Detailed Explanation of Avalanche's Technical Features, Consensus Mechanism, and Current Status of Ecological Development

Author: Daolectic Research

Original Title: 《Even the largest Avalanche is triggered by small things..!》

Compiled by: Linqi, Chain Catcher

Introduction

Avalanche is a proof-of-stake cryptocurrency that utilizes the "Avalanche consensus mechanism." It is a blockchain network with a transaction throughput of 4,500 transactions per second (TPS) and is one of the earliest smart contract platforms capable of confirming transactions in less than a second.

Avalanche is a high-performance, scalable, configurable, and secure blockchain platform designed for developing blockchains for specific applications, scalable decentralized applications, and complex digital smart assets. In fact, the Avalanche protocol offers various updated, smart contract-focused projects aimed at accelerating the adoption of blockchain technology through fast technology.

The project was founded by Ava Labs in 2018 by Turkish-American computer scientist and Cornell University associate professor Emin Gun Sirer. The company is headquartered in New York City and Miami, funded by Andreessen Horowitz, Polychain Capital, Initialized Capital, and angel investors, including Balaji Srinvasan and Naval Ravikant from AngelList. The project launched in 2020.

Recent initiatives include a $180 million incentive program by the Avalanche Foundation to attract decentralized finance (DeFi) assets and applications to the network. Two leading DeFi protocols, Aave and Curve, along with the Avalanche-native liquidity protocol BENQI, were among the first to join.

Team

Ava Labs currently has over 110 employees, more than half of whom are dedicated to technical research and development. According to Emin Gun Sirer, CEO and founder of AVA Labs, nearly everyone on his team has an Ethereum background. More recent information about the team can be found directly from their Medium.

Technology

The Avalanche network consists of multiple blockchains, each of which is a virtual machine supporting various custom virtual machines, such as EVM and WASM. This is thanks to the gRPC server that supports the use of multiple languages.

As a result, each chain can contain case-specific functionalities. Each virtual machine is linked to a subnet and provides a set of incentives for validators; it is a customized blockchain network composed of "a group of dynamic validators collaborating to create consensus." Thus, Avalanche can be considered a "platform of platforms," made up of thousands of subnets that work together to create an interoperable network.

Avalanche pre-configures three blockchains: Exchange Chain (X-Chain), Platform Chain (P-Chain), and Contract Chain (C-Chain).

All three blockchains are validated and secured by the main network.

The main network is a dedicated subnet that confirms Avalanche's built-in blockchain: all subnets are part of it.

To join the main network, individuals must invest some Avalanche tokens. Therefore, all validators across all blockchains need to validate Avalanche's built-in blockchain and have staked Avalanche tokens (at least 2,000 AVAX in the main network).

The different chains of Avalanche can be categorized as follows:

• The C-Chain is an Ethereum Virtual Machine instance powered by Avalanche. By using the C-API, users of the Chain can build smart contracts and perform any other tasks that could be executed on Ethereum.
• The default subnet is the only permissionless subnet on the Avalanche platform. By registering on the P-Chain, you can build your own permissioned subnet on the Avalanche platform.
• NFTs are directly integrated into the X-Chain transaction structure. Its architecture is actually more similar to EIP-1155 (Collectible NFTs) than ERC 721. EIP-1155 is, in any case, a design summary of ERC721.

Detailed Explanation of the Consensus Mechanism

The Avalanche consensus protocol is a collection of four processes—Slush, Snowflake, Snowball, and Avalanche—that depend on each other and become more secure over time.

In short, the Avalanche consensus program is a unique voting protocol based on repeated random sampling: Validator nodes randomly query other validators until the network reaches consensus and decides whether to accept or reject incoming transactions. In this sense, consensus is inspired by the Gossip algorithm and ensures its security through the use of metastable processes.

Compared to traditional linear "chains," the Avalanche consensus protocol uses a directed acyclic graph (DAG) to provide a relative order for transactions.

Technically, a linear blockchain is a directed acyclic graph (DAG) where each block is a vertex with ancestors (previous and next).

Avalanche's DAG is more versatile, supporting the existence of many vertex ancestors and descendants. Because block generation can be parallelized, it will be faster, and it also removes the requirement for transaction competition to enter the next block and miner competition to locate the next block.

On a given "layer," multiple valid blocks can accelerate confirmation times, as there are no performance constraints on ensuring one block is connected before another is generated. Additionally, there is almost no loss during block propagation.

The consensus algorithm is based on the Snowball method:

• Sample size is k
• Group size is α
• Decision threshold is β

After querying k nodes on the network, a node can adjust its query preference using the Snowball method: if it encounters a proof or α or more times while responding to the query, it will change its preference for that proof.

To decide on that proof or transaction, the node needs to receive that proof α times after querying k nodes on the network β times, obtaining β continuous large counts for that statement.

Moreover, because a node queries only k nodes at a time, the Snowball method is scalable. Regardless of how many nodes are in the network, each query is an interaction with a set of nodes.

A node queries k nodes for a given transaction only once; if it receives α majority approval for that transaction, it will give it a "chit."

A chit is simply a boolean value (either 0 or 1) indicating whether the node has received the majority for the transaction. If a transaction receives a chit, it must increase its "predecessor's" confidence and continuous success count.

The confidence of a transaction equals the total of its descendants' chits plus its current chit. Additionally, the continuous success count of a transaction equals the number of times it or its descendants received a majority of successful responses.

For simplicity, we will treat each transaction in the DAG as its node: if a requested transaction does not receive the required votes, it will not receive a chit: any unaccepted ancestor will have its success count reset to zero.

On the other hand, because other descendants of the transaction may still have chits, confidence remains unchanged. Without a chit, the transaction is essentially equivalent to adding 0 to the total number of ancestor chits. When the continuous success count of a transaction reaches β, the transaction will be "accepted."

Given that transactions are built on each other, users do not need to query at least β times before making a judgment on each transaction. Each "child" of a transaction provides further evidence proving its validity, which is how trust and success are transmitted.

When nodes vote, if they have the highest confidence among all transactions in the conflict set, they vote in favor of the transaction; if they lack sufficient confidence, they vote against it.

The main advantages of the Avalanche consensus protocol are its speed and finality. Unlike the Nakamoto consensus network, which relies on the passage of time and the generation of additional blocks to increase users' confidence that their transactions will not be revoked due to forks, Avalanche's confirmation speed should only take a few seconds and is irreversible.

Security (ensuring that two honest nodes agree on the transaction status) is probabilistic and controlled by network parameters: nodes must stake the native token AVAX to participate in the consensus mechanism as validators; the more tokens a node stakes, the more likely it is to be queried.

To simplify and visualize how Avalanche's consensus works, we recommend users watch the Decentralized Thought video to aid understanding. (Creator @don_wonton)

Token Distribution

The token distribution is shown in the figure below. 360 million AVAX were allocated at the mainnet launch, with the remaining 360 million distributed over ten years. The token release mechanism varies from 1 year to 10 years.

Staking incentives—50% of the tokens have been distributed as staking rewards to validators.

Team—10% of the tokens are allocated to the founders and non-founder members of AVA Labs. Team members, including the founders, received tokens at launch and will voluntarily re-lock all tokens for four years.

Seed round—2.5% of the tokens were allocated. The token price was $0.33, with 10% released at mainnet launch, followed by 22.5% every three months for one year.

Private sale—3.5% of the tokens were allocated for private sale participants. Each token was priced at $0.5, with 10% released at mainnet launch, followed by 22.5% every three months for one year.

Public sale

• Option A1—1% of the tokens were allocated for Option A1 participants. Each token was priced at $0.5, with a maximum of 25,000 tokens per user. The token release mechanism is over 1 year, with 10% issued at mainnet launch and 22.5% distributed every three months over the year.
• Option A2—8.3% of the tokens were allocated for Option A2 participants. Each token was priced at $0.5, with a maximum share of $2.5 million per user. The token release mechanism is over 1.5 years, with 10% issued at mainnet launch and 15% distributed every three months over 18 months.
• Option B—0.67% of the tokens were allocated for Option B participants. Each token was priced at $0.85, with no release mechanism.

Foundation—9.26% of the tokens belong to the foundation. These are used for marketing, bounties, incentive programs, etc. The release mechanism is over 10 years.

Community and development donation fund—7% of the tokens were donated to this fund. These tokens will be allocated to individuals and organizations working on developing Avalanche core tools and infrastructure, including marketing and community promotion. Grants will be released over 1 year.

Testnet incentive program—0.27%. Participants who validate in Avalanche's testnet incentive program will receive these tokens. Participants can earn up to 2,000 AVAX based on task completion. These tokens will initially be locked for one year.

Strategic partners—5% of the tokens were allocated to strategic partners. These tokens are given to teams, organizations, and companies that use Avalanche technology and network to develop their businesses. For example, entrepreneurs developing businesses based on Avalanche or financial institutions attempting to tokenize assets on Avalanche through their own subnets. The release mechanism is over 4 years.

Airdrop—2.5% of the tokens were allocated to different groups to expand the Avalanche community. For example, airdrops to crypto community organizations, Reddit communities, developer forums, and even users who have interacted previously.

Token Utility

Avalanche tokens are crucial for network security, paying network operating fees, and facilitating atomic asset exchanges (between subnets). The function of AVAX is similar to Ethereum's "gas," but with additional utility, such as in governance.

In fact, Avalanche validators can benefit from a multitude of value streams beyond pure staking rewards. Among other things, governance can determine the minting rate, such as how many tokens are minted (the total supply remains 7.2 billion), the minting speed, and the staking rate.

AVAX aims to become a universal unit of account, ideally becoming a globally recognized currency, making it more valuable; however, dApps built on Avalanche may have their own tokens, which will pay fees to Avalanche validators using their native currency.

AVAX transaction fees can be burned, increasing the scarcity of AVAX. However, the reward calculation will consider the current circulating supply and ensure it never exceeds the hard cap. In any case, since transaction fees are burned on the network, this will continuously reduce the overall circulating supply, thereby increasing staking rewards without exceeding the cap.

Ecosystem

Since its initial launch and announcement as an Ethereum-compatible blockchain, Avalanche has significantly developed its ecosystem. Previously, the most significant issues faced by Avalanche and other L1 blockchains were the lack of infrastructure, tools, and interoperability with other blockchains, which served as barriers to widespread adoption by platforms and developers. Avalanche has addressed this issue through its bridging solutions, enabling cross-chain interoperability.

The Avalanche Bridge allows users to transfer ERC 20 tokens between Ethereum and Avalanche's C-Chain, attracting significant interest from the DeFi community due to its compatibility with EVM. Many Ethereum-based applications, including Sushiswap, TrueUSD, Reef, and bZx, have since connected to the Avalanche blockchain.

DeFi

The TVL metric is crucial for the growth of DeFi, as it indicates the value of these protocols.

According to DefiLlama, the AVAX ecosystem's TVL increased from $9.1 million to $10.77 billion in just one year, a growth of 118,000.3%. The Avalanche ecosystem now supports 156 DeFi protocols.

However, it is still down 20% from its historical peak of $13.79 billion in December 2021, as shown below:

The top five AVAX DeFi protocols (Aave, Trader Joe, Benqi, Curve, and Multichain) account for 71% of AVAX's TVL.

While $10.85 billion may seem like a significant amount, it is trivial compared to other blockchains: in fact, at the time of writing, the total value across all blockchains measured by TVL is $208.57 billion. AVAX's TVL ranks fourth, accounting for about 5% of the total TVL.

According to CoinMarketCap, AVAX's market cap is $22.2 billion, still down 37% from its peak of $144.85 billion in late November 2021.

Introduction to Avalanche Ecosystem Projects

Aave is a non-custodial protocol that allows users to earn interest on deposits and borrow digital assets. It is open-source and free to use. The company's UK entity, Aave Limited, obtained an electronic money institution license in July 2020. Stani Kulechov is the driving force behind the creation of Aave.

The decentralized protocol Aspen Protocol uses oracles and incentive platforms to create synthetic assets that reflect the prices of traditional assets.

Beefy.Finance is a yield farming optimizer that allows users to earn compound interest on their held crypto assets using various strategies. To avoid the costs associated with manual optimization, the protocol algorithmically ensures yield potential. This eliminates the need for users to actively participate in yield farming personally.

BENQI is an algorithmic liquidity market protocol that provides a lending market for Avalanche assets. In addition to Avalanche, strategic investors include Ascensive Asset, Dragonfly Capital, Mechanism Capital, and Avalanche.

CURVE is a trading liquidity pool that enables trading with low risk, minimal slippage, and minimal fee structures. It is an attractive trading method for users trading stablecoins and liquidity providers earning income from trading fees and interest rates.

Pangolin Exchange is a decentralized exchange built on Avalanche that uses the same AMM as Uniswap. It provides a fast solution, ensuring low trading costs and democratically allocating funds in a secure environment.

Reef is an EVM-compatible chain that incentivizes interoperability by integrating DeFi from Ethereum, Polkadot, Avalanche, Cosmos, Binance Smart Chain, and other cryptocurrencies and blockchains. It is efficient, scalable, and does not require any unnecessary mining. It can also use POS developed with Polka Substrate, making it more secure.

SushiSwap is a decentralized exchange and AMM built on the Ethereum blockchain.

Trader Joe is a decentralized trading platform and AMM on the Avalanche blockchain, facilitating easy trading between two tokens. By combining DEX services with DeFi funding, the platform offers leveraged trading.

Trader Joe operates similarly to Uniswap based on Avalanche and is a one-stop trading platform. Trader Joe combines DEX functionality with DeFi lending options, providing a comprehensive suite of products and utilizing similar AMM technology, such as Compound and Cream, to offer yield farming, staking, token trading, and leveraged lending features for Avalanche DeFi customers.

Trader Joe has become the preferred DEX for AVAX holders looking to maximize their asset value, surpassing Pangolin to become the largest DEX on Avalanche: it aims to attract all DeFi users' attention and establish itself as the greatest money market protocol on Avalanche through ecosystem development and the addition of proven technologies comparable to Compound and Cream Finance.

Next Steps

The entire blockchain industry and crypto space have high hopes for 2022: Avalanche's Blizzard Foundation has invested $200 million in network development, expansion, and innovation. This fund was launched in early November 2021, with investors including Ava Labs, Polychain Capital, Three Arrows Capital, and Dragonfly Capital.

Perhaps the most compelling argument for supporting any Layer 1 is its ability to integrate real-world use cases for social and economic value.

Avalanche's operational history is short and has yet to be validated over a longer period. The network deployed its genesis block in late September 2020. Despite facing numerous trials in the past, the crypto network continues to evolve, with key design, functionality, and governance choices ongoing.