Avalanche (AVAX) stands out in the blockchain landscape with its unique ecosystem, offering developers a platform that emphasizes flexibility and scalability by leveraging custom subnets. Subnets empower developers to create their custom blockchains within the Avalanche ecosystem, allowing them to prioritize whatever attributes they find most important, while the Primary Network handles consensus, security, and token minting. These subnets act as dedicated environments where developers can create and customize their blockchain networks, tailoring them to specific use cases and requirements. This flexibility is a crucial asset in the blockchain ecosystem, allowing for innovation and specialization within the Avalanche network.
Additionally, Avalanche is compatible with the Ethereum Virtual Machine (EVM). This compatibility means that Avalanche can seamlessly connect to the Ethereum network, effectively bridging the gap between the two ecosystems. This dual-role capability enables Avalanche to serve as both a cheaper EVM chain as well as a vast landscape to experiment with other virtual machines (VMs) and designs thanks to subnets.
Q4 2023 saw both aspects of Avalanche’s ecosystem (the C-chain and subnets) grow and mature in different ways, from ultra-high transaction counts and fees on the EVM C-chain to exciting new adoption and project announcements via subnets.
The Evolution of Subnets
Traditional Subnets
At the heart of Avalanche’s scaling solution is the concept of subnetworks, or subnets, which allow developers to create customized blockchains tailored to specific needs. This feature sets Avalanche apart from its contemporaries like Bitcoin and Ethereum, which primarily rely on different L2 implementations for scaling purposes.
Avalanche's subnet architecture is a testament to the platform's commitment to providing versatile and efficient solutions. Each subnet constitutes a dynamic group of validators collaborating to achieve consensus on their respective blockchain. This framework ensures that while a single subnet is dedicated to validating one blockchain, it possesses the capacity to manage multiple blockchains. This multiplicity not only enhances the network's overall efficiency but also offers developers a level of control unprecedented in the blockchain space.
One of the critical components of Avalanche's architecture is the Primary Network, which acts as a central hub for the various subnets. Within this ecosystem, the P-Chain, a specialized subnet, plays a vital role. It oversees the validation processes across the entire network, ensuring smooth and efficient operations. This design not only enables developers to build blockchains that are either permissioned or permissionless but also ensures these blockchains maintain interoperability within the same subnet by having a common blockchain in which all BLS keys are stored.
The flexibility of Avalanche's subnet structure extends to various aspects of blockchain customization. Developers have the liberty to design the tokenomics, virtual machine, fee structures, smart contract language, and governance rules of their blockchains. This level of customization is particularly advantageous for projects with unique requirements or those needing to comply with specific regulatory standards.
“Elastic” Subnets
The Banff upgrade was successfully activated on the mainnet on October 18, 2022, introducing the concept of Elastic Subnets, a feature that significantly enhances the flexibility and autonomy of subnet creators within the Avalanche ecosystem. Elastic Subnets represent a material shift in the way subnets are managed and validated on the Avalanche platform. One of the core functionalities introduced by this feature is the ability for subnet creators to implement Proof-of-Stake (PoS) validation mechanisms using their tokens. This development democratizes the validation process, allowing anyone to participate as a validator by staking the specific token associated with a subnet. Such a mechanism not only incentivizes participation but also aligns the interests of validators with the specific subnet they are securing.
By opting for an Elastic Subnet, a subnet creator makes the important design decision to lock the subnet from future modifications or upgrades. This decision entails selecting an Avalanche Native Token (ANT) for staking purposes and distribution as staking rewards. Additionally, the subnet creator is responsible for defining a set of parameters that will dictate the subnet’s staking dynamics. These parameters are crucial as they determine the mechanics of token staking and reward distribution, thus shaping the economic and governance landscape of the subnet.
In essence, Elastic Subnets offer subnet creators on the Avalanche platform a higher degree of control and customization. By allowing the use of their tokens for PoS validation and defining specific staking parameters, creators can tailor subnets to fit their unique needs and objectives. This feature not only enhances the functionality and appeal of the Avalanche ecosystem but also underscores its commitment to innovation and adaptability in the rapidly evolving blockchain sector.
With the potential to accommodate tens of thousands of validators, Elastic Subnets can achieve massive scale. As the Avalanche tech stack continues to gain traction, the role of Elastic Subnets becomes increasingly pivotal, promising enhanced security and a thriving Subnet economy.
The Movement Subnet
The Movement Subnet is a first-of-its-kind subnet that will utilize the Move Virtual Machine, popularized by projects like Aptos and Sui. Recognized for its flexibility, high throughput, security, and interoperability, the Movement Subnet offers a promising platform for developers and users alike.
Move is a relatively novel smart contract programming language distinguished by its unwavering commitment to safety and adaptability, catering to the needs of developers. One of its compelling features is the seamless integration of formal verification into the development process. This facet proves especially advantageous as it instills a proactive approach to code security during the earliest phases of product development. At the core of Move's verification capability lies the Move Prover, a specialized tool designed to furnish developers with the confidence that their code operates without flaws.
The Movement Subnet addresses known security concerns, like reentrancy attacks, by incorporating Move's reentrancy protection into its smart contracts. Reentrancy attacks have plagued blockchain networks, resulting in significant losses for users and developers. By leveraging Move's reentrancy protection, Movement Subnet enhances the security of its applications, reducing the risk of vulnerabilities that can lead to exploitation. This feature empowers developers to create more robust and secure decentralized applications (dApps) within the Movement ecosystem.
What sets Move apart is its memory-safe architecture, expressive nature, and its foundation on the widely acclaimed Rust programming language. This distinctive attribute makes Move an enticing prospect for developers, as it allows for the transfer of knowledge and skills from Rust to Move. This level of cross-compatibility is less apparent in languages like Solidity, thereby positioning Move as an enticing proposition for attracting development talent.
One of Movement Subnet's standout features is its integration with Movement Lab's Fractal Transpiler. This tool enables developers to write smart contracts using the Move language while ensuring compatibility with Ethereum Virtual Machine (EVM) standards. This flexibility is a game-changer, as it simplifies the onboarding process for Solidity developers, who constitute a significant portion of the smart contract development community.
A key factor in Movement’s decision to build a subnet is Avalanche Warp Messaging, a feature that facilitates cross-chain liquidity. This capability allows for seamless asset transfer and interaction between different blockchains. By leveraging this feature, Movement can ensure that its blockchain remains fluid and versatile, capable of engaging with a broader network beyond its boundaries.
Crucially, Avalanche empowers developers with full control over validators. This includes the ability to set custom gas rules and choose between permissioned and permissionless configurations. Such control is vital for projects that require specific governance models or have unique economic structures.
Movement Subnet's integration of the Move language, coupled with its interoperability and reentrancy protection, sets it apart from traditional blockchain platforms. The combination of flexibility, security, and high throughput makes Movement Subnet a compelling choice for developers and businesses seeking to harness the full potential of blockchain technology. The subnet is currently on testnet with hopes of launching a mainnet in 2024.
Hubblenet Subnet
Hubble Exchange introduced a perpetuals platform marked by a fully decentralized matching and liquidation engine built on its own subnet in Q4 2023. This innovative approach melds the user experience of traditional centralized exchanges with the composability and transparency inherent in decentralized platforms. The platform's hallmark feature is its utilization of USDC as a gas token, streamlining transactions and enhancing user experience by negating the need to hold multiple coin types for transaction fees.
Hubble Exchange debuts as the inaugural product on Hubblenet, an L1 subnet atop Avalanche, enabling a high degree of feature customization. At its inception, Hubble supports trading pairs including AVAX, ETH, and SOL, with a roadmap for expanding its offerings. In a departure from the centralized nature of traditional order book exchanges, Hubble Exchange introduces a Decentralized Limit Order Book (DLOB). This architecture ensures that all computations, including order matching and liquidations, are executed on-chain by Hubblenet's validators. The result is a trading platform that combines the transparency of Automated Market Makers (AMMs) with the capital efficiency and pricing accuracy of an order book. As a decentralized order book, Hubble Exchange offers the full suite of features found in centralized exchanges—such as limit orders without slippage, tight spreads, and lower transaction fees—while achieving a higher degree of decentralization.
Central to Hubble's value proposition is its robust bridging system, powered by LayerZero. This feature allows for seamless asset deposits from a multitude of EVM chains directly onto Hubble Exchange, paving the way for Hubble to become a central trading hub for these networks.
Astra Proposal
Ava Labs is rolling out an ambitious proposal known as the Astra Upgrade, a comprehensive plan designed to streamline the complexities associated with launching and securing subnets within its robust ecosystem. The initial phase of the Astra Upgrade focuses on addressing some of the key pain points faced by subnet validators. Notably, it eliminates the obligation for subnet validators to simultaneously validate the entirety of the sprawling Avalanche Primary Network. Instead, under this upgrade, validators can redirect their resources exclusively towards managing their respective subnet and overseeing the pivotal P-Chain. The P-Chain, in turn, is responsible for activities like staking AVAX tokens and disbursing rewards to participants. This strategic shift looks to reduce the computational burden and the associated costs of running a subnet. Doing so effectively lowers the entry barriers for potential validators, a move that promises to democratize participation in the Ava Labs ecosystem.
The advantages of this transformation are manifold, primarily benefiting subnet validators by obviating the need to engage in the demanding task of validating the entire main network. This, in turn, eliminates the need for validators to initialize and synchronize with the C-Chain and X-Chain components, simplifying their operational requirements. Validators will now only need to synchronize with the P-Chain, which tracks validator set changes and facilitates efficient communication across subnets. This enhanced focus on subnet-specific activities promises to not only make the validators' roles more streamlined but also augment the overall robustness of the network by allowing them to dedicate their resources more efficiently.
Another aspect of the proposal looks to shift from the current staking model to a rent-based system, introducing a variable "pay-as-you-go" fee structure denominated in AVAX tokens. The fee adjusts dynamically based on the number of validators within a subnet, eliminating the need for validators to commit substantial amounts of AVAX (currently 2,000) upfront. This dynamic pricing model represents a significant departure from the traditional staking approach, offering validators greater flexibility and cost-effectiveness in their participation.
Currently, to qualify as a Subnet Validator, individuals must initially commit to being a Primary Network Validator, necessitating a minimum stake of 2,000 AVAX. Typically, subnets launch with around eight validators, which translates to a total stake of 16,000 AVAX. Additionally, validators must maintain significant computational resources, including eight virtual CPUs, 16 GB of RAM, and 1 TB of storage. These resources are crucial for synchronization with the entire Primary Network and active participation in its consensus mechanism.
The current model presents formidable challenges, impacting both small, resource-constrained projects and larger, regulated entities. Regulated entities, particularly those following traditional finance (TradFI) paradigms, often face restrictions when it comes to validating permissionless, smart contract-capable blockchains like the C-Chain. The requirement for Primary Network Validation becomes a barrier, preventing such entities from launching their subnets and hindering a potentially substantial influx of Real World Asset (RWA) issuers from contributing to the vibrant Avalanche ecosystem.
To address these challenges comprehensively, the new proposal introduces several key changes. It envisions the creation of an entirely new entity known as a Subnet-only Validator (SOV). This new classification eliminates the upfront 2,000 AVAX commitment and replaces it with a more accessible and refundable 500 AVAX deposit. Moreover, a new transaction type is introduced, mandating that SOVs register with the P-Chain, ensuring clarity and accountability in their participation. Collectively, these measures represent a significant shift in the landscape of subnet validation, with the potential to usher in a more inclusive and dynamic ecosystem within Ava Labs.
Economics
A Surge in Transactions and Token Burns
In recent weeks, the Avalanche network has witnessed a substantial uptick in the burning of AVAX tokens during transactions, resulting in a significant reduction in the token's circulating supply. This phenomenon has garnered attention within the cryptocurrency community due to its potential implications for AVAX's scarcity and value.
As a refresher, Avalanche has a distinctive fee mechanism that sets it apart from many other blockchain platforms. All transaction fees incurred on the Avalanche network are subjected to a "burn" mechanism, effectively removing AVAX tokens from circulation. This design closely resembles Ethereum's EIP-1559, which introduced a similar burn element to transaction fees. However, the crucial distinction lies in how these fees are handled: Ethereum distributes a portion of transaction fees to validators and burns the remainder, whereas Avalanche opts for a comprehensive burn approach.
The surge in AVAX token burns in Q4 2023 has been notable. Analyzing data throughout Q2 and Q3 2023, it can be observed that weekly AVAX burns typically remained in the low thousands, with a notable peak of ~39,000 AVAX in a single day in April 2023. However, the landscape changed dramatically towards the end of November. During this period, the network experienced a spike to 85,000 AVAX, followed by another significant burn of ~195,000 AVAX in December.
If this activity persists, the additional burns could help offset AVAX inflation, pushing it closer to competitors Ethereum and BSC concerning token inflation/deflation.
Inscriptions Catch On
A critical factor contributing to this surge in AVAX token burns is the proliferation of inscription-related transactions across Avalanche and other blockchain networks. Initially stemming from Bitcoin, inscription-related transactions now account for a substantial portion of transaction fees and subsequent token burns on the Avalanche network. According to data from a Dune Analytics dashboard developed by Hildobby, inscription-based transactions made up a staggering 75%+ of transaction fees and 90%+ of transactions at peak times.
Inscription-based tokens are a unique class of tokens that have gained popularity due to their versatility and cost-effectiveness. These tokens are created by embedding text within standard blockchain transactions, supplemented by an off-chain numbering system for tracking purposes. They first emerged as a workaround on the Bitcoin network, which lacked native support for tokens. The primary driver behind their proliferation across various blockchain networks is their cost-efficiency in comparison to native tokens, making them an attractive option for users seeking to move assets inexpensively.
Avalanche Fees Rise, but Chain Maintains Uptime
One of the most remarkable aspects of this surge in activity is how the Avalanche network responded to the increased demand. Scalability has long been a challenge for blockchain networks, with congestion and high gas fees often plaguing popular chains like Bitcoin. However, Avalanche demonstrated its prowess in scalability by swiftly accommodating the surge in inscriptions without experiencing crippling congestion or downtime, like in the case of Ethereum rollup, Arbitrum.
The recent surge in AVAX token burns on the Avalanche network has brought attention to the unique fee structure and growing popularity of inscription-based transactions. As Avalanche continues to evolve and gain prominence within the blockchain ecosystem, monitoring the impact of these developments on AVAX's scarcity and market dynamics will be of utmost importance to investors and enthusiasts alike. The cryptocurrency community will undoubtedly be closely watching how this trend unfolds in the coming months, as it may hold valuable insights into the broader blockchain landscape.
Network Growth and Adoption
Institutions
Avalanche has emerged as a prominent player, driven by a combination of institutional adoption and continuous product development. Notably, institutions of global significance, such as Citi and JP Morgan, have embraced Avalanche's subnets, underlining the growing recognition of its capabilities within the blockchain ecosystem.
Citi’s RFS
One key catalyst for Avalanche's growth has been the successful deployment of subnets tailored to institutional requirements. Citi's recent proof-of-concept for a Request for Streaming (RFS) solution for foreign exchange (FX) pricing and execution is a compelling example. This innovative solution was constructed as a subnet on Avalanche Evergreen, a version of Avalanche specifically designed to cater to institutions. It offers crucial support for Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance, reinforcing the platform's commitment to regulatory standards. Moreover, its interoperability through Avalanche Warp Messaging (AWM) further enhances its appeal in the institutional realm.
AvaCloud
Avalanche's prowess extends beyond its blockchain technology to its managed blockchain service, known as AvaCloud. This platform has garnered attention for its user-friendly approach, enabling projects to effortlessly create new blockchains with customized configurations. AvaCloud also provides ongoing managed infrastructure in the cloud, along with essential tools such as data monitoring and block explorers. This comprehensive suite of services significantly simplifies the process of launching and managing a blockchain, a feat that is made even more accessible as AvaCloud becomes integrated into developer tooling like ThirdWeb.
The institutional adoption of Avalanche holds particular significance, given the unique challenges and requirements that institutions bring to the table. These organizations, which represent vast pools of capital and complex operational structures, often find it challenging to engage with fully public blockchain networks. Avalanche has demonstrated a clear leadership position in addressing the distinct needs of these institutional participants. This development is promising for the platform and the broader Avalanche ecosystem, as blockchain technology gradually replaces legacy financial infrastructure.
Project Guardian
Finally, in a more recent development, JP Morgan embarked on a collaborative venture with a range of blockchain platforms to conduct trials related to Project Guardian. This project serves as a proof of concept, demonstrating the potential of blockchain technology, smart contracts, and tokenization in automating portfolio management. Notably, the trial explores including alternative assets (alts) alongside more liquid assets within discretionary portfolios.
Leveraging JP Morgan's ONYX platform and the Oasis Pro asset-issuing platform, this partnership empowers fund managers to tokenize portfolios while utilizing a range of crypto interoperability protocols. This innovative approach enables the seamless exchange and rebalancing of portfolios across various blockchains, bridging the gap between EVM (Ethereum Virtual Machine) and non-EVM, as well as between private and public chains.
The project's success highlights the transformative potential of smart contracts in streamlining and automating complex financial processes. Notably, the use of smart contracts automated over 3,000 operational steps, leading to a significant reduction in costs — almost 20% — despite the involvement of multiple parties in the asset management process. This experiment not only demonstrated the efficiency gains achievable through blockchain technology but also underscored the benefits of interoperability in managing a diverse range of assets within a single, discretionary portfolio.
While this development is encouraging for the broader blockchain ecosystem, including platforms like Avalanche, JP Morgan's future commitments remain uncertain. The banking giant has developed its blockchain solutions, such as the Tokenized Collateral Network, which might take precedence over external platforms like Avalanche's subnets. This is despite the appeal of Avalanche's subnets, particularly the enterprise-friendly Evergreen Subnets introduced in April, which cater to institutional needs.
Real World Asset (RWA) Experimentation Grows
Avalanche has been at the forefront of developing cutting-edge technology and solutions that facilitate the integration of traditional financial assets into the world of cryptocurrencies. Notably, in the second quarter of the year, Avalanche unveiled the Spruce and Evergreen subnets, empowering users to create their subnets, complete with customizable Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements, as well as unique privacy features. This strategic move attracted early partners like Wellington and T. Rowe, signaling the industry's recognition of the platform's innovative potential.
In a further demonstration of its commitment to fostering a more efficient, cost-effective, and accessible financial system, the Avalanche Foundation launched the "Avalanche Vista" program in July. This program allocates up to $50 million for the purchase of tokenized assets minted on the Avalanche blockchain. "Avalanche Vista" reaffirms Avalanche's support for Real World Asset (RWA) providers operating on its blockchain. The program celebrated its first success in August with the announcement of HiYield, a venture from Lydia Labs, joining the Vista initiative.
Avalanche further solidified its position as a trailblazer in the blockchain landscape by serving as the host for the first tokenized assets introduced by Securitize. Securitize, a renowned player in the tokenization of off-chain assets, found in Avalanche the ideal solution to meet regulatory requirements by operating in a "sandbox" environment. Avalanche's distinctive capabilities provided the necessary infrastructure for this endeavor. The tokens issued on this occasion represent equity in the Spanish real estate investment trust known as Mancipi Partners.
Finally, Republic, a platform committed to democratizing private investment, has partnered with Avalanche to launch and trade its Republic Note, a profit-sharing digital asset, on INX.One. Republic's mission is to offer accessible investment opportunities to its 3 million members who have invested over $2.6 billion since 2016. The Republic Note, backed by a portfolio of 750+ private assets, allows global retail investors to earn profits in stablecoins. With over $30 million raised in pre-sales, the digital asset reflects a growing trend towards tokenization in finance.
Wallet
Avalanche recently made a significant announcement regarding the upcoming phase-out of the Avalanche Wallet. This strategic move represents a pivotal shift towards what is known as Core Stake, a transformation designed to elevate the user experience by introducing advanced staking features.
Core Stake is a significant development launched by Ava Labs in 2022. It has rapidly evolved into the central hub for exploring the vast ecosystem of Avalanche. Available as a web application and a mobile wallet, as well as a Chrome Browser Extension, Core serves a singular purpose - to introduce and facilitate user engagement with Avalanche technology.
Additionally, Core introduces a groundbreaking approach to crypto wallet management, eliminating the need for seed phrases. Traditionally, seed phrases are essential for users to recover their crypto wallets. However, they are often seen as a barrier for widespread adoption due to their complexity. Core's innovative solution allows users to generate and manage keys using familiar Web2 methods such as Gmail and Apple logins.
The significance of this development lies in its universal application. Core's seed abstraction is not confined to any single blockchain or virtual machine. Users can leverage the Core-generated seed across a variety of blockchains, from Bitcoin to Ethereum Virtual Machines (EVMs), simplifying the user experience without the hassle of navigating multiple contracts or dealing with cross-chain complications. This represents a first-of-its-kind experience in wallet creation, primarily designed to enhance the Avalanche ecosystem and extend its benefits beyond.
The scheduled date for the phase-out of the Avalanche Wallet is January 23, 2024. The transition to Core Stake signifies a substantial leap forward in terms of functionality and efficiency in staking operations and portfolio management. This platform integrates the latest advancements in staking features and offers a glimpse into upcoming innovations like Elastic Subnet Staking.
Block Explorer
In Q4 2023, Avalanche’s primary block explorer, SnowTrace.io, managed by Etherscan, transitioned to Snowtrace Multichain. The transition represents a strategic move to broaden the capabilities and user experience of the blockchain explorer within the Avalanche ecosystem.
Snowtrace Multichain emerges as a state-of-the-art platform, encompassing not only the standard features expected of a blockchain explorer but also integrating the unique data associated with subnets. This integration is particularly significant as it aligns with the growing interest and utilization of subnets within the Avalanche community and beyond.
Moreover, Snowtrace Multichain's focus on catering specifically to the Avalanche ecosystem denotes a specialized approach. By tailoring its features and functionalities to meet the unique needs and characteristics of the Avalanche network, Snowtrace Multichain positions itself as a dedicated tool for both developers and users within this specific blockchain environment.
Conclusion
Subnets represent a significant departure from traditional blockchain scaling models, as exemplified by early projects like Bitcoin and Ethereum. The flexibility and efficiency inherent in Avalanche's subnet architecture have set a new standard in blockchain technology, enabling developers to create customized blockchains that cater to specific needs and applications.
The transition to Elastic Subnets, as marked by the Banff upgrade, further enhances the autonomy and versatility of the Avalanche platform. This feature democratizes the validation process and aligns the interests of validators with their respective subnets, fostering a more inclusive and secure blockchain environment. Additionally, the Movement Subnet, with its integration of the Move Virtual Machine, brings a new dimension of security, throughput, and interoperability, positioning Avalanche as a preferred platform for developers and users alike.
The Astra Proposal, aiming to streamline the complexities of launching and securing subnets, represents another leap forward in making Avalanche's technology more accessible and efficient. By reducing the barriers to entry for validators and introducing a rent-based system, Avalanche is paving the way for a more dynamic and inclusive blockchain ecosystem.
The surge in transaction volumes and token burns on the Avalanche network highlights the growing acceptance and utility of the platform. The increasing popularity of inscription-based transactions and the network's ability to maintain uptime under high demand are testaments to Avalanche's scalability and robustness.
Institutional adoption, as evidenced by the engagement of global entities like Citi and JP Morgan, further validates Avalanche's potential to revolutionize traditional financial systems. The integration of real-world assets and the focus on compliance with KYC and AML standards demonstrate Avalanche's commitment to bridging the gap between traditional finance and blockchain technology.
Finally, the developments in Avalanche's tools, including the transition to Core Stake and the enhancement of Snowtrace Multichain, reflect the platform's continuous evolution and dedication to improving user experience and functionality.
Overall, Avalanche's subnet technology and its ongoing innovations present a compelling narrative of growth, adaptation, and potential. As the blockchain ecosystem continues to evolve, Avalanche's unique approach to scalability, security, and interoperability positions it as a leader in the drive toward a more integrated, efficient, and inclusive digital future.
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.
Avalanche (AVAX) stands out in the blockchain landscape with its unique ecosystem, offering developers a platform that emphasizes flexibility and scalability by leveraging custom subnets. Subnets empower developers to create their custom blockchains within the Avalanche ecosystem, allowing them to prioritize whatever attributes they find most important, while the Primary Network handles consensus, security, and token minting. These subnets act as dedicated environments where developers can create and customize their blockchain networks, tailoring them to specific use cases and requirements. This flexibility is a crucial asset in the blockchain ecosystem, allowing for innovation and specialization within the Avalanche network.
Additionally, Avalanche is compatible with the Ethereum Virtual Machine (EVM). This compatibility means that Avalanche can seamlessly connect to the Ethereum network, effectively bridging the gap between the two ecosystems. This dual-role capability enables Avalanche to serve as both a cheaper EVM chain as well as a vast landscape to experiment with other virtual machines (VMs) and designs thanks to subnets.
Q4 2023 saw both aspects of Avalanche’s ecosystem (the C-chain and subnets) grow and mature in different ways, from ultra-high transaction counts and fees on the EVM C-chain to exciting new adoption and project announcements via subnets.
The Evolution of Subnets
Traditional Subnets
At the heart of Avalanche’s scaling solution is the concept of subnetworks, or subnets, which allow developers to create customized blockchains tailored to specific needs. This feature sets Avalanche apart from its contemporaries like Bitcoin and Ethereum, which primarily rely on different L2 implementations for scaling purposes.
Avalanche's subnet architecture is a testament to the platform's commitment to providing versatile and efficient solutions. Each subnet constitutes a dynamic group of validators collaborating to achieve consensus on their respective blockchain. This framework ensures that while a single subnet is dedicated to validating one blockchain, it possesses the capacity to manage multiple blockchains. This multiplicity not only enhances the network's overall efficiency but also offers developers a level of control unprecedented in the blockchain space.
One of the critical components of Avalanche's architecture is the Primary Network, which acts as a central hub for the various subnets. Within this ecosystem, the P-Chain, a specialized subnet, plays a vital role. It oversees the validation processes across the entire network, ensuring smooth and efficient operations. This design not only enables developers to build blockchains that are either permissioned or permissionless but also ensures these blockchains maintain interoperability within the same subnet by having a common blockchain in which all BLS keys are stored.
The flexibility of Avalanche's subnet structure extends to various aspects of blockchain customization. Developers have the liberty to design the tokenomics, virtual machine, fee structures, smart contract language, and governance rules of their blockchains. This level of customization is particularly advantageous for projects with unique requirements or those needing to comply with specific regulatory standards.
“Elastic” Subnets
The Banff upgrade was successfully activated on the mainnet on October 18, 2022, introducing the concept of Elastic Subnets, a feature that significantly enhances the flexibility and autonomy of subnet creators within the Avalanche ecosystem. Elastic Subnets represent a material shift in the way subnets are managed and validated on the Avalanche platform. One of the core functionalities introduced by this feature is the ability for subnet creators to implement Proof-of-Stake (PoS) validation mechanisms using their tokens. This development democratizes the validation process, allowing anyone to participate as a validator by staking the specific token associated with a subnet. Such a mechanism not only incentivizes participation but also aligns the interests of validators with the specific subnet they are securing.
By opting for an Elastic Subnet, a subnet creator makes the important design decision to lock the subnet from future modifications or upgrades. This decision entails selecting an Avalanche Native Token (ANT) for staking purposes and distribution as staking rewards. Additionally, the subnet creator is responsible for defining a set of parameters that will dictate the subnet’s staking dynamics. These parameters are crucial as they determine the mechanics of token staking and reward distribution, thus shaping the economic and governance landscape of the subnet.
In essence, Elastic Subnets offer subnet creators on the Avalanche platform a higher degree of control and customization. By allowing the use of their tokens for PoS validation and defining specific staking parameters, creators can tailor subnets to fit their unique needs and objectives. This feature not only enhances the functionality and appeal of the Avalanche ecosystem but also underscores its commitment to innovation and adaptability in the rapidly evolving blockchain sector.
With the potential to accommodate tens of thousands of validators, Elastic Subnets can achieve massive scale. As the Avalanche tech stack continues to gain traction, the role of Elastic Subnets becomes increasingly pivotal, promising enhanced security and a thriving Subnet economy.
The Movement Subnet
The Movement Subnet is a first-of-its-kind subnet that will utilize the Move Virtual Machine, popularized by projects like Aptos and Sui. Recognized for its flexibility, high throughput, security, and interoperability, the Movement Subnet offers a promising platform for developers and users alike.
Move is a relatively novel smart contract programming language distinguished by its unwavering commitment to safety and adaptability, catering to the needs of developers. One of its compelling features is the seamless integration of formal verification into the development process. This facet proves especially advantageous as it instills a proactive approach to code security during the earliest phases of product development. At the core of Move's verification capability lies the Move Prover, a specialized tool designed to furnish developers with the confidence that their code operates without flaws.
The Movement Subnet addresses known security concerns, like reentrancy attacks, by incorporating Move's reentrancy protection into its smart contracts. Reentrancy attacks have plagued blockchain networks, resulting in significant losses for users and developers. By leveraging Move's reentrancy protection, Movement Subnet enhances the security of its applications, reducing the risk of vulnerabilities that can lead to exploitation. This feature empowers developers to create more robust and secure decentralized applications (dApps) within the Movement ecosystem.
What sets Move apart is its memory-safe architecture, expressive nature, and its foundation on the widely acclaimed Rust programming language. This distinctive attribute makes Move an enticing prospect for developers, as it allows for the transfer of knowledge and skills from Rust to Move. This level of cross-compatibility is less apparent in languages like Solidity, thereby positioning Move as an enticing proposition for attracting development talent.
One of Movement Subnet's standout features is its integration with Movement Lab's Fractal Transpiler. This tool enables developers to write smart contracts using the Move language while ensuring compatibility with Ethereum Virtual Machine (EVM) standards. This flexibility is a game-changer, as it simplifies the onboarding process for Solidity developers, who constitute a significant portion of the smart contract development community.
A key factor in Movement’s decision to build a subnet is Avalanche Warp Messaging, a feature that facilitates cross-chain liquidity. This capability allows for seamless asset transfer and interaction between different blockchains. By leveraging this feature, Movement can ensure that its blockchain remains fluid and versatile, capable of engaging with a broader network beyond its boundaries.
Crucially, Avalanche empowers developers with full control over validators. This includes the ability to set custom gas rules and choose between permissioned and permissionless configurations. Such control is vital for projects that require specific governance models or have unique economic structures.
Movement Subnet's integration of the Move language, coupled with its interoperability and reentrancy protection, sets it apart from traditional blockchain platforms. The combination of flexibility, security, and high throughput makes Movement Subnet a compelling choice for developers and businesses seeking to harness the full potential of blockchain technology. The subnet is currently on testnet with hopes of launching a mainnet in 2024.
Hubblenet Subnet
Hubble Exchange introduced a perpetuals platform marked by a fully decentralized matching and liquidation engine built on its own subnet in Q4 2023. This innovative approach melds the user experience of traditional centralized exchanges with the composability and transparency inherent in decentralized platforms. The platform's hallmark feature is its utilization of USDC as a gas token, streamlining transactions and enhancing user experience by negating the need to hold multiple coin types for transaction fees.
Hubble Exchange debuts as the inaugural product on Hubblenet, an L1 subnet atop Avalanche, enabling a high degree of feature customization. At its inception, Hubble supports trading pairs including AVAX, ETH, and SOL, with a roadmap for expanding its offerings. In a departure from the centralized nature of traditional order book exchanges, Hubble Exchange introduces a Decentralized Limit Order Book (DLOB). This architecture ensures that all computations, including order matching and liquidations, are executed on-chain by Hubblenet's validators. The result is a trading platform that combines the transparency of Automated Market Makers (AMMs) with the capital efficiency and pricing accuracy of an order book. As a decentralized order book, Hubble Exchange offers the full suite of features found in centralized exchanges—such as limit orders without slippage, tight spreads, and lower transaction fees—while achieving a higher degree of decentralization.
Central to Hubble's value proposition is its robust bridging system, powered by LayerZero. This feature allows for seamless asset deposits from a multitude of EVM chains directly onto Hubble Exchange, paving the way for Hubble to become a central trading hub for these networks.
Astra Proposal
Ava Labs is rolling out an ambitious proposal known as the Astra Upgrade, a comprehensive plan designed to streamline the complexities associated with launching and securing subnets within its robust ecosystem. The initial phase of the Astra Upgrade focuses on addressing some of the key pain points faced by subnet validators. Notably, it eliminates the obligation for subnet validators to simultaneously validate the entirety of the sprawling Avalanche Primary Network. Instead, under this upgrade, validators can redirect their resources exclusively towards managing their respective subnet and overseeing the pivotal P-Chain. The P-Chain, in turn, is responsible for activities like staking AVAX tokens and disbursing rewards to participants. This strategic shift looks to reduce the computational burden and the associated costs of running a subnet. Doing so effectively lowers the entry barriers for potential validators, a move that promises to democratize participation in the Ava Labs ecosystem.
The advantages of this transformation are manifold, primarily benefiting subnet validators by obviating the need to engage in the demanding task of validating the entire main network. This, in turn, eliminates the need for validators to initialize and synchronize with the C-Chain and X-Chain components, simplifying their operational requirements. Validators will now only need to synchronize with the P-Chain, which tracks validator set changes and facilitates efficient communication across subnets. This enhanced focus on subnet-specific activities promises to not only make the validators' roles more streamlined but also augment the overall robustness of the network by allowing them to dedicate their resources more efficiently.
Another aspect of the proposal looks to shift from the current staking model to a rent-based system, introducing a variable "pay-as-you-go" fee structure denominated in AVAX tokens. The fee adjusts dynamically based on the number of validators within a subnet, eliminating the need for validators to commit substantial amounts of AVAX (currently 2,000) upfront. This dynamic pricing model represents a significant departure from the traditional staking approach, offering validators greater flexibility and cost-effectiveness in their participation.
Currently, to qualify as a Subnet Validator, individuals must initially commit to being a Primary Network Validator, necessitating a minimum stake of 2,000 AVAX. Typically, subnets launch with around eight validators, which translates to a total stake of 16,000 AVAX. Additionally, validators must maintain significant computational resources, including eight virtual CPUs, 16 GB of RAM, and 1 TB of storage. These resources are crucial for synchronization with the entire Primary Network and active participation in its consensus mechanism.
The current model presents formidable challenges, impacting both small, resource-constrained projects and larger, regulated entities. Regulated entities, particularly those following traditional finance (TradFI) paradigms, often face restrictions when it comes to validating permissionless, smart contract-capable blockchains like the C-Chain. The requirement for Primary Network Validation becomes a barrier, preventing such entities from launching their subnets and hindering a potentially substantial influx of Real World Asset (RWA) issuers from contributing to the vibrant Avalanche ecosystem.
To address these challenges comprehensively, the new proposal introduces several key changes. It envisions the creation of an entirely new entity known as a Subnet-only Validator (SOV). This new classification eliminates the upfront 2,000 AVAX commitment and replaces it with a more accessible and refundable 500 AVAX deposit. Moreover, a new transaction type is introduced, mandating that SOVs register with the P-Chain, ensuring clarity and accountability in their participation. Collectively, these measures represent a significant shift in the landscape of subnet validation, with the potential to usher in a more inclusive and dynamic ecosystem within Ava Labs.
Economics
A Surge in Transactions and Token Burns
In recent weeks, the Avalanche network has witnessed a substantial uptick in the burning of AVAX tokens during transactions, resulting in a significant reduction in the token's circulating supply. This phenomenon has garnered attention within the cryptocurrency community due to its potential implications for AVAX's scarcity and value.
As a refresher, Avalanche has a distinctive fee mechanism that sets it apart from many other blockchain platforms. All transaction fees incurred on the Avalanche network are subjected to a "burn" mechanism, effectively removing AVAX tokens from circulation. This design closely resembles Ethereum's EIP-1559, which introduced a similar burn element to transaction fees. However, the crucial distinction lies in how these fees are handled: Ethereum distributes a portion of transaction fees to validators and burns the remainder, whereas Avalanche opts for a comprehensive burn approach.
The surge in AVAX token burns in Q4 2023 has been notable. Analyzing data throughout Q2 and Q3 2023, it can be observed that weekly AVAX burns typically remained in the low thousands, with a notable peak of ~39,000 AVAX in a single day in April 2023. However, the landscape changed dramatically towards the end of November. During this period, the network experienced a spike to 85,000 AVAX, followed by another significant burn of ~195,000 AVAX in December.
If this activity persists, the additional burns could help offset AVAX inflation, pushing it closer to competitors Ethereum and BSC concerning token inflation/deflation.
Inscriptions Catch On
A critical factor contributing to this surge in AVAX token burns is the proliferation of inscription-related transactions across Avalanche and other blockchain networks. Initially stemming from Bitcoin, inscription-related transactions now account for a substantial portion of transaction fees and subsequent token burns on the Avalanche network. According to data from a Dune Analytics dashboard developed by Hildobby, inscription-based transactions made up a staggering 75%+ of transaction fees and 90%+ of transactions at peak times.
Inscription-based tokens are a unique class of tokens that have gained popularity due to their versatility and cost-effectiveness. These tokens are created by embedding text within standard blockchain transactions, supplemented by an off-chain numbering system for tracking purposes. They first emerged as a workaround on the Bitcoin network, which lacked native support for tokens. The primary driver behind their proliferation across various blockchain networks is their cost-efficiency in comparison to native tokens, making them an attractive option for users seeking to move assets inexpensively.
Avalanche Fees Rise, but Chain Maintains Uptime
One of the most remarkable aspects of this surge in activity is how the Avalanche network responded to the increased demand. Scalability has long been a challenge for blockchain networks, with congestion and high gas fees often plaguing popular chains like Bitcoin. However, Avalanche demonstrated its prowess in scalability by swiftly accommodating the surge in inscriptions without experiencing crippling congestion or downtime, like in the case of Ethereum rollup, Arbitrum.
The recent surge in AVAX token burns on the Avalanche network has brought attention to the unique fee structure and growing popularity of inscription-based transactions. As Avalanche continues to evolve and gain prominence within the blockchain ecosystem, monitoring the impact of these developments on AVAX's scarcity and market dynamics will be of utmost importance to investors and enthusiasts alike. The cryptocurrency community will undoubtedly be closely watching how this trend unfolds in the coming months, as it may hold valuable insights into the broader blockchain landscape.
Network Growth and Adoption
Institutions
Avalanche has emerged as a prominent player, driven by a combination of institutional adoption and continuous product development. Notably, institutions of global significance, such as Citi and JP Morgan, have embraced Avalanche's subnets, underlining the growing recognition of its capabilities within the blockchain ecosystem.
Citi’s RFS
One key catalyst for Avalanche's growth has been the successful deployment of subnets tailored to institutional requirements. Citi's recent proof-of-concept for a Request for Streaming (RFS) solution for foreign exchange (FX) pricing and execution is a compelling example. This innovative solution was constructed as a subnet on Avalanche Evergreen, a version of Avalanche specifically designed to cater to institutions. It offers crucial support for Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance, reinforcing the platform's commitment to regulatory standards. Moreover, its interoperability through Avalanche Warp Messaging (AWM) further enhances its appeal in the institutional realm.
AvaCloud
Avalanche's prowess extends beyond its blockchain technology to its managed blockchain service, known as AvaCloud. This platform has garnered attention for its user-friendly approach, enabling projects to effortlessly create new blockchains with customized configurations. AvaCloud also provides ongoing managed infrastructure in the cloud, along with essential tools such as data monitoring and block explorers. This comprehensive suite of services significantly simplifies the process of launching and managing a blockchain, a feat that is made even more accessible as AvaCloud becomes integrated into developer tooling like ThirdWeb.
The institutional adoption of Avalanche holds particular significance, given the unique challenges and requirements that institutions bring to the table. These organizations, which represent vast pools of capital and complex operational structures, often find it challenging to engage with fully public blockchain networks. Avalanche has demonstrated a clear leadership position in addressing the distinct needs of these institutional participants. This development is promising for the platform and the broader Avalanche ecosystem, as blockchain technology gradually replaces legacy financial infrastructure.
Project Guardian
Finally, in a more recent development, JP Morgan embarked on a collaborative venture with a range of blockchain platforms to conduct trials related to Project Guardian. This project serves as a proof of concept, demonstrating the potential of blockchain technology, smart contracts, and tokenization in automating portfolio management. Notably, the trial explores including alternative assets (alts) alongside more liquid assets within discretionary portfolios.
Leveraging JP Morgan's ONYX platform and the Oasis Pro asset-issuing platform, this partnership empowers fund managers to tokenize portfolios while utilizing a range of crypto interoperability protocols. This innovative approach enables the seamless exchange and rebalancing of portfolios across various blockchains, bridging the gap between EVM (Ethereum Virtual Machine) and non-EVM, as well as between private and public chains.
The project's success highlights the transformative potential of smart contracts in streamlining and automating complex financial processes. Notably, the use of smart contracts automated over 3,000 operational steps, leading to a significant reduction in costs — almost 20% — despite the involvement of multiple parties in the asset management process. This experiment not only demonstrated the efficiency gains achievable through blockchain technology but also underscored the benefits of interoperability in managing a diverse range of assets within a single, discretionary portfolio.
While this development is encouraging for the broader blockchain ecosystem, including platforms like Avalanche, JP Morgan's future commitments remain uncertain. The banking giant has developed its blockchain solutions, such as the Tokenized Collateral Network, which might take precedence over external platforms like Avalanche's subnets. This is despite the appeal of Avalanche's subnets, particularly the enterprise-friendly Evergreen Subnets introduced in April, which cater to institutional needs.
Real World Asset (RWA) Experimentation Grows
Avalanche has been at the forefront of developing cutting-edge technology and solutions that facilitate the integration of traditional financial assets into the world of cryptocurrencies. Notably, in the second quarter of the year, Avalanche unveiled the Spruce and Evergreen subnets, empowering users to create their subnets, complete with customizable Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements, as well as unique privacy features. This strategic move attracted early partners like Wellington and T. Rowe, signaling the industry's recognition of the platform's innovative potential.
In a further demonstration of its commitment to fostering a more efficient, cost-effective, and accessible financial system, the Avalanche Foundation launched the "Avalanche Vista" program in July. This program allocates up to $50 million for the purchase of tokenized assets minted on the Avalanche blockchain. "Avalanche Vista" reaffirms Avalanche's support for Real World Asset (RWA) providers operating on its blockchain. The program celebrated its first success in August with the announcement of HiYield, a venture from Lydia Labs, joining the Vista initiative.
Avalanche further solidified its position as a trailblazer in the blockchain landscape by serving as the host for the first tokenized assets introduced by Securitize. Securitize, a renowned player in the tokenization of off-chain assets, found in Avalanche the ideal solution to meet regulatory requirements by operating in a "sandbox" environment. Avalanche's distinctive capabilities provided the necessary infrastructure for this endeavor. The tokens issued on this occasion represent equity in the Spanish real estate investment trust known as Mancipi Partners.
Finally, Republic, a platform committed to democratizing private investment, has partnered with Avalanche to launch and trade its Republic Note, a profit-sharing digital asset, on INX.One. Republic's mission is to offer accessible investment opportunities to its 3 million members who have invested over $2.6 billion since 2016. The Republic Note, backed by a portfolio of 750+ private assets, allows global retail investors to earn profits in stablecoins. With over $30 million raised in pre-sales, the digital asset reflects a growing trend towards tokenization in finance.
Wallet
Avalanche recently made a significant announcement regarding the upcoming phase-out of the Avalanche Wallet. This strategic move represents a pivotal shift towards what is known as Core Stake, a transformation designed to elevate the user experience by introducing advanced staking features.
Core Stake is a significant development launched by Ava Labs in 2022. It has rapidly evolved into the central hub for exploring the vast ecosystem of Avalanche. Available as a web application and a mobile wallet, as well as a Chrome Browser Extension, Core serves a singular purpose - to introduce and facilitate user engagement with Avalanche technology.
Additionally, Core introduces a groundbreaking approach to crypto wallet management, eliminating the need for seed phrases. Traditionally, seed phrases are essential for users to recover their crypto wallets. However, they are often seen as a barrier for widespread adoption due to their complexity. Core's innovative solution allows users to generate and manage keys using familiar Web2 methods such as Gmail and Apple logins.
The significance of this development lies in its universal application. Core's seed abstraction is not confined to any single blockchain or virtual machine. Users can leverage the Core-generated seed across a variety of blockchains, from Bitcoin to Ethereum Virtual Machines (EVMs), simplifying the user experience without the hassle of navigating multiple contracts or dealing with cross-chain complications. This represents a first-of-its-kind experience in wallet creation, primarily designed to enhance the Avalanche ecosystem and extend its benefits beyond.
The scheduled date for the phase-out of the Avalanche Wallet is January 23, 2024. The transition to Core Stake signifies a substantial leap forward in terms of functionality and efficiency in staking operations and portfolio management. This platform integrates the latest advancements in staking features and offers a glimpse into upcoming innovations like Elastic Subnet Staking.
Block Explorer
In Q4 2023, Avalanche’s primary block explorer, SnowTrace.io, managed by Etherscan, transitioned to Snowtrace Multichain. The transition represents a strategic move to broaden the capabilities and user experience of the blockchain explorer within the Avalanche ecosystem.
Snowtrace Multichain emerges as a state-of-the-art platform, encompassing not only the standard features expected of a blockchain explorer but also integrating the unique data associated with subnets. This integration is particularly significant as it aligns with the growing interest and utilization of subnets within the Avalanche community and beyond.
Moreover, Snowtrace Multichain's focus on catering specifically to the Avalanche ecosystem denotes a specialized approach. By tailoring its features and functionalities to meet the unique needs and characteristics of the Avalanche network, Snowtrace Multichain positions itself as a dedicated tool for both developers and users within this specific blockchain environment.
Conclusion
Subnets represent a significant departure from traditional blockchain scaling models, as exemplified by early projects like Bitcoin and Ethereum. The flexibility and efficiency inherent in Avalanche's subnet architecture have set a new standard in blockchain technology, enabling developers to create customized blockchains that cater to specific needs and applications.
The transition to Elastic Subnets, as marked by the Banff upgrade, further enhances the autonomy and versatility of the Avalanche platform. This feature democratizes the validation process and aligns the interests of validators with their respective subnets, fostering a more inclusive and secure blockchain environment. Additionally, the Movement Subnet, with its integration of the Move Virtual Machine, brings a new dimension of security, throughput, and interoperability, positioning Avalanche as a preferred platform for developers and users alike.
The Astra Proposal, aiming to streamline the complexities of launching and securing subnets, represents another leap forward in making Avalanche's technology more accessible and efficient. By reducing the barriers to entry for validators and introducing a rent-based system, Avalanche is paving the way for a more dynamic and inclusive blockchain ecosystem.
The surge in transaction volumes and token burns on the Avalanche network highlights the growing acceptance and utility of the platform. The increasing popularity of inscription-based transactions and the network's ability to maintain uptime under high demand are testaments to Avalanche's scalability and robustness.
Institutional adoption, as evidenced by the engagement of global entities like Citi and JP Morgan, further validates Avalanche's potential to revolutionize traditional financial systems. The integration of real-world assets and the focus on compliance with KYC and AML standards demonstrate Avalanche's commitment to bridging the gap between traditional finance and blockchain technology.
Finally, the developments in Avalanche's tools, including the transition to Core Stake and the enhancement of Snowtrace Multichain, reflect the platform's continuous evolution and dedication to improving user experience and functionality.
Overall, Avalanche's subnet technology and its ongoing innovations present a compelling narrative of growth, adaptation, and potential. As the blockchain ecosystem continues to evolve, Avalanche's unique approach to scalability, security, and interoperability positions it as a leader in the drive toward a more integrated, efficient, and inclusive digital future.
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.
Avalanche (AVAX) stands out in the blockchain landscape with its unique ecosystem, offering developers a platform that emphasizes flexibility and scalability by leveraging custom subnets. Subnets empower developers to create their custom blockchains within the Avalanche ecosystem, allowing them to prioritize whatever attributes they find most important, while the Primary Network handles consensus, security, and token minting. These subnets act as dedicated environments where developers can create and customize their blockchain networks, tailoring them to specific use cases and requirements. This flexibility is a crucial asset in the blockchain ecosystem, allowing for innovation and specialization within the Avalanche network.
Additionally, Avalanche is compatible with the Ethereum Virtual Machine (EVM). This compatibility means that Avalanche can seamlessly connect to the Ethereum network, effectively bridging the gap between the two ecosystems. This dual-role capability enables Avalanche to serve as both a cheaper EVM chain as well as a vast landscape to experiment with other virtual machines (VMs) and designs thanks to subnets.
Q4 2023 saw both aspects of Avalanche’s ecosystem (the C-chain and subnets) grow and mature in different ways, from ultra-high transaction counts and fees on the EVM C-chain to exciting new adoption and project announcements via subnets.
The Evolution of Subnets
Traditional Subnets
At the heart of Avalanche’s scaling solution is the concept of subnetworks, or subnets, which allow developers to create customized blockchains tailored to specific needs. This feature sets Avalanche apart from its contemporaries like Bitcoin and Ethereum, which primarily rely on different L2 implementations for scaling purposes.
Avalanche's subnet architecture is a testament to the platform's commitment to providing versatile and efficient solutions. Each subnet constitutes a dynamic group of validators collaborating to achieve consensus on their respective blockchain. This framework ensures that while a single subnet is dedicated to validating one blockchain, it possesses the capacity to manage multiple blockchains. This multiplicity not only enhances the network's overall efficiency but also offers developers a level of control unprecedented in the blockchain space.
One of the critical components of Avalanche's architecture is the Primary Network, which acts as a central hub for the various subnets. Within this ecosystem, the P-Chain, a specialized subnet, plays a vital role. It oversees the validation processes across the entire network, ensuring smooth and efficient operations. This design not only enables developers to build blockchains that are either permissioned or permissionless but also ensures these blockchains maintain interoperability within the same subnet by having a common blockchain in which all BLS keys are stored.
The flexibility of Avalanche's subnet structure extends to various aspects of blockchain customization. Developers have the liberty to design the tokenomics, virtual machine, fee structures, smart contract language, and governance rules of their blockchains. This level of customization is particularly advantageous for projects with unique requirements or those needing to comply with specific regulatory standards.
“Elastic” Subnets
The Banff upgrade was successfully activated on the mainnet on October 18, 2022, introducing the concept of Elastic Subnets, a feature that significantly enhances the flexibility and autonomy of subnet creators within the Avalanche ecosystem. Elastic Subnets represent a material shift in the way subnets are managed and validated on the Avalanche platform. One of the core functionalities introduced by this feature is the ability for subnet creators to implement Proof-of-Stake (PoS) validation mechanisms using their tokens. This development democratizes the validation process, allowing anyone to participate as a validator by staking the specific token associated with a subnet. Such a mechanism not only incentivizes participation but also aligns the interests of validators with the specific subnet they are securing.
By opting for an Elastic Subnet, a subnet creator makes the important design decision to lock the subnet from future modifications or upgrades. This decision entails selecting an Avalanche Native Token (ANT) for staking purposes and distribution as staking rewards. Additionally, the subnet creator is responsible for defining a set of parameters that will dictate the subnet’s staking dynamics. These parameters are crucial as they determine the mechanics of token staking and reward distribution, thus shaping the economic and governance landscape of the subnet.
In essence, Elastic Subnets offer subnet creators on the Avalanche platform a higher degree of control and customization. By allowing the use of their tokens for PoS validation and defining specific staking parameters, creators can tailor subnets to fit their unique needs and objectives. This feature not only enhances the functionality and appeal of the Avalanche ecosystem but also underscores its commitment to innovation and adaptability in the rapidly evolving blockchain sector.
With the potential to accommodate tens of thousands of validators, Elastic Subnets can achieve massive scale. As the Avalanche tech stack continues to gain traction, the role of Elastic Subnets becomes increasingly pivotal, promising enhanced security and a thriving Subnet economy.
The Movement Subnet
The Movement Subnet is a first-of-its-kind subnet that will utilize the Move Virtual Machine, popularized by projects like Aptos and Sui. Recognized for its flexibility, high throughput, security, and interoperability, the Movement Subnet offers a promising platform for developers and users alike.
Move is a relatively novel smart contract programming language distinguished by its unwavering commitment to safety and adaptability, catering to the needs of developers. One of its compelling features is the seamless integration of formal verification into the development process. This facet proves especially advantageous as it instills a proactive approach to code security during the earliest phases of product development. At the core of Move's verification capability lies the Move Prover, a specialized tool designed to furnish developers with the confidence that their code operates without flaws.
The Movement Subnet addresses known security concerns, like reentrancy attacks, by incorporating Move's reentrancy protection into its smart contracts. Reentrancy attacks have plagued blockchain networks, resulting in significant losses for users and developers. By leveraging Move's reentrancy protection, Movement Subnet enhances the security of its applications, reducing the risk of vulnerabilities that can lead to exploitation. This feature empowers developers to create more robust and secure decentralized applications (dApps) within the Movement ecosystem.
What sets Move apart is its memory-safe architecture, expressive nature, and its foundation on the widely acclaimed Rust programming language. This distinctive attribute makes Move an enticing prospect for developers, as it allows for the transfer of knowledge and skills from Rust to Move. This level of cross-compatibility is less apparent in languages like Solidity, thereby positioning Move as an enticing proposition for attracting development talent.
One of Movement Subnet's standout features is its integration with Movement Lab's Fractal Transpiler. This tool enables developers to write smart contracts using the Move language while ensuring compatibility with Ethereum Virtual Machine (EVM) standards. This flexibility is a game-changer, as it simplifies the onboarding process for Solidity developers, who constitute a significant portion of the smart contract development community.
A key factor in Movement’s decision to build a subnet is Avalanche Warp Messaging, a feature that facilitates cross-chain liquidity. This capability allows for seamless asset transfer and interaction between different blockchains. By leveraging this feature, Movement can ensure that its blockchain remains fluid and versatile, capable of engaging with a broader network beyond its boundaries.
Crucially, Avalanche empowers developers with full control over validators. This includes the ability to set custom gas rules and choose between permissioned and permissionless configurations. Such control is vital for projects that require specific governance models or have unique economic structures.
Movement Subnet's integration of the Move language, coupled with its interoperability and reentrancy protection, sets it apart from traditional blockchain platforms. The combination of flexibility, security, and high throughput makes Movement Subnet a compelling choice for developers and businesses seeking to harness the full potential of blockchain technology. The subnet is currently on testnet with hopes of launching a mainnet in 2024.
Hubblenet Subnet
Hubble Exchange introduced a perpetuals platform marked by a fully decentralized matching and liquidation engine built on its own subnet in Q4 2023. This innovative approach melds the user experience of traditional centralized exchanges with the composability and transparency inherent in decentralized platforms. The platform's hallmark feature is its utilization of USDC as a gas token, streamlining transactions and enhancing user experience by negating the need to hold multiple coin types for transaction fees.
Hubble Exchange debuts as the inaugural product on Hubblenet, an L1 subnet atop Avalanche, enabling a high degree of feature customization. At its inception, Hubble supports trading pairs including AVAX, ETH, and SOL, with a roadmap for expanding its offerings. In a departure from the centralized nature of traditional order book exchanges, Hubble Exchange introduces a Decentralized Limit Order Book (DLOB). This architecture ensures that all computations, including order matching and liquidations, are executed on-chain by Hubblenet's validators. The result is a trading platform that combines the transparency of Automated Market Makers (AMMs) with the capital efficiency and pricing accuracy of an order book. As a decentralized order book, Hubble Exchange offers the full suite of features found in centralized exchanges—such as limit orders without slippage, tight spreads, and lower transaction fees—while achieving a higher degree of decentralization.
Central to Hubble's value proposition is its robust bridging system, powered by LayerZero. This feature allows for seamless asset deposits from a multitude of EVM chains directly onto Hubble Exchange, paving the way for Hubble to become a central trading hub for these networks.
Astra Proposal
Ava Labs is rolling out an ambitious proposal known as the Astra Upgrade, a comprehensive plan designed to streamline the complexities associated with launching and securing subnets within its robust ecosystem. The initial phase of the Astra Upgrade focuses on addressing some of the key pain points faced by subnet validators. Notably, it eliminates the obligation for subnet validators to simultaneously validate the entirety of the sprawling Avalanche Primary Network. Instead, under this upgrade, validators can redirect their resources exclusively towards managing their respective subnet and overseeing the pivotal P-Chain. The P-Chain, in turn, is responsible for activities like staking AVAX tokens and disbursing rewards to participants. This strategic shift looks to reduce the computational burden and the associated costs of running a subnet. Doing so effectively lowers the entry barriers for potential validators, a move that promises to democratize participation in the Ava Labs ecosystem.
The advantages of this transformation are manifold, primarily benefiting subnet validators by obviating the need to engage in the demanding task of validating the entire main network. This, in turn, eliminates the need for validators to initialize and synchronize with the C-Chain and X-Chain components, simplifying their operational requirements. Validators will now only need to synchronize with the P-Chain, which tracks validator set changes and facilitates efficient communication across subnets. This enhanced focus on subnet-specific activities promises to not only make the validators' roles more streamlined but also augment the overall robustness of the network by allowing them to dedicate their resources more efficiently.
Another aspect of the proposal looks to shift from the current staking model to a rent-based system, introducing a variable "pay-as-you-go" fee structure denominated in AVAX tokens. The fee adjusts dynamically based on the number of validators within a subnet, eliminating the need for validators to commit substantial amounts of AVAX (currently 2,000) upfront. This dynamic pricing model represents a significant departure from the traditional staking approach, offering validators greater flexibility and cost-effectiveness in their participation.
Currently, to qualify as a Subnet Validator, individuals must initially commit to being a Primary Network Validator, necessitating a minimum stake of 2,000 AVAX. Typically, subnets launch with around eight validators, which translates to a total stake of 16,000 AVAX. Additionally, validators must maintain significant computational resources, including eight virtual CPUs, 16 GB of RAM, and 1 TB of storage. These resources are crucial for synchronization with the entire Primary Network and active participation in its consensus mechanism.
The current model presents formidable challenges, impacting both small, resource-constrained projects and larger, regulated entities. Regulated entities, particularly those following traditional finance (TradFI) paradigms, often face restrictions when it comes to validating permissionless, smart contract-capable blockchains like the C-Chain. The requirement for Primary Network Validation becomes a barrier, preventing such entities from launching their subnets and hindering a potentially substantial influx of Real World Asset (RWA) issuers from contributing to the vibrant Avalanche ecosystem.
To address these challenges comprehensively, the new proposal introduces several key changes. It envisions the creation of an entirely new entity known as a Subnet-only Validator (SOV). This new classification eliminates the upfront 2,000 AVAX commitment and replaces it with a more accessible and refundable 500 AVAX deposit. Moreover, a new transaction type is introduced, mandating that SOVs register with the P-Chain, ensuring clarity and accountability in their participation. Collectively, these measures represent a significant shift in the landscape of subnet validation, with the potential to usher in a more inclusive and dynamic ecosystem within Ava Labs.
Economics
A Surge in Transactions and Token Burns
In recent weeks, the Avalanche network has witnessed a substantial uptick in the burning of AVAX tokens during transactions, resulting in a significant reduction in the token's circulating supply. This phenomenon has garnered attention within the cryptocurrency community due to its potential implications for AVAX's scarcity and value.
As a refresher, Avalanche has a distinctive fee mechanism that sets it apart from many other blockchain platforms. All transaction fees incurred on the Avalanche network are subjected to a "burn" mechanism, effectively removing AVAX tokens from circulation. This design closely resembles Ethereum's EIP-1559, which introduced a similar burn element to transaction fees. However, the crucial distinction lies in how these fees are handled: Ethereum distributes a portion of transaction fees to validators and burns the remainder, whereas Avalanche opts for a comprehensive burn approach.
The surge in AVAX token burns in Q4 2023 has been notable. Analyzing data throughout Q2 and Q3 2023, it can be observed that weekly AVAX burns typically remained in the low thousands, with a notable peak of ~39,000 AVAX in a single day in April 2023. However, the landscape changed dramatically towards the end of November. During this period, the network experienced a spike to 85,000 AVAX, followed by another significant burn of ~195,000 AVAX in December.
If this activity persists, the additional burns could help offset AVAX inflation, pushing it closer to competitors Ethereum and BSC concerning token inflation/deflation.
Inscriptions Catch On
A critical factor contributing to this surge in AVAX token burns is the proliferation of inscription-related transactions across Avalanche and other blockchain networks. Initially stemming from Bitcoin, inscription-related transactions now account for a substantial portion of transaction fees and subsequent token burns on the Avalanche network. According to data from a Dune Analytics dashboard developed by Hildobby, inscription-based transactions made up a staggering 75%+ of transaction fees and 90%+ of transactions at peak times.
Inscription-based tokens are a unique class of tokens that have gained popularity due to their versatility and cost-effectiveness. These tokens are created by embedding text within standard blockchain transactions, supplemented by an off-chain numbering system for tracking purposes. They first emerged as a workaround on the Bitcoin network, which lacked native support for tokens. The primary driver behind their proliferation across various blockchain networks is their cost-efficiency in comparison to native tokens, making them an attractive option for users seeking to move assets inexpensively.
Avalanche Fees Rise, but Chain Maintains Uptime
One of the most remarkable aspects of this surge in activity is how the Avalanche network responded to the increased demand. Scalability has long been a challenge for blockchain networks, with congestion and high gas fees often plaguing popular chains like Bitcoin. However, Avalanche demonstrated its prowess in scalability by swiftly accommodating the surge in inscriptions without experiencing crippling congestion or downtime, like in the case of Ethereum rollup, Arbitrum.
The recent surge in AVAX token burns on the Avalanche network has brought attention to the unique fee structure and growing popularity of inscription-based transactions. As Avalanche continues to evolve and gain prominence within the blockchain ecosystem, monitoring the impact of these developments on AVAX's scarcity and market dynamics will be of utmost importance to investors and enthusiasts alike. The cryptocurrency community will undoubtedly be closely watching how this trend unfolds in the coming months, as it may hold valuable insights into the broader blockchain landscape.
Network Growth and Adoption
Institutions
Avalanche has emerged as a prominent player, driven by a combination of institutional adoption and continuous product development. Notably, institutions of global significance, such as Citi and JP Morgan, have embraced Avalanche's subnets, underlining the growing recognition of its capabilities within the blockchain ecosystem.
Citi’s RFS
One key catalyst for Avalanche's growth has been the successful deployment of subnets tailored to institutional requirements. Citi's recent proof-of-concept for a Request for Streaming (RFS) solution for foreign exchange (FX) pricing and execution is a compelling example. This innovative solution was constructed as a subnet on Avalanche Evergreen, a version of Avalanche specifically designed to cater to institutions. It offers crucial support for Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance, reinforcing the platform's commitment to regulatory standards. Moreover, its interoperability through Avalanche Warp Messaging (AWM) further enhances its appeal in the institutional realm.
AvaCloud
Avalanche's prowess extends beyond its blockchain technology to its managed blockchain service, known as AvaCloud. This platform has garnered attention for its user-friendly approach, enabling projects to effortlessly create new blockchains with customized configurations. AvaCloud also provides ongoing managed infrastructure in the cloud, along with essential tools such as data monitoring and block explorers. This comprehensive suite of services significantly simplifies the process of launching and managing a blockchain, a feat that is made even more accessible as AvaCloud becomes integrated into developer tooling like ThirdWeb.
The institutional adoption of Avalanche holds particular significance, given the unique challenges and requirements that institutions bring to the table. These organizations, which represent vast pools of capital and complex operational structures, often find it challenging to engage with fully public blockchain networks. Avalanche has demonstrated a clear leadership position in addressing the distinct needs of these institutional participants. This development is promising for the platform and the broader Avalanche ecosystem, as blockchain technology gradually replaces legacy financial infrastructure.
Project Guardian
Finally, in a more recent development, JP Morgan embarked on a collaborative venture with a range of blockchain platforms to conduct trials related to Project Guardian. This project serves as a proof of concept, demonstrating the potential of blockchain technology, smart contracts, and tokenization in automating portfolio management. Notably, the trial explores including alternative assets (alts) alongside more liquid assets within discretionary portfolios.
Leveraging JP Morgan's ONYX platform and the Oasis Pro asset-issuing platform, this partnership empowers fund managers to tokenize portfolios while utilizing a range of crypto interoperability protocols. This innovative approach enables the seamless exchange and rebalancing of portfolios across various blockchains, bridging the gap between EVM (Ethereum Virtual Machine) and non-EVM, as well as between private and public chains.
The project's success highlights the transformative potential of smart contracts in streamlining and automating complex financial processes. Notably, the use of smart contracts automated over 3,000 operational steps, leading to a significant reduction in costs — almost 20% — despite the involvement of multiple parties in the asset management process. This experiment not only demonstrated the efficiency gains achievable through blockchain technology but also underscored the benefits of interoperability in managing a diverse range of assets within a single, discretionary portfolio.
While this development is encouraging for the broader blockchain ecosystem, including platforms like Avalanche, JP Morgan's future commitments remain uncertain. The banking giant has developed its blockchain solutions, such as the Tokenized Collateral Network, which might take precedence over external platforms like Avalanche's subnets. This is despite the appeal of Avalanche's subnets, particularly the enterprise-friendly Evergreen Subnets introduced in April, which cater to institutional needs.
Real World Asset (RWA) Experimentation Grows
Avalanche has been at the forefront of developing cutting-edge technology and solutions that facilitate the integration of traditional financial assets into the world of cryptocurrencies. Notably, in the second quarter of the year, Avalanche unveiled the Spruce and Evergreen subnets, empowering users to create their subnets, complete with customizable Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements, as well as unique privacy features. This strategic move attracted early partners like Wellington and T. Rowe, signaling the industry's recognition of the platform's innovative potential.
In a further demonstration of its commitment to fostering a more efficient, cost-effective, and accessible financial system, the Avalanche Foundation launched the "Avalanche Vista" program in July. This program allocates up to $50 million for the purchase of tokenized assets minted on the Avalanche blockchain. "Avalanche Vista" reaffirms Avalanche's support for Real World Asset (RWA) providers operating on its blockchain. The program celebrated its first success in August with the announcement of HiYield, a venture from Lydia Labs, joining the Vista initiative.
Avalanche further solidified its position as a trailblazer in the blockchain landscape by serving as the host for the first tokenized assets introduced by Securitize. Securitize, a renowned player in the tokenization of off-chain assets, found in Avalanche the ideal solution to meet regulatory requirements by operating in a "sandbox" environment. Avalanche's distinctive capabilities provided the necessary infrastructure for this endeavor. The tokens issued on this occasion represent equity in the Spanish real estate investment trust known as Mancipi Partners.
Finally, Republic, a platform committed to democratizing private investment, has partnered with Avalanche to launch and trade its Republic Note, a profit-sharing digital asset, on INX.One. Republic's mission is to offer accessible investment opportunities to its 3 million members who have invested over $2.6 billion since 2016. The Republic Note, backed by a portfolio of 750+ private assets, allows global retail investors to earn profits in stablecoins. With over $30 million raised in pre-sales, the digital asset reflects a growing trend towards tokenization in finance.
Wallet
Avalanche recently made a significant announcement regarding the upcoming phase-out of the Avalanche Wallet. This strategic move represents a pivotal shift towards what is known as Core Stake, a transformation designed to elevate the user experience by introducing advanced staking features.
Core Stake is a significant development launched by Ava Labs in 2022. It has rapidly evolved into the central hub for exploring the vast ecosystem of Avalanche. Available as a web application and a mobile wallet, as well as a Chrome Browser Extension, Core serves a singular purpose - to introduce and facilitate user engagement with Avalanche technology.
Additionally, Core introduces a groundbreaking approach to crypto wallet management, eliminating the need for seed phrases. Traditionally, seed phrases are essential for users to recover their crypto wallets. However, they are often seen as a barrier for widespread adoption due to their complexity. Core's innovative solution allows users to generate and manage keys using familiar Web2 methods such as Gmail and Apple logins.
The significance of this development lies in its universal application. Core's seed abstraction is not confined to any single blockchain or virtual machine. Users can leverage the Core-generated seed across a variety of blockchains, from Bitcoin to Ethereum Virtual Machines (EVMs), simplifying the user experience without the hassle of navigating multiple contracts or dealing with cross-chain complications. This represents a first-of-its-kind experience in wallet creation, primarily designed to enhance the Avalanche ecosystem and extend its benefits beyond.
The scheduled date for the phase-out of the Avalanche Wallet is January 23, 2024. The transition to Core Stake signifies a substantial leap forward in terms of functionality and efficiency in staking operations and portfolio management. This platform integrates the latest advancements in staking features and offers a glimpse into upcoming innovations like Elastic Subnet Staking.
Block Explorer
In Q4 2023, Avalanche’s primary block explorer, SnowTrace.io, managed by Etherscan, transitioned to Snowtrace Multichain. The transition represents a strategic move to broaden the capabilities and user experience of the blockchain explorer within the Avalanche ecosystem.
Snowtrace Multichain emerges as a state-of-the-art platform, encompassing not only the standard features expected of a blockchain explorer but also integrating the unique data associated with subnets. This integration is particularly significant as it aligns with the growing interest and utilization of subnets within the Avalanche community and beyond.
Moreover, Snowtrace Multichain's focus on catering specifically to the Avalanche ecosystem denotes a specialized approach. By tailoring its features and functionalities to meet the unique needs and characteristics of the Avalanche network, Snowtrace Multichain positions itself as a dedicated tool for both developers and users within this specific blockchain environment.
Conclusion
Subnets represent a significant departure from traditional blockchain scaling models, as exemplified by early projects like Bitcoin and Ethereum. The flexibility and efficiency inherent in Avalanche's subnet architecture have set a new standard in blockchain technology, enabling developers to create customized blockchains that cater to specific needs and applications.
The transition to Elastic Subnets, as marked by the Banff upgrade, further enhances the autonomy and versatility of the Avalanche platform. This feature democratizes the validation process and aligns the interests of validators with their respective subnets, fostering a more inclusive and secure blockchain environment. Additionally, the Movement Subnet, with its integration of the Move Virtual Machine, brings a new dimension of security, throughput, and interoperability, positioning Avalanche as a preferred platform for developers and users alike.
The Astra Proposal, aiming to streamline the complexities of launching and securing subnets, represents another leap forward in making Avalanche's technology more accessible and efficient. By reducing the barriers to entry for validators and introducing a rent-based system, Avalanche is paving the way for a more dynamic and inclusive blockchain ecosystem.
The surge in transaction volumes and token burns on the Avalanche network highlights the growing acceptance and utility of the platform. The increasing popularity of inscription-based transactions and the network's ability to maintain uptime under high demand are testaments to Avalanche's scalability and robustness.
Institutional adoption, as evidenced by the engagement of global entities like Citi and JP Morgan, further validates Avalanche's potential to revolutionize traditional financial systems. The integration of real-world assets and the focus on compliance with KYC and AML standards demonstrate Avalanche's commitment to bridging the gap between traditional finance and blockchain technology.
Finally, the developments in Avalanche's tools, including the transition to Core Stake and the enhancement of Snowtrace Multichain, reflect the platform's continuous evolution and dedication to improving user experience and functionality.
Overall, Avalanche's subnet technology and its ongoing innovations present a compelling narrative of growth, adaptation, and potential. As the blockchain ecosystem continues to evolve, Avalanche's unique approach to scalability, security, and interoperability positions it as a leader in the drive toward a more integrated, efficient, and inclusive digital future.
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.
