Can Avalanche Take The Crypto-World By A Storm?

A couple of weeks ago Avalanche (AVAX) took the crypto world by storm by hitting new price highs. Avalanche is an open, programmable smart contracts platform for decentralized applications. It claims to allow for building fast, low cost, Solidity-compatible DApps (decentralized applications) to launch Ethereum DApps which can confirm transactions instantly and process thousands of transactions per second. While smart contract platforms have grown in the recent past, AVAX claims to offer high speeds paired with low costs; essentially tackling the pain points many Ethereum (ETH) blockchain users face. Arguably the many advantages AVAX offers is reflected in its price action. For instance, AVAX's announcement of a $180 million DeFi incentive program in September saw the prices perk up.

Figure: Avalanche (AVAX) Price Action From 2020-2021

Overall AVAX prices have been on an upswing throughout 2021 (June-Aug 2021 price decline notwithstanding) compared to 2020. As of September 2021, The Avalanche Foundation completed a $230 million private sale of AVAX tokens to Polychain and Three Arrows Capital along with some other crypto funds. However, price action and institutional interests are not the only reason to be bullish on AVAX. The cryptocurrency offers robust fundamentals which are worth keeping in mind.

Reasons To Be Bullish on AVAX Fundamentals

While cryptocurrencies don't have fundamentals the way stocks do, the crypto ecosystem in question, its practical applications and user engagement act as a proxy for fundamentals. For instance, the total Github commits by Avalanche increased by more than 700% over the past year, the network dominates layer-one solutions. Additionally, easy transfers of assets between Avalanche and Ethereum blockchains are facilitated by Avalanche Bridge. The equivalent of $1.3 billion in crypto assets have been transferred using this bridge. The Avalanche project offers the benefit of users to access the benefits of different networks by, for example, deploying assets hosted on one blockchain to decentralized applications on another. For instance, Avalanche’s smart contract chain executes Ethereum Virtual Machine contracts, which means users already active on the Ethereum blockchain can reuse their codebase and Ethereum Dapps can be ported to Avalanche. Avalanche consensus combines the benefits of Nakamoto consensus (robustness, scale, decentralization) and all the benefits of Classical consensus (speed, quick finality, and energy efficiency).

AVAX made a successful foray into the non-fungible token (NFT) space by partnering with the legacy trading cards and collectables company Topps and launched the first collection featuring highlights from the German football league’s 2020–2021 season. Now in case, you are wondering how many different blockchains are needed for NFTs, there is more to AVAX than cards and cyber cats. What caught my fancy is that AVAX has been built with serving financial markets in mind. It has native support for easily creating and trading digital smart financial assets along with the ability to set trading rules to help meet regulatory needs. The digital assets could represent a variety of financial instruments such as equities, bonds, debt or fractionalized real estate. The Avalanche ecosystem is also making forays into Private Securities, ILOs, DEX’s, Synthetics, Stablecoins, Prediction Markets. Offering an ecosystem to build digital assets targeting the traditional finance market gives AVAX a potential toehold in a multi-trillion dollar industry. I can see myself happily trading fractionalised Apple tokens on my phone. Given that tokenized stocks are already available on Bittrex, it would be interesting to see what breakthroughs AVAX can make in this sphere. Additionally, AVAX is analogous to Bitcoin in the sense its supply is limited; this creates scarcity and its expected AVAX will not suffer from consistent dilution through inflation like other platforms. This scarcity could also yield good staking rewards.

Reasons To Be Wary

The Avalanche ecosystem is trying to solve a valid problem; the scalability of the older blockchains and make the deployment of DAppas faster and cheaper. However, there is no denying that Ethereum is the market leader for DApps, smart contracts and NFTs. Many big-ticket projects and NFTs have been deployed via the ETH blockchain. So the million dollar question if if AVAX or any other blockchain can actually make tangible inroads into ETH's strongholds. This is something only time will tell. In February 2021, AVAX was crippled by malfunctions arising as a consequence of high volume of transactions. Such malfunctions could erode confidence. Avalanche, from inception to now, has had a ratio of about 70%-80% of all coins being staked. This means that early comers have a very strong hold on the project, and it's at the expense of liquidity and chain democracy. While lower transaction costs are one of AVAX's claims to fame, in its 2021 phase-one Apricot upgrade, the projected only decreased the C-Chain transaction fees by 50%, and they decided not to decrease the X-Chain or P-Chain transaction fees at all. This could cause misgivings for those searching for the lowest possible transaction costs. Going forwards, Avalanche will benefit from clearer communication and smoother operations. In the meantime, I am keeping my eyes peeled for this one.