals. Of late, Avalanche has made headlines because of some notable institutional adoption of subnets. Citi recently delivered a proof of concept for a request for streaming (RFS) solution for foreign exchange pricing and execution. In this proof of concept, Citi priced and executed simulated bilateral trades in collaboration with Fidelity and T. Rowe Price Associates. Importantly, this was done in an institutionally compliant manner using a subnet that was tailored to financial institutions with KYC/AML support. This solution also made use of Avalanche’s managed blockchain service, AvaCloud.

JP Morgan has also been running a proof of concept project using Avalanche. This initiative was in conjunction with the Monetary Authority of Singapore’s Project Guardian and showcased a tokenized and automated portfolio management system. The project used a permissioned Avalanche Evergreen Subnet and facilitated subscriptions and redemptions for funds offered by WisdomTree. As in the Citi example, the benefit of this subnet design is that the blockchain can be customized for institutional applications. In this case, there were added privacy features and gas optimizations. The outcome of this proof of concept was that it demonstrated that by deploying smart contracts representing discretionary portfolios, many portfolios can be programmatically linked to allocation models and automatically rebalanced en masse.

Gaming is another area that is gaining traction in Avalanche. Games tend to have specific requirements that are well-suited for subnets to offer. These include a high number of transactions per second, fast time to finality and chain customizability. Subnets allow games to create their own application-specific blockchains that are independent of other Avalanche applications. Several high-profile games have already started building on Avalanche including Shrapnel, which is the most anticipated AAA first-person shooter game that is blockchain-enabled.

There are several core ecosystems that CMCC Global has historically invested in and supported, most notably Ethereum, Solana and Cosmos. There are others that we have closely followed, waiting to see signs of differentiation and adoption. Avalanche is one of the latter. We have been monitoring Avalanche for several years, know many members of the team and have attended Avalanche conferences. The technological robustness of Avalanche was never in question. In the early years of the project, we had go-to-market concerns and question marks over the ability of the network to gain meaningful adoption.

Over the last year, it has become clear that there is growing activity in the Avalanche ecosystem. The institutional adoption of the technology is of particular interest. The architecture of subnets makes Avalanche a flexible platform for institutions to use and mould into compliant environments for institutional applications. Proof of concept projects are an indication of this and there is now a clear path to further usage of the technology by financial institutions. CMCC Global has an AVAX position in our digital asset funds and we have been actively reviewing Avalanche ecosystem projects. We are excited by the use cases for subnets and the potential for Avalanche to differentiate itself in the institutional and enterprise realm. In line with our mission at CMCC Global, Avalanche is well-positioned to drive the broader adoption of blockchain technology forward.