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DeFi Decrypted: Avalanche and AVAX explained

DeFi Decrypted: Avalanche and AVAX explained

Explainers DeFi

16 Jul 2021

Created by Ava Labs, Avalanche is a platform for creating blockchain networks and dApps. It was created to overtake Ethereum to become the most widely used smart contract platform in DeFi, joining the ranks of many other would-be Ethereum Killers such as Cardano, Polkadot, Solana, and Binance Smart Chain.

Avalanche seeks to compete with Ethereum, boasting greater scalability with a transaction throughput of 4,500 transactions per second (TPS) compared to Ethereum’s 14 TPS. Avalanche claims that its consensus protocol achieves high transaction speeds, quick finality, and energy efficiency without compromising security or decentralization.

Since the mainnet launch in September 2020, a number DeFi projects have integrated with Avalanche including SushiSwap, Reef, Securitize, TrueUSD, Pangolin, Chain Link. To make it easier for users with assets in Ethereum-based DeFi products, Avalanche is building a bridge to Ethereum which will allow users to transfer assets between the two blockchains.

On the open, programmable platform developers can create fast, low cost, Solidity-compatible dApps that confirm transactions instantly and process thousands of transactions per second, far beyond what most other decentralized blockchain platforms can achieve today. You can also launch customized blockchains, both private and public, that fit specific application needs and build your own virtual machine dictating exactly how the blockchain should operate.

The benefits of Avalanche

Even with the recent correction, Ethereum-based DeFi is still prohibitively expensive for most users. A simple swap can come at a double digit cost, and during sudden gas spikes transaction can even fail which means the transaction is not executed but the user does need to pay the fee.

This is exactly what the new and improved protocols like Solana and Polkadot are solving for, and now Avalanche is part of this dynamic as well. The Avalanche-Ethereum Bridge represents a step towards migrating Ethereum's slow and costly DeFi infrastructure to the significantly faster and cheaper Avalanche network. Transaction fees on Avalanche are rarely more than a few cents, while even complicated computations cost in the single digit dollar range to execute, and are significantly faster.

The low cost of transactions on Avalanche means that smaller trades are more financially viable, opening up the DeFi ecosystem to everyone everywhere, which is what DeFi was all about in the first place. Plus, the faster transaction rate and higher throughput of the Avalanche network opens the door to minimal price slippage and instant trades, bringing the experience of trading on DEXs closer to that of their centralized counterparts.

The AVAX Token

After raising $18M from investment firms like Polychain Capital and Andreeesen Horowitz, Avalanche managed to raise an additional $42M in just a couple of hours with the public launch of its newly minted AVAX token.

The native Avalanche token has a capped supply of 720 million, and is used as both a governance tool as well as for paying network transaction fees. The genesis block contained half the supply of AVAX, with the other half scheduled for release in line with an emission curve detailed in the whitepaper. The AVAX release rate can be changed by community consensus, but the supply cannot be changed.

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