Deep Dive on Avalanche and Subnets
Avalanche’s AVAX token was one of the standout cryptocurrencies of 2021. Their traction and growth have been impressive, and they are currently within the top 10 cryptocurrencies in terms of market capitalization. As of writing, it is the 4th platform ranked by DeFi total locked-in value (TVL), with more than 267m AVAX staked. This leads to the question — how is Avalanche different from the other layer 1 blockchains? We believe what truly sets them apart from other tokens is their use of subnets to scale.
Introduction to Avalanche
Before the deep dive on subnets, we have to know about their basic infrastructure to understand how subnets can come into the picture. Avalanche is an open-source platform that features highly scalable smart contracts. Avalanche’s infrastructure is based on these built-in blockchains: Exchange Chain (X-Chain), Platform Chain (P-Chain) and Contract Chain (C-Chain). All three blockchains are verified and secured by the Primary Network. Subnets are created a layer below these three blockchains depending on the functionality required.
X-Chain is a decentralized platform that enables people to create and trade digital smart assets in addition to the native token AVAX. P-Chain is responsible for the management of validators. Each validator needs to deposit at least 2,000 AVAX tokens in P-Chain to be qualified. C-Chain is a chain for smart contract applications and is an instance of EVM, which means that developers can easily transform their applications on the Ethereum main net to Avalanche
Various DApps are flourishing on the Avalanche C-Chain due to its high throughput, low transaction fee, and EVM compatibility. For example, Aave and Benqi are largest non-custodial liquidity market protocols which enable users to effortlessly lend, borrow, and earn interest with their cryptocurrency assets; Trader Joe and Curve are major DEXs for users to trade on chain; Ribbon Finance and Struct Finance provide customize interest rate products and superior structured products based on interest rate instruments and options so that retail users could gain excess return in a more convenient way.
What are Subnets?
Subnets were essentially conceptualized by Avalanche as a solution to today’s problems around scaling blockchains. We need to first understand the current bottlenecks with scaling to appreciate how subnets have redefined the possibilities of scaling. There are broadly two forms of scaling — horizontal and vertical. Vertical scaling entails adding more power and memory to a system’s unit to process transactions faster. The main problem with vertical scaling is the cost factor as it will be expensive to run a full node resulting in less decentralization. Horizontal scaling entails executing multiple blockchains in parallel. For instance, you can run two 100 TPS blockchains in parallel, effectively giving you a 200 TPS blockchain.
Subnets is Avalanche’s answer to horizontal scaling. Subnets are a way by which anyone can start a new blockchain underneath the Avalanche umbrella. Think of subnets as individual blockchains within a blockchain. Membership is managed by a dynamic set of validators within their own subnets achieving consensus with the primary Avalanche network. Subnets are isolated from the rest of the network and they can decide their own rules. This is an exciting development because (1) subnets do not have to vie for network resources with other subnets (think faster transactions and lower fees) and (2) it highlights the extent of how customizable Avalanche is.
Why faster transactions?
Subnets do not share network load with the main-net which equates to lower latency and higher TPS that runs in parallel with each other. Theoretically, there is no limit to the number of subnets one can create as long as there are sufficient validators.
Why lower transaction fees?
Transaction fees are lower because the multitude of subnets and their validators result in less congestion compared to a blockchain that runs all activities on one sole network.
How customizable is Avalanche?
Subnets can choose which virtual machines to run (AVM, EVM or create your own), decide their fee structure, validator requirements, which programming language to use and even who has access to the subnet. Protocols can customize their rules according to their needs.
What is the difference between L2s and Subnets since they are both horizontal scaling?
Notably, interoperability between subnets can be completed directly with each other without having to go through a beacon / relay chain. This means assets can freely move between subnets. The main difference is that L2s is not interoperable and there is fragmentation of liquidity. For instance, liquidity is split across Ethereum L1 and L2 solutions such as Arbitrium or ZKSync. Assets cannot be easily transferred between different L2s — this makes it difficult for an ecosystem of DeFi protocols to exist together
Similar to operating systems, EVMs will continue to upgrade continuously. This is a potential limitation for L2s as they are inextricably tied to their primary EVMs unlike the flexibility that Avalanche offers.
Avalanche’s Unique Consensus Mechanism
Beyond subnets, Avalanche also has an incredible time-to-finality which can be attributed to their unique consensus mechanism.
Avalanche’s consensus mechanism essentially combines the benefits of traditional consensus and Nakamoto consensus. Traditional consensus ensures that all correct nodes could reach the same agreements through all-to-all communication, but this is only efficient if there is a small number of nodes. Nakamoto Consensus is the model that Bitcoin uses — nodes participate in solving cryptographic puzzles in order to validate new information and add new blocks to the end of the chain. The longest chain is deemed the most valid since it has the largest amount of computational resources dedicated to it. Nakamoto Consensus is a natural fit for open, permissionless systems compared with traditional consensus. However, this only allows Bitcoin to provide a probabilistic safety guarantee and operate at only a few transactions per second with high energy usage.
The Avalanche team introduced a new family of consensus protocols called Snow which use repeated subsampling to prompt correct nodes to reach a consensus quickly — “instead of all-to-all voting, these protocols randomly select a handful of participants and ask about the state of the world”
Potential Use Cases For Subnets
DeFi: In addition to the comparatively low transaction fees which is an attractive proposition for small traders and more retail investors, the high customizability is also an advantage which DeFi protocols can utilize to build their own subnets. Protocols can customize their subnets’ rules and functions based on their specific needs. For example, Ava Labs is collaborating with the Aave Companies, Golden Tree Asset Management, Wintermute, Jump Crypto, Valkyrie, Securitize and others to build a subnet with native Know Your Customer (KYC) functionality, targeting institutional DeFi. All DeFi apps hosted on this subnet could utilize this KYC functionality, removing a major regulatory roadblock to institutional adoption and enabling regulated institutions to explore the fast-growing decentralized finance space.
GameFi: Subnets could be a great choice for GameFi protocols as they will require their own dedicated blockspace instead of having to exist on the same chain as other protocols. Gaming protocols naturally require a lot of network capacity and by existing on subnets, they are not required to share traffic with other resource intensive DApps. Therefore, both new games and games that existed on other blockchains, such as Shrapnel, Crabada, DeFi Kingdoms, Imperium Empires and Heroes Chained, are moving to subnets.
Shrapnel is the world’s first blockchain-enabled moddable AAA first-person shooter game developed by experienced experts who have worked on some of the biggest titles in gaming industry — Halo, Call of Duty, Star Wars, etc. This FPS game has decided to launch on Avalanche subnet due to the aforementioned benefits of scaling a gaming project. The high throughput and low transaction fee enable Shrapnel to provide players with low-latency, seamless, glitch-free gameplay and support a growing number of players in the future. Shrapnel also offers a powerful set of creation tools so that players could use them to create weapon skins or maps and sell them for profit. Subnets allow projects define their own parameters and fee structure, providing Shrapnel a high degree of customization and flexibility to capture a diversity of demand. For example, Shrapnel is currently planning to use their own token for gas fees instead of AVAX which allows them to function on almost akin to a layer 1 protocol. There is also potential to allow other game developers to build on top of their subnet — think of it as a L1 as a service.
The example of Defi Kingdom can also illustrate the extent of how customizable and flexible subnets can be on Avalanche. DeFi Kingdom, a popular GameFi DApp on Harmony, launched its DeFi Kingdoms Blockchain (DFK Chain) on Avalanche as a subnet. DFK Chain is an EVM compatible blockchain built on Avalanche, it chose to use DeFi Kingdoms governance token JEWEL as gas fuel instead of using the AVAX token. This approach has two benefits: first, it increases demand for their own JEWEL tokens; and second, it simplifies the transaction experience, making it unnecessary for users to hold other tokens in order to pay for Gas.
According to official figures, the total bridge volume of the DFK Chain is over 500 million, which is supported by the cross-chain liquidity network Synapse Protocol. Since subnets have flexible room for customization, DFK Chain has also developed their own fee structure below for the collected gas.
1. 20% is allocated to validators: to encourage more validators to participate in network validation.
2. 50% is burned: This burning mechanism will reduce the supply of JEWEL while increasing the token value.
3. 25% will be sent to the Quest Fund to reward their community and players.
Such a customized fee structure is difficult to implement in other L1 blockchains.
They have more than one million members growing across Twitter, Discord, Reddit, etc with a great mix of developers and users keen on the potential use cases of Avalanche.
The Avalanche Foundation is now incentivizing developers to capitalize on the potential of subnets with a new $290 million fund. The program, which is dubbed the “Multiverse,” is designed to provide financial support and incentives for developers to create and run subnets for their DApps on Avalanche.
They recently organized a successful in-person conference — Avalanche Summit 2022 in Barcelona which drew many in-person/virtual community members as well as industry experts to learn more about the potential of subnets.
Avalanche’s application-specific subnets offer an attractive pragmatic and customizable way of scaling. The unique characteristics of subnets will offer a unique value proposition to creators, developers and users when it comes to L1 blockchain. Other than subnets, the impressive time-to-finality, fast transaction speed, and low transaction fees propel Avalanche to stand out as a top player in the ecosystem. We are thrilled that Avalanche has redefined the sheer possibilities in this space and are excited for what is to come in the near future.