• Ela Arenas Eryilmaz

Avalanche: Blockchain 3.0

Avalanche is a relatively new blockchain created by Ava Labs. The project started in 2018 and was launched in 2020 in the United States by Emin Gün Sirer, a renowned computer scientist and former professor at Cornell University.

Avalanche has the capacity to adapt to different usages through its different sub-networks. This ‘platform of platforms’ can support an unlimited number of sub-networks enabling it to scale substantially without compromising the ability to host dApps (decentralized applications) and other protocols. Its objective is to become a unified global decentralized financial network.

Avalanche, or ‘the internet of assets’, provides a diverse set of services aiming to offer a seamless experience across different financial assets and activities. These include peer-to-peer lending, trading, and the creation of sub-networks (which requires AVAX tokens, Avalanche’s native token). In addition, developers, and creators of dApps have a plethora of new possibilities.

Consensus mechanism


Avalanche prides itself on being fast, low-cost, and eco-friendly. This is related to its consensus mechanism.


Most existing blockchains, including Bitcoin, use Nakamoto consensus. Avalanche has created its own family of consensus protocols. This, in combination with another scaling solution called ‘sharding’, allows Avalanche to scale well beyond the capabilities of other blockchain networks. The consensus protocols used in the Avalanche network combine the best of Nakamoto consensus – robustness, scalability, and decentralization – and classical consensus – speed and energetic efficiency.

The 2 consensus models that are deployed on the Avalanche network are Avalanche and Snowman++. Both models use Snowball, a Proof-of-Stake (PoS) consensus mechanism designed by Ava Labs. This mechanism does not require energy-intensive mining as it is the case in Proof-of-Work consensus mechanisms.

Avalanche consensus is made of Snowball combined with the DAG structure (Directed Acyclic Graphs, a data structure which gives a partial ordering rather than a linear ordering of decisions).


Source: Mike D Crypto


Snowman++, on the other hand, is the non-DAG version of Avalanche Consensus, its blockchain version (for linear chains).



Source: Mike D Crypto


Avalanche’s Primary Network


Three different chains make up the avalanche ecosystem: the c-chain, the p-chain, and the x-chain. They are all separate but interoperable. This approach is more efficient and much more scalable than the single-chain approach.


The c-chain is the contract chain and is used for DeFi. It uses Snowman++ protocol since contracts require events to happen in absolute order (one after the other). The p-chain is the platform chain. It is mainly used for staking AVAX and serving as a validator. The validators and delegators receive their AVAX rewards on this chain. It also uses Snowman++ since it stores network data and needs to understand a concept of ‘time’. Finally, the x-chain is the exchange chain. It cannot be used for DeFi, rather it is used to send and receive funds (atomic swaps). It works like a ‘bridge’ and can also be used to store funds. It uses avalanche consensus.



Source: Avalanche website


Network validation


To become transaction validators, users must stake at least 2,000 AVAX tokens. Validator nodes in a subnet constantly ask each other to assess the authenticity of the network’s transactions until they reach a common decision and build network-wide consensus. The higher a node’s stake in AVAX currencies, the more frequently it is queried. All validators must validate the Primary Network (all three of the primary chains). In the case of custom blockchains, validators are determined by the creator of the blockchain. The creator can customise the subnet (group of validators) as he/she wants, requiring, for instance, that members meet special criteria. Nonetheless, subnet members are still subject to the same requirements as all other validators. Finally, each blockchain can only have one subnet validating it.

Validators are rewarded based on uptime and reaction latency, with payouts proportional to their overall investment. Thus, the longer they keep their stake for the more they will earn. Delegators will also receive a reward if they delegate their AVAX coins to a validator, and that validator obtains a reward.

Delegation

Users can delegate AVAX tokens to validators. Delegators are only required to stake a minimum of 25 AVAX. A small fee is taken by the validator. This system is trustless (a smart contract pays the delegators).

Comparing to other Blockchains:

This table compares Avalanche to other blockchain platforms – namely Bitcoin, Ethereum, and Polkadot. It highlights the rapidity (with an infinity of transactions per second) and security of Avalanche transactions, as well as its energetic efficiency.



Source: Avalanche


AVAX


Avalanche operates through its own native token, AVAX, allowing multiple DeFi operations to take place. Staking AVAX contributes to securing the network and allows those staking the coin to receive awards for securing it and participate in governance.


AVAX has a max supply of 720 million (currently with 268 million circulating at a price of $78.3) with a market cap of $21 billion, making AVAX the 10th biggest by market cap. 360 million were minted at genesis block and some tokens are vested and will be unlocked as time goes by. Moreover, the inflation rate of staked tokens is about 9.5%.

AVAX is also a governance token. Users holding AVAX can decide on issues such as the staking reward rate, the minimum amount of AVAX required for validation and delegation, the minimum and maximum required staking period, and the fee structure.


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I spoke to Emin Gün Sirer, founder and CEO of Avalanche on the legal implications of blockchain and the role of Avalanche.

This is a summary of the interview.

What are the ways in which Blockchain is being used now and what are the future possibilities?

Blockchain is being used for a wide range of enterprise and institutional use cases, but decentralised finance (DeFi) is the most popular application today. It eliminates the middle person and the custodian by putting those parts in a programmatic form. Thus, compliance is built into the contract. In other words, those things that are supposed to happen as part of a contract necessarily happen. This engenders trust. However, it renders the contract very complex, which leads us to the following question: do the parties really understand what they are investing in and what the contract is doing?

Moreover, Blockchain plays an essential role in the development of Web 3.0. Web 1.0 and 2.0 are a client server model. In Web 2.0, Zuckerberg has power: Facebook controls user data and can sell it to other companies. Moreover, Web 2.0 creates moral hazard, rendering financial transactions unfair and sometimes dangerous. Finally, Web 2.0 platforms dictate the rules of the transactions and can allow autocratic governments to persecute individuals. Web 3.0, on the other hand, functions without a server. It is based on user empowerment: you are in charge of your own data. It’s disintermediated, nobody can give out information. This said, competing with Facebook is very difficult.

What policy questions will arise from the usage of blockchain?

For me, the law is the immune system of a society. But while each country has a different jurisdiction, blockchains are global and operate at a planetary scale. Thus, it is not easy to impose jurisdictional restrictions on them. Indeed, blockchains are built with no concern for laws. However, lawmakers love to use the financial sector to control – e.g., asset freezing, imposition of embargos. By using blockchain, people can punch in these restrictions because people can’t be excluded in blockchain. This is a problem for law enforcement.

Another problem is that new networks have global reach and thus it’s very easy to create a new financial instrument, to pitch it across the globe and to sell it saying ‘in one month my token is going to cost 10 times more than today’. People can make fraudulent misrepresentations (i.e., knowing or believing that the statement is untrue or not caring whether it is true or false), without any liability.


That said, blockchains are open and transparent. They are banking networks that are totally auditable, which is an amazing overhaul over the opaque financial system it is succeeding. All funds and flows can be traced and, if tied to illicit activity, can be flagged at the off-ramp for adjudication by local authorities.


In what ways is Avalanche revolutionising the blockchain industry?

Avalanche is the fastest smart contract platform in the world as measured by time to finality. It is also more inclusive and cheaper to use as a result of its novel consensus mechanism and scaling innovation with custom, application-specific blockchains called Subnets.

These Subnets enable projects, ranging from global institutions to individuals, to fully customize a blockchain with their own rules, operating systems, security models, economic incentives and more. This accommodates legal restrictions for regulated companies and industries who see the massive potential of public blockchains, but haven’t had a clear path to compliance and performance in one package.

Avalanche held a summit in Barcelona between March 22 and 27. What did you expect from this summit and are you satisfied with the result?

The Avalanche Summit was a massive success, bringing together nearly 4,000 people from around the world to celebrate the Avalanche community, and coalesce as builders for the first time in the real world.


Avalanche was born during the pandemic, and it was special to see everyone come together and share stories from the very early days, while also welcoming hundreds of people who recently joined the community.


Truly an amazing week and incredibly energizing. I’m just now getting my voice back!


Finally, as law students interested in these developments, what do you advise us to focus on?


Lawyers who make the biggest impact in this space are passionate about technology and understand it as well as engineers. They may not be able to code, but these are intricate systems that require the people around them to be educated, so we can clarify misconceptions about this technology.


So, my advice is to learn as much as possible on the technical aspects and align yourself with peers in the engineering programme who are keen to build with blockchains. There is so much potential yet to be tapped and a lower barrier to building a startup than any trillion dollar industry.

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Vocabulary:

Consensus mechanisms: used to verify the validity of information added to the ledger. This prevents double spending and invalid data added to the blockchain. Two of the main consensus mechanisms are proof of work and proof of stake.

- Proof of work: miners compete to solve puzzles to complete a block and be rewarded with newly minted coins. The amount of puzzles a miner can solve will increase by using more computational power. Thus, this mechanism consumes a high level of energy. According to the Digiconomist, bitcoin mining requires an annual energy consumption of 204 TWh, which equals the energy consumed by Serbia in 2019 (according to BP Statistical Review of World Energy; and EIA), a country with 8,7 million inhabitants.

- Proof of stake: the chances of creating a valid block increase with the number of coins the validators ‘lock’ or put at stake. All the coins are created at the beginning and validators are rewarded with transaction fees. Lower energy cost enables the role of validator to be more accessible as there is no need for powerful mining computers. However, some state that this mechanism is less democratic, providing a platform for the rich to get richer.

Validators (also called miners in PoW consensus mechanisms): individuals, companies, or institutions who use their computers to process transactions and add them to the blockchain. They run the blockchain network and keep it secure.

Nodes: a point in a network which is usually a device (computer or server). It can validate or reject a block of transactions. It can also save and store the transaction history inside a block and distribute the transaction history to other nodes. Nodes help keep the blockchain secure by keeping record of the latest transactions. This way, no one can make changes in the blockchain since the data is copied across thousands of different nodes.

DeFi: an ecosystem of smart contracts, digital assets, protocols, and decentralized apps. It reshapes traditional financial services through blockchain technology and offers users open, accessible financial services such as lending, asset trading, prediction platforms and insurance.

Web 1.0: The first wave of the internet started in the early 1980’s. It was a content delivery network (CDN) with a few content creators and a huge majority of users who were content consumers. It consisted mainly of static pages and advertisements on websites while surfing the internet were banned. Web 1 deterred non-technical users from participating because of the technical knowledge required to use the open protocols (TCP, IP, SMTP, HTTP). Furthermore, the protocols didn’t cover search, payment, and didn’t capture user data. It was characterised by its openness, transparency.

Web 2.0: The second wave of the internet started in the early 2000’s. Web 2.0 enables user participation and interaction. Users can now not only consume content but also create, upload, and share their own content. This wave is characterised by companies such as Facebook, which not only provide a new variety of opportunities for users but also collect and monetize user data.

Web 3.0: The third wave of the internet started in 2016 and is still developing. It combines the best parts of Web 1.0 – i.e., transparent and open protocols – and Web 2.0 – ability to read and write dynamic content. Web 3.0 would run on decentralised protocols and has the power of technologies such as blockchain, artificial intelligence, and IoT.


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