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Avalanche stands as a foundational L1 protocol offering the necessary framework for the development of performant, low-cost, highly customizable, interconnected blockchains. In 2023, the Avalanche blockchain saw impressive growth, both in its EVM-compatible C-chain, as well as its subnet network. The network's subnet infrastructure expanded significantly, with ~20 new active subnets launching in 2023, raising the total to ~30. However, the C-Chain remains the epicenter of activity, attracting the majority of the ecosystem's liquidity and users. It witnessed over 2 million AVAX burned   

Technical Updates and Improvements

Durango Upgrade and Teleporter

The activation of Durango on the mainnet was completed in early March 2024, marking a significant stride towards enhancing interoperability within the Avalanche ecosystem. This development ushers in the pioneering usage of Avalanche Warp Messaging (AWM) through the Teleporter protocol, marking a crucial milestone in facilitating seamless cross-subnet communication. 

The Teleporter, an Ethereum Virtual Machine (EVM) compatible cross-subnet communication protocol, is implemented via smart contracts and leverages the AWM primitive. This innovative solution enables the native invocation of smart contracts across different subnets, thereby creating a unified network of subnets with frictionless communication. By facilitating cross-subnet messaging and transactions, Teleporter paves the way for a harmonized liquidity pool across the network. This, in turn, preserves the autonomy and customization afforded by independent blockchains while ensuring a streamlined and interconnected operational environment. 

One of the most significant advantages of AWM is its elimination of third-party intermediaries, relying solely on the validators within the Primary Network and the communicating subnets for trust. This ensures a highly secure and efficient mechanism for subnet-to-subnet communication. The process involves aggregating signatures from a substantial portion of the participating stake within a subnet, culminating in the creation of a BLS Multi-Signature and a bit set indicating the validators' involvement. This protocol significantly streamlines communication within the Avalanche ecosystem, relying on the P-Chain as a unified validator set registry, thereby enhancing operational simplicity and security.

By supporting native P-Chain transfers and allowing subnet ownership transitions, Durango addresses critical operational challenges, thereby enhancing asset management efficiency and facilitating smoother control transitions for subnet operators. Furthermore, the compatibility with the Ethereum Shanghai Upgrade ensures that the C-Chain remains aligned with Ethereum's smart contract standards, underscoring Avalanche's commitment to interoperability and developer support.

Building Faster with HyperSDK

An SDK, or Software Development Kit, serves as a foundational toolkit for software development, providing a set of pre-written codes, libraries, and documentation to streamline the creation process of new software. SDKs simplify the development process for builders, enabling them to build upon a core framework rather than starting from zero. 

A mature and easy-to-use SDK can be critically important to a project's success, especially in the blockchain world. This is due to the unique externalities involved with creating even a simple dApp, such as consensus mechanisms, governance models, and economic incentives. Blockchain SDKs aim to lower these barriers, thereby improving the speed, cost efficiency, and security of building within that ecosystem. This accessibility enables both startups and established entities to experiment and innovate within the blockchain space with reduced financial risk.

Avalanche’s vision for scaling involves the proliferation of thousands of blockchains using various VMs tailored to their specific needs. However, crafting a custom VM is a complex process, leading most chains within the network to adopt the Subnet-EVM. To address this complexity, the HyperSDK was developed to streamline the creation of bespoke VMs, dubbed HyperVMs, for integration into the Avalanche Network. This framework empowers developers by offering robust default settings, enabling them to concentrate on the essence of their applications rather than the intricacies of VM construction. 

The crux of HyperSDK's innovation lies in its ability to abstract common runtime complexities, thereby providing an industry-leading performance that unlocks new design space for developers that were previously constrained by a blockchain’s speed and scalability. Known as HyperChains, when developed with HyperSDK, these blockchains can be adapted to any functionality desired by the developer, ranging from NFT marketplaces to decentralized finance (DeFi) protocols. According to Avalanche's team, depending on the extent of mechanism design required, a blockchain could be customized with approximately 500-1,000 lines of code. This flexibility opens a new chapter for Avalanche developers, empowering them with the tools to unleash their creativity fully.

For instance, the HyperSDK facilitates the creation of VMs capable of executing ~140,000 transactions per second (TPS) in a test environment utilizing a new technology dubbed Vryx. Vryx is a cutting-edge transaction processing framework that enhances transaction throughput by parallelizing the construction, replication, and verification phases of block processing. This innovation is expected to significantly boost the Transaction Per Second (TPS) rate on the network.

Vryx

Ava Labs recently articulated its plan to initially deploy Vryx on the first HyperSDK testnet, anticipated to launch in Q2 2024. By employing a novel approach that separates the various components of the transaction process and enables them to be completed at the same time (a form of “pipelining” and parallel execution), Vryx is able to improve transaction processing efficiency.  This methodology allows for the simultaneous verification of one block of transactions while another is being prepared, a technique that mirrors strategies employed by other blockchain platforms such as Aptos and Sui. This approach effectively increases the system's throughput by reducing the overall time needed to assemble, replicate, and confirm a block. As a result, this innovation is poised to significantly enhance the number of transactions per second (TPS) that can be handled within the Avalanche Network.

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Firewood

With subnet communication and efficient transaction processing already being addressed, the Firewood initiative from Ava Labs looks to improve upon the network’s data storage and retrieval. The challenge of efficiently accessing merkelized data stands as a significant bottleneck affecting all blockchains, including Avalanche. The issue involves the slow and costly access to data, compounded by the problem of state bloat. State bloat, characterized by the uncontrolled growth of blockchain state, escalates costs for validators and undermines the decentralization principle central to blockchain technology. A solution to these challenges is the introduction of Firewood, a cutting-edge technology designed to revolutionize the way merkelized databases handle read/write access patterns.

Firewood seeks to substantially enhance the efficiency of accessing merkelized data by optimizing the routing of database requests through the most resource-efficient paths. This approach promises not only to streamline the access process but also to mitigate the adverse effects of state bloat by ensuring a more economical use of resources. One of the hallmark features of Firewood is its ability to enable parallel execution of read/write operations, a development that stands to significantly decrease latency for end-users, thereby improving the overall user experience.

Moreover, Firewood introduces a caching layer to the architecture of merkelized databases. This layer is designed to provide rapid access to frequently used data while relegating less commonly accessed information to a larger, slower-access data lake. This stratification of data access speeds is crucial for optimizing the performance of data storage and retrieval across various virtual machines, catering to the diverse needs of blockchain applications.

AvalancheGo Roadmap

In March 2024, a proposed roadmap for AvalancheGo was released, highlighting an initiative to blend the strengths of both monolithic and modular blockchain architectures. The document (the images below, cropped into thirds for visibility) outlines a comprehensive strategy aimed at enhancing the capabilities, performance, and reliability of the Avalanche network. At the core of the roadmap are three foundational pillars designed to elevate the AvalancheGo network's functionality and scalability: modular programmability, monolithic performance, and system reliability. Each pillar addresses specific aspects of the blockchain's development, ensuring a balanced approach to overcoming the current limitations faced by existing networks.

Modular Programmability

The first pillar emphasizes the importance of modular programmability in creating permissionless, highly customizable, and sovereign chains. The goal is to advance the flexibility and autonomy of subnets, transforming them into potent sovereign chains that stand out in the blockchain ecosystem. Key initiatives include the implementation of chain-driven validator management for enhanced isolation and security, leveraging AVAX staking to bootstrap security for these sovereign chains, and the introduction of custom chain tokenomics designs. Furthermore, the roadmap envisions the expansion of P-chain programmability and the integration of deep BLS support, among other advancements. These efforts aim to make the construction of sovereign chains not only feasible but also best-in-class, offering unparalleled customization and independence.

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Monolithic Performance

The second pillar focuses on monolithic performance, specifically, the ambition to significantly increase the performance of the monolithic stack to surpass 100,000 transactions per second (tps) per chain. This leap in performance is envisioned through the parallelization of state read/writes and execution, with projects such as HyperSDK, Firewood, and Vryx leading the charge. 

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System Reliability

The third pillar targets enhancements in system reliability, particularly improvements in time to finality and overall system robustness. This entails a concerted effort to eliminate code debt and optimize the consensus mechanism to reduce finality times. Strategies include improving gossip/message handling, accelerating the optimistic consensus process, and refining block management. These enhancements are crucial for ensuring that the network remains reliable and efficient, even as it scales to support higher transaction volumes and more complex applications.

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February 2024 Downtime

Avalanche’s reliability and uptime were topics of conversation in February 2024 due to the network suffering a ~ five-hour outage due to a software bug. The problem was linked to a flaw in the network's logic that caused an "excessive amount of gossip" among validator nodes. The excessive communication led to a bandwidth overload, preventing efficient data processing and causing the network to go offline. A software patch effectively disabled the problematic logic, reducing unnecessary data exchange between nodes, and allowing the network to restart. This adjustment allowed validators to manage their stake-weighted bandwidth more effectively, preventing the saturation that had hindered the system's ability to process transactions and reach consensus. A formal post-mortem from Ava Labs or the wider Avalanche ecosystem has not yet been released.

Enterprise Adoption and PoCs

Recently, JP Morgan and Citi have embarked on innovative ventures on the Avalanche blockchain under the scope of a wider project entitled Project Guardian. In this groundbreaking move in late October 2023, the Monetary Authority of Singapore (MAS) joined forces with three major global financial regulators—the Financial Services Agency of Japan (FSA), the Swiss Financial Market Supervisory Authority (FINMA), and the Financial Conduct Authority (FCA) of the United Kingdom. This collaboration was established to spearhead digital asset pilots across various financial sectors, including fixed income, foreign exchange, and asset management through Project Guardian. 

This initiative aims to support significant buy and sell-side institutions in exploring blockchain technology for advancements in tokenization and on-chain finance. Through Project Guardian's Onyx project, JP Morgan has introduced a proof of concept utilizing Avalanche's Evergreen Subnet for revolutionizing asset and wealth management. In partnership with Apollo and WisdomTree, JP Morgan's endeavor explores the utilization of smart contracts to facilitate access to and management of alternative assets, including private equity and real estate. This approach enables these assets to be managed and traded using the same infrastructure that supports payments, showcasing a significant step towards integrating blockchain technology with traditional financial services.

J.P. Morgan

Established in 2020, Onyx by J.P. Morgan embarked on a mission to revolutionize the banking sector by leveraging blockchain technology to enhance financial services, particularly in areas like wholesale payments, asset tokenization, and wealth management. Through Onyx, J.P. Morgan offers a suite of blockchain services aimed at addressing key challenges and inefficiencies in traditional banking.

One of the initiative's primary innovations, Onyx Digital Assets, represents a leap toward the future of asset management, offering a blockchain platform for the tokenization of assets. By the end of 2023, it was reported that Onyx Digital Assets had facilitated the settlement of approximately $900 billion worth of tokenized US bonds. This platform allows institutions to tokenize a wide range of assets, trading them with the benefits of blockchain technology, such as enhanced liquidity, automation, and atomic settlements.

The exploration of blockchain in wealth management has been notably advanced by J.P. Morgan's collaboration with global asset management firm Apollo. In a 2023 report, J.P. Morgan and Apollo present a proof of concept (PoC) that looks to create a new paradigm in asset management, demonstrating how blockchain technology can be applied to the creation, distribution, and automated management of model portfolios, incorporating both traditional and alternative investment assets.

The PoC utilized three distinct blockchain networks: the Onyx Digital Assets network, Avalanche Subnet (EVM-based), and the Provenance Blockchain (WASM-based), to tokenize different funds and explore operational efficiencies across varied environments. This experiment aimed to showcase how portfolio managers can efficiently manage diversified portfolios across multiple blockchain networks, leveraging smart contracts for automation and achieving near-instant settlement times. The Avalanche Subnet used in this test is a private network, as opposed to public networks. Notably, Avalanche also provides a private Subnet service for financial institutions, known as the Avalanche Evergreen Subnet. 

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The concept of permissioned networks represents a specialized approach within the blockchain landscape, notably utilized by traditional financial sectors to ensure secure and regulated participation. Examples of such networks include Onyx Digital Assets and Avalanche Evergreen. Avalanche Evergreen introduces a bespoke Subnet service designed for the financial industry, offering appchain services that adhere to KYC/KYB norms, alongside customizable options such as gas tokens and virtual machines. Notably, the Spruce Subnet, developed through Avalanche Evergreen, has served as a testnet for prominent firms like T. Rowe Price Associates, Wisdom Tree, Wellington Management, and Cumberland (discussed below), enabling them to delve into the potential applications of blockchain technology.

Citi Tests Benefits of Private Markets Tokenization With Avalanche Evergreen Subnet ‘Spruce’

In 2023, Ava Labs introduced Avalanche Spruce, a groundbreaking subnet designed explicitly for institutional players in the buy- and sell-side markets to explore the practical applications and advantages of on-chain finance. This development was further legitimized by the participation of major financial institutions, including Citi and DTCC Digital Assets, alongside key asset managers such as Wellington Management and WisdomTree, all of which embarked on testing the waters of private market tokenization within this new ecosystem.

In a particularly ambitious initiative, Citi leveraged the capabilities of the Evergreen Subnet to revolutionize foreign exchange (FX) trading by developing an Avalanche-based solution for spot FX trading contracts, specifically targeting the USD/SGD pair. The initiative was not just a test of technology but a testament to the potential of blockchain to improve various aspects of trading, including transparency, capital efficiency, auditability, and security. The choice of Avalanche for this experiment was strategic, drawn by its scalability and customization capabilities.

Citi's exploration into blockchain-based trading solutions was practical and involved real-world applications, including bilateral foreign exchange requests for quotes and trade execution. By bringing Fidelity International and T. Rowe Price on board as clients, the project utilized three Avalanche subnets to streamline trade requests and quotes, as well as to record on-chain price quotes. This infrastructure not only facilitated the operational aspects of trading but also provided robust post-trade analytics and auditability, showcasing the tangible benefits of integrating blockchain technology into traditional financial operations.

This collective movement towards embracing blockchain technology in capital markets signifies a broader trend of digital transformation within the financial industry. By integrating cutting-edge technology like Avalanche's blockchain infrastructure into their operations, institutions like Citi, DTCC Digital Assets, Wellington Management, and WisdomTree are not only enhancing their own service offerings but also paving the way for a new era of financial services. This shift towards on-chain finance, evidenced by projects such as Avalanche Spruce and initiatives like Project Guardian, highlights the industry's commitment to innovation, efficiency, and security, heralding a future where blockchain technology is integral to the fabric of global financial systems.

DeFi Evolves with SteakHut

SteakHut, an active liquidity management and decentralized market-making platform, launched SteakHut Liquidity V2 on the Avalanche C-Chain in Q1 2024. This DeFi liquidity platform is now operational on Uniswap v3 within the Avalanche C-Chain ecosystem, enabling users to leverage and manage custom liquidity strategies among the leading concentrated liquidity market makers (CLMMs). The rollout of V2 on Avalanche signifies a leap forward in active liquidity management, promising enhanced capital efficiency and customized strategies that promise to attract sophisticated traders and firms to the Avalanche ecosystem.

SteakHut's strategic approach to liquidity management addresses the pressing challenges of liquidity fragmentation in the DeFi landscape. By offering smart contracts that enable seamless liquidity management across various blockchains and CLMMs, SteakHut introduces a solution for protocols struggling with concentrated liquidity or lacking the resources for active liquidity position monitoring and management. Additionally, liquidity providers now have the ability to 

• launch their liquidity vaults directly from the SteakHut platform
• establish up to 20 concentrated liquidity ranges within a single vault

• dynamically adjust their strategies in response to market conditions
• view token compositions for hedging strategies and analyze revenue data using advanced analytical tools

Conclusion

In conclusion, the Avalanche blockchain ecosystem experienced a year of significant growth and innovation throughout 2023 and into early 2024, solidifying its position as a leading Layer 1 protocol. With the launch of ~20 new active subnets, bringing the total to ~30, alongside the continued dominance of its EVM-compatible C-Chain, Avalanche has demonstrated its versatility and appeal to a wide range of users and developers. 

The introduction of groundbreaking technologies like the Durango Upgrade, Teleporter protocol, HyperSDK, and Vryx, as well as initiatives like Firewood and the AvalancheGo roadmap, underscore Avalanche's commitment to enhancing interoperability, scalability, and efficiency within its ecosystem. These technical advancements, coupled with significant enterprise adoption through partnerships with major financial institutions like JP Morgan and Citi, highlight the blockchain's potential to revolutionize various sectors, from DeFi to traditional finance. 

Despite facing challenges such as the February 2024 downtime, Avalanche's proactive approach to problem-solving and continuous innovation set a strong foundation for future growth. As Avalanche continues to evolve, it paves the way for a more interconnected, efficient, and scalable blockchain ecosystem, promising exciting developments for users, developers, and institutional adopters alike.

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Disclaimer: This report was commissioned by Ava Labs. This research report is exactly that — a research report. It is not intended to serve as financial advice, nor should you blindly assume that any of the information is accurate without confirming through your own research. Bitcoin, cryptocurrencies, and other digital assets are incredibly risky and nothing in this report should be considered an endorsement to buy or sell any asset. Never invest more than you are willing to lose and understand the risk that you are taking. Do your own research. All information in this report is for educational purposes only and should not be the basis for any investment decisions that you make.

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