The Investor’s Guide to Avalanche (AVAX) – Blockworks


What is AVAX?

Avalanche (AVAX) is a layer-1 smart contract platform built by Ava Labs, which is headquartered in Singapore. It is a proprietary proof-of-stake blockchain that is Ethereum-compatible. Developers can build and deploy decentralized applications (dApps) on the platform.

The Avalanche network is regulated by its primary network, which validates its three subnets:

  1. The Exchange Chain (X-Chain), used to create and exchange tokens, which is an instance of the Avalanche Virtual Machine (AVM)
  2. The Platform Chain (P-Chain), a metadata blockchain that coordinates validators to create/track subnets
  3. The Contract Chain (C-Chain), an instance of the Ethereum Virtual Machine (EVM) which creates and deploys smart contracts

These subnets enable the Avalanche network to offer a wide range of features without sacrificing speed, as each subchain only needs to perform a single set of operations specific to its purpose. This speed and variety make it an attractive platform for developers looking to deploy custom blockchains, which they can do on the P-Chain.

The case for AVAX

Tokenomics

AVAX is the primary token of the Avalanche network, though developers can issue their own tokens on its custom blockchains. The max supply of AVAX is 720 million tokens, half of which were created with the genesis block.

However, similar to the Ethereum network, fees in Avalanche are burned, progressively deflating the token supply. 

As a proof-of-stake platform, Avalanche relies on validators that stake AVAX to earn block rewards. Validators can earn up to 11% APY on staked AVAX, with the average yearly return currently around 9.75%.

Core projects

Ava Labs and the Avalanche Foundation are the primary organizations associated with the Avalanche network. Ava Labs is responsible for internal research and development, especially the development of the Avalanche network. 

The Avalanche Foundation handles economic prospects, such as the Blizzard Fund, which supports third-party innovation on the Avalanche network.

The foundation also has a startup accelerator, Avalanche-X, which offers blockchain developers funding for decentralized finance (DeFi) and community projects.

The core aim of the Avalanche network is to be faster and cheaper than other layer-1 smart contract protocols. Some hope meeting this goal would give it an edge in the battle for dominance against the slower Ethereum network, which is known to suffer from gas fees upwards of $100 per transaction in some cases.

Core team

Headquartered in Singapore, Avalanche’s Ava Labs has offices in New York City and Miami, and an international core team comprising developers, economists and legal experts. Members of the Avalanche team have experience from companies and organizations like Microsoft, Google, NASA and other noteworthy institutions. 

In September 2021, Avalanche held a token sale to raise funds for development, which yielded $230 million and garnered support from Polychain and Three Arrows Capital.

Layer-2

As an Ethereum-compatible layer-1 smart contract platform, Avalanche is capable of hosting just about any Web3 protocol.

Numerous popular layer-2 projects built on Avalanche across a wide range of use cases:

  1. Decentralized exchanges — Trader Joe, SushiSwap, ParaSwap
  2. NFT marketplaces — Topps NFTs, Curate, Niftyx Protocol 
  3. Borrowing/lending — Aave, Curve, Nexo
  4. Optimized yield — Yield, Snowball, Yield Yak
  5. Portfolio management — DeBank, Ape Board, Markr

For a full list of layer-2 platforms built on or integrated with Avalanche, explore their ecosystem page.

How to invest in AVAX

Step 1 – Buy AVAX

As with all layer-1s, the most current opportunities to invest in Avalanche start with buying AVAX tokens. That is unless you find a DeFi index fund with exposure to Avalanche or its layer-2s, which is effectively asking someone else to hold AVAX for you.

If you want to buy AVAX, you can do so on centralized exchanges such as Coinbase, Kraken and Gemini, as well as decentralized exchanges like Trader Joe, Pangolin and Rubic Exchange.

Step 2 – Choose your use case

Once you’ve bought AVAX, you can hold it in hopes that the token value appreciates. Alternatively, you can choose to put your AVAX to work earning yield. The drawback is that most, if not all, yield farming options have some degree of wait time before your tokens are returned to you, meaning you could miss an opportunity to sell if you can’t pull your tokens out in time.

Staking

The most common way to earn yield on AVAX is to become a validator for the Avalanche network. To do this, stake your AVAX on the platform. Your share of block rewards as a validator depends on how many tokens are currently staked but currently averages about 9.75% annually.

Liquidity provision

Another popular yield farming method is to supply your AVAX as liquidity for a cryptocurrency exchange. One such layer-2 method built on Avalanche is the Pangolin Exchange. Liquidity providers on Pangolin earn at least 0.25% of all trades on the deposited token pair proportional to the share of the pool.

Be aware, however, that when you provide liquidity for an exchange, you may experience impermanent loss. Impermanent loss is a phenomenon that occurs when you supply two-sided liquidity and withdraw it later, but you don’t receive an equal ratio back and suffer a loss of value.

For example, if you provide $1,000 worth of ETH and 1,000 USDT as liquidity in a decentralized exchange (DEX), and other users sell their ETH to buy your USDT, when you withdraw your liquidity you will get back more ETH than USDT, even though you originally supplied equal parts. This is to keep liquidity pools balanced against trades. However, if the value of ETH has decreased since you originally supplied liquidity, then the value of what you’ve withdrawn is now less than the original $2000 you provided. 

This is considered an impermanent loss because the user can leave their provision within the DEX until the ratio evens out again.

Invest more than just money

If you’re feeling entrepreneurial, you may want to take the far less common investing route with Avalanche. Alone or with a team of developers, you can build a dApp, create a token protocol or integrate an exchange on the Avalanche platform.  

Final considerations

As always, consider your desired level of involvement and your appetite for risk.

There is no such thing as a good investment because every person has different interests, resources and skillsets. However, there are bad investments. A bad investment is easy to spot — it’s the person that asks you if they should invest in (insert asset here) because they heard about it on the news.

When a project speaks to your experience, interests or beliefs, it’s much easier to dive deeper and comprehend it intimately. Therefore, it becomes a much safer investment. Emotional investing often leads to ruin, but passionate investing can change lives and, often, portfolios for the better.

Resources and further reading

Avalanche documentation

Avalanche Platform Whitepaper

Avalanche Consensus Protocol Whitepaper

Avalanche Native Token Dynamics

A Classification Framework for Stablecoin Designs

Recent news

Voyager Expands AVAX, NFT, DeFi Offerings with Avalanche Integration

Avalanche Launches $200M Fund to Support Ecosystem Growth

Roll Raises $10M, Merkle Science Closed $5.75M and Avalanche Touts Token Sale

Avalanche Closes $230M Token Sale Backed by Three Arrows Capital, Polychain

Get educated. Check out The Investor’s Guide to BitcoinThe Investor’s Guide to NFTsThe Investor’s Guide to DeFiThe Investor’s Guide to the Metaverse or The Investor’s Guide to Music NFTs.

Note: This Investor’s Guide was not sponsored. The writer is not invested in Avalanche, Ava Labs, their subsidiaries or any projects mentioned in this guide at the time of writing and publishing. This is not an endorsement of any project, and should not be interpreted as investment advice. This Guide is for educational purposes only.


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  • Aaron Ahmadi

    Blockworks

    Content Marketing Manager

    Aaron Ahmadi is a Colorado-based writer and content marketer. Before joining the Blockworks team, he served as editor-in-chief for a privacy-focused crypto exchange, as well as in crypto advisory roles for the Vietnamese government.

    He co-authors the daily Blockworks newsletter with Byron Gilliam and writes the Blockworks Investor’s Guides.



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