DeFi Deep Dive — Avalanche, DeFi in Under a Second

Avalanche is an open-source platform for launching decentralized financial (DeFi) applications and enterprise blockchain deployments in an interoperable and highly scalable ecosystem.

Avalanche’s mainnet went live at the end of September 2020. It is the first smart contract platform that confirms transactions in less than a second, is compatible with the Ethereum development toolkit, and allows independent validators to participate as producers of complete blocks.

How does Avalanche work?

Avalanche employs a multi-chain framework with three blockchains dividing up critical functions and uses different data structures.

In this way, developers get maximum flexibility and control over their applications. Dividing the network into three separate entities or processing powers enables Avalanche to deliver the first smart contract platform that confirms transactions in less than a second.

X-Chain (Exchange chain)

X-Chain makes it easy to create and share assets between peers, including Avalanche’s native token, AVAX. In addition to AVAX, the X-Chain allows anyone to create and mint other smart digital assets such as stablecoins, utility tokens, NFT’s, wrapped tokens, equity, etc. The creation and minting of these tokens also require a fee in AVAX that is subsequently burnt.

C-Chain (Contract Chain)

The C-Chain is a chain of smart contracts that uses the Ethereum Virtual Machine and is 100% compatible with existing tools in Ethereum. Everything that can be done on Ethereum can be done on the C-Chain with the added advantage of offering 4500 Tps, sub-second completion, and low transaction fees. Users can easily port existing DApps to take advantage of the benefits Avalanche offers over Ethereum.

P-Chain (Platform Chain)

Finally, the P-Chain (Platform Chain) is responsible for managing staking, coordinating validators across networks, and creating custom subnets. Each Avalanche’s validator participates by depositing the staking network token in the Platform Chain to help secure the core network. At the same time, these validators can form sets of dynamic or private validators to operate subnets.

Avalanche is a “platform of platforms,” ultimately consisting of thousands of subnets to form a heterogeneous interoperable network of many blockchains.

Their system allows anyone to create their application-specific blockchains, supporting multiple custom virtual machines like EVM and WASM. In addition, they can add written in popular languages ​​like Go (plus others to be included in the future).

Each subnet can have its own token and commission structure. They can also choose to have staking and transaction fees paid in AVAX, stablecoins, or their own token.

New mechanism for consensus, speed, and decentralization

Avalanche has developed a consensus protocol that belongs to the so-called Snow protocols. This consensus mechanism combines the best properties of the Nakamoto consensus (robust and highly decentralized) with the best of classic consensus protocols (low latency, high throughput, lightness).

To achieve this, repeated votes by random subsampling are used to choose the validator that will take care of the next block. Furthermore, each validator consults only a small random sample of the other participants in each round.

The selected validators are weighted by the amount deposited in staking, and this methodology allows the protocol to be extended theoretically to millions of participants.

Avalanche family protocols are capable of less than one-second finality, supporting more than 4,500 transactions per second and scaling up to millions of full, consensus-producing, block-producing validation nodes. Avalanche applications can run on their own independent blockchains known as subnets.

Existing blockchains can even migrate their status to Avalanche and replace their consensus with Avalanche while maintaining their own native token. These subnets will then be able to interoperate with each other and with other blockchains.

AVAX token

The AVAX token is the native token of the Avalanche platform. It is used to secure the network through staking, carrying out transactions between different tokens, paying fees, and providing a basic unit of account between the multiple subnets created in Avalanche.

The transaction fees on all blockchains on the primary network, the creation and minting fees of digital assets on the network, the creation of blockchains, and the creation of subnets require a payment made in AVAX. These tokens are subsequently burned, thus reducing the total supply.

If the number of AVAX burned exceeds the amount minted to reward the validators, then the total number of tokens will be reduced, resulting in deflation and further shortages.

This system is very reminiscent of Ethereum’s EIP-1559 but unlike it. In the case of Avalanche, all transaction fees are burned instead of just part of it. In addition to this, there is also a maximum AVAX amount of 720 million limits that can never be exceeded.

For its part, the Ethereum network does not have a fixed number of tokens that can be created, and this will increase depending on the needs of the network to stay safe.

Staking in Avalanche

Avalanche uses a proof of stake (POS) consensus mechanism. In this way, the system financially motivates nodes participating in the network to act virtuously.

They avoid behaviors that may damage the operation of the network. Therefore, the value of the tokens is deposited in staking.

A node wishing to enter the network can do so freely by placing and blocking a certain amount of tokens that cannot be moved for a period of time determined by the token holder—being the minimum of 2 weeks.

The network has validators and delegates. Validators are in charge of securing the network, create new blocks, and process transactions. On the other side, a delegator is the owner of the AVAX token who wants to participate in staking but chooses to trust an existing validation node through delegation.

The minimum quantity that a validator must have is 2,000 AVAX in staking. At the same time, the minimum amount that a delegator must delegate is 25 AVAX.

Unlike other systems that also propose a POS mechanism, AVAX does not introduce any penalty to stakers. Therefore, the total amount of AVAX deposited in a validator is returned in full when the staking period expires.

Staking offers rates between 9.32% and 11.1%. If a user wants to obtain the highest rate of profit, they must block their tokens from staking for a whole year. There are currently 976 block validators, increasing, and the vast majority participate in the consensus that validates a transaction.

Avalanche ecosystem

The Avalanche ecosystem is young but very rich. We find platforms focused on gaming, such as AvaxCells, Avaxstars, or Polyient Games. Projects focused on NFTs such as the 420Swap marketplace, the Cryptoseals generative collectibles platform, or predictive markers such as Prosper.

Avalanche is a diverse ecosystem. However, it includes some projects dedicated to decentralized finance. Given that this sector has seen an exponential boom in the last year, it is not uncommon to see how the projects that have attracted the most traction offer finance-related products.

Markr

Markr is a yield farming aggregator for all projects that live in the Avalanche network. The platform offers a ranking of the DeFi platforms in the network ordered by the total value deposited. It also adds in its same interface all the possibilities of yield farming of the projects in the ranking.

Yield Yak

Yield Yak is one of the ones with the most traction. The platform is in second place in terms of total deposited value after Pangolin. Its main product, the YY Farms, is an autocompounder that generates an interest compounded automatically with the rewards obtained by yield farming in different protocols of the Avalanche network.

Yield Yak farms allow users to deposit an asset to earn more of that asset. When making a deposit, the deposits of each user are joined with those of other users. When performing yield farming altogether, compound interest increases and with it profits.

Gondola Finance

As fourth-ranked and with more than $13 million deposited on its platform, Gondola finance offers its users the possibility of exchanging tokens anchored to tangible assets such as stablecoins of all kinds. In addition, its purpose is to create a bridge that solves the fragmentation of liquidity that is separated in different blockchains.

Snowball Network

Finally, it is worth highlighting the Snowball Network. This is a project based on Pickle finance that has more than 14 million deposits on its platform. Snowball generates strategies from Pangolin’s yield farming opportunities. Additionally, it allows users to reduce the cost of generating compound interest in an automated way and with a high frequency.

Pangolin

Pangolin is a decentralized exchange (DEX) that works on Avalanche. It uses the same Automated Market Making (AMM) model as Uniswap.

It has a native governance token called PNG that is fully distributed by the community. The exchange offers the possibility to swap all the tokens issued in Ethereum and Avalanche. Pangolin offers three major benefits, fast and cheap operations, community-driven development, and fair and open token distribution.

Currently, Pangolin is the 23rd DEX in daily transaction volume, according to CoinGecko. It is undoubtedly Avalanche’s native DEX with the highest volume with more than 126 million daily trades on its platform.

There are currently numerous options in the field of decentralized exchanges at Avalanche. The ecosystem has just been born, and many of them are unknown and offer limited liquidity.

Among the most prominent is Penguin finance. It has a total value deposited in its funds of more than $22 million. This is a far cry from the more than $200 million deposited in Pangolin. Other options are Lydia finance with more than $6 million deposited and Baguette exchange with more than $5 million.

It should be noted that other DEX’s such as SushiSwap or Beefy Finance, despite being native to other networks such as Ethereum or Binance Smart chain, have incorporated the Avalanche network into their systems.

Wallets

Avalanche has several options when it comes to storing crypto assets. A user can configure Metamask to work on the Avalanche network in a straightforward way.

In addition, the network has an official wallet created by the same team, the Avalanche Wallet. Another option for those users who opt for an online wallet is Sinzu. For those users who keep their cryptocurrencies in cold wallets, Ledger already has compatibility for this network.

Avalanche going forward

Despite being a fairly new platform, Avalanche has made some serious ground in the DeFi space. In under a year since its mainnet went live it has picked up positive response and integration.