Welcome to Part 2 of my Avalanche series. Here’s a link to Part 1 and my Ethereum gas fees article. Not necessary, but reading both of my previous articles will help you understand Part 2 better.
Before diving into Avalanche, I’d like to highlight a few real world cases of Ethereum’s high gas fees. It’ll serve as a reminder of why gas fees matter.
Buying an NFT on OpenSea will cost you over $200 in gas fees.
Current gas fees to trade on Uniswap V2 is over $100.
Swapping stablecoins on Curve right now will cost you $80.
In all scenarios, gas fees will materially affect the cost of investing in crypto. It effectively pushes up any crypto investment’s cost basis. When looking at trading cryptocurrencies, gas fees will eat up your capital base, capping your potential gains. Unless you’re a crypto whale, using Ethereum as your main crypto exchange asset is increasingly out of reach.
Thinking about the incremental new crypto user, would they want to start on Ethereum?
Sure, the Ethereum ecosystem has a lot of DApps and investable opportunities, but the triple and double digit gas fees will be a hard pill to swallow (repeatedly). Instead, I believe new users will increasingly look at other Layer 1 chains -- why pay Ethereum gas fees when I can get similar experiences for less?
That’s where Avalanche comes in. The competing Layer 1 protocol has a scalable blockchain infrastructure to ensure gas fees stay low while transactions per second (TPS) can be incrementally added. The scalability comes from two parts: first, the three different chains that comprise the Avalanche protocol (X, C, P) and second, subnets.
Avalanche operates with a Primary Network that secures the three chains. The Primary Network is the default subnet for everything that happens in Avalanche. Each of the three chains run on the Primary Network and is specialized -- The C-Chain is EVM-compatible and provides smart contract features; the X-Chain creates and transacts Avalanche tokens (AVAX); and the P-Chain is for coordinating and tracking validators and subnets.
The modular approach of having three different chains is to ensure one chain does not become the bottleneck. Today, many Layer 1 protocols attempt to have a single mainnet that does it all -- process transactions, store data, and provide consensus. Scalability rapidly becomes an issue (e.g. Ethereum) or often requires centralization at the outset to ensure high TPS and low gas fees (e.g. Binance Smart Chain, Ethereum Layer 2 rollups, Ronin). Avalanche, with specialized chains that comprise Layer 1, ensures surges in transactions do not dramatically slow down the mainnet nor increase gas fees exponentially.
Now, you might point out that I noted in Part 1 that Avalanche has a TPS of 4,500. That’s far lower than what Solana offers (50,000 TPS) and doesn’t even come close to what TradFi companies can process (65,000 TPS). You’re right, one instance of Avalanche is not enough. That’s where subnets come in.
Subnets can be new instances of Avalanche’s blockchain. Think of it like a Kubernetes container -- they can be spun up quickly and deployed on an as-needed basis. Subnets can run in parallel to stack TPS (e.g. two subnets equal 9,000 TPS) and spin up more instances of subnets on top of itself, like a Russian nested doll. There’s a lot more subnets can do but for this article, subnets are essentially a native hosting environment that can be spun up whenever to add capacity.
For more crypto native folks, subnets are a horizontal scaling solution. The P-Chain serves as the communication layer between all subnets to ensure consensus and validation. All of this is native to Avalanche and are core features to future proof the chain.
With subnets, Avalanche doesn’t have a theoretical limit on TPS; it’s infinite. As transaction volume increases over time, Avalanche can incrementally add TPS capacity with more subnets. The main takeaway is that subnets ensure TPS can scale quickly to match transaction demands while keeping gas fees nominal.
Finally, subnets are also secured by validators on the Primary Network. To create new subnets, the subnet creator has to either already be a validator or become a validator by staking 2,000 AVAX tokens. As a result, each new subnet can create more decentralization, which avoids the centralization required of many Layer 2 scaling solutions on Ethereum.
Combined, the three chains and subnets ensure Avalanche is able to compound network effects. Scalability is a critical differentiator in crypto, and Avalanche has the foundation required to maintain usability and offer affordable transaction fees with each new incremental user. Combined with the team’s business acumen, I believe Avalanche has the potential to become a top five coin.
To wrap, here’s a quick diagram of The Avalanche Network from the Avalanche Foundation that covers the Primary Network and the three chains. I hope the visualization highlights Avalanche’s scalability.
Note: Avalanche has had record growth in transactions and gas fees have spiked to upwards of $20 on occasion as a result. I know I know, this directly refutes my point about Avalanche’s scalability. I’m not worried though, I believe the Avalanche Foundation and Ava Labs will execute and ship code to reduce gas fees. Here’s a recent tweet by a member of Ava Labs that discusses what the team is doing to manage the surge. Here’s Avalanche’s medium post this week (November 22nd) on Apricot Five, a protocol upgrade to improve transaction batching, inter-chain operability, and fee optimization. Overall, I’m confident in the team’s ability to execute.
Thank you for reading the second part of my Avalanche series. Now that I’ve laid out Avalanche’s technical differentiation at a high level, future parts of this series will get more strategic and feature more of my personal takes on how the protocol could evolve in the future. Look out for Part 3 in the coming weeks.
Disclaimer: I hold investments in Solana and Avalanche, both crypto projects mentioned in this article. I also hold investments in specific DApps in the Avalanche ecosystem. This is not investment advice.