I’d like to briefly summarize one of the most important crypto concepts: legitimacy. Vitalik Buterin, founder of Ethereum, defines legitimacy as the following:
“Legitimacy is a pattern of higher-order acceptance. An outcome in some social context is legitimate if the people in that social context broadly accept and play their part in enacting that outcome, and each individual person does so because they expect everyone else to do the same.”
Vitalik further elaborates that legitimacy and coordination go hand-in-hand. For example, the American dual party political system is a form of coordination. Because everyone is expected to join either party, nearly all individuals become a Republican or Democrat. Since most of the country splits along the two parties, modern presidents come from either parties; as a result, legitimacy is conferred. One could instead join the Green Party but to do so leads to isolation and no chance of winning any major office (thus, considered not legitimate). Coordination is game theory and with enough iteration, it manifests legitimacy.
In crypto, coordination is paramount: not only does it underpin the consensus mechanism but it also attracts users and developers -- which Layer 1 protocol to build on, which DApps are important, and which cryptocurrency serves as the on-ramp for new users. Groups work together to adopt and enrich specific projects, which attracts incremental new users and developers.
Coordination is a crucial moat in crypto. Without it, projects are short-lived. Think of all the astronomical APY new projects use to attract TVL. The artificially inflated APY primary attracts yield mercenaries that will rotate out as soon as more attractive APY appears. Instead, the cyclical nature of crypto prices exhibit coordination driven legitimacy. Every crypto price boom represents a spontaneous coordinated rush of new crypto users; meanwhile, the eventual price crash represents transient speculators leaving. The cumulative effect of each cycle is net new users that increase crypto user density.
Looking at crypto legitimacy today, Ethereum is the top Layer 1 smart contract protocol. The chain’s scale has given it the ability to dominate crypto discourse while enriching believers along the way. With their massive TVL and numerous DeFi primitives, new crypto users and Web 3 developers are pulled into Ethereum’s gravity.
As a result, how does a Layer 1 protocol compete against Ethereum? How do you build legitimacy? How does a new chain crank their flywheel?
Avalanche provides one template. The people behind the protocol have carefully sequenced their capital raises and ecosystem announcements to bootstrap legitimacy. By accumulating credibility early, Avalanche has successfully kickstarted network effects.
First, Avalanche raised multiple rounds of capital from top tier VC firms and crypto native funds. In May 2019, the first $6M round was raised from blue chip mainstream investors -- A16z and Initialized Capital. The next two rounds of capital came from well regarded crypto native investors. The $12M round included crypto native funds like Galaxy Digital, Polychain, and Dragonfly. Most recently, the $230M round in September 2021 included existing crypto native investors (Polychain, Dragonfly) and new crypto native funds (Three Arrows).
Raising capital from highly reputable investors provides credibility, a form of legitimacy. Like any new startup, Avalanche was trying to compete against established stalwarts. The nascent Layer 1 protocol was a catch-22: it needed credibility to scale but couldn’t build credibility without scale. Thus, “buying” credibility from investors in exchange for tokens was necessary.
Avalanche immediately used the capital to attract users. They shrewdly matched the massive $230M round with the $180M Rush program to attract Ethereum DeFi users to Avalanche. The numbers tell a complete story: TVL increased from $300M before Rush to $12.8B on October 31st (day before announcing Blizzard). The TVL increase represents a ~69x return in less than two months. Avalanche used Rush to tap into Ethereum’s network effects to bootstrap their own network. By attracting existing crypto users, Avalanche created legitimacy by participation: “If people participate in choosing an outcome, they are more likely to consider it legitimate” -- Vitalik Buterin.
But users alone do not create protocol legitimacy. Long-term legitimacy comes from developers natively building Avalanche apps, not simply porting over existing primitives with EVM compatibility. Developer adoption is needed to solidify participation legitimacy.
The Avalanche Foundation clearly saw the opportunity: they launched the Blizzard program to facilitate developer density. Announced on November 1st, Blizzard is a $200M ecosystem fund to back native Avalanche DApps and projects. Going beyond just capital, the program also offers institutional support by providing “equity investments, token purchases, and various forms of technology, business development and ecosystem integration support”. The message is clear to developers: come to Avalanche, we have the users that will use your product, the institutional capital to back you, and the expertise to help you succeed.
Ultimately, legitimacy matters because it allows crypto projects to cross the chasm. Projects typically launch with fanfare but only a few achieve breakout success. Most fizzle out during the long march of achieving sustainable TVL. Legitimacy ensures projects have enough influence to encourage coordination (e.g. build on Ethereum), survive near-fatal mistakes (e.g. Solana consensus going down for a day), and convince users to stay despite dysfunction (e.g. SushiSwap). Eventually, legitimacy translates into trust and patience from the community that rewards building for the long-term even if there is short-term volatility.
Applying legitimacy back to Avalanche, the project has successfully crossed the early-stage chasm by carefully managing sources and uses of capital. Avalanche is now the #5 chain by TVL, and the number one Avalanche DEX, Trader Joe, is posting record trading volume. Trust is taking hold – users stayed despite gas fee spikes before Apricot 5, network utilization is steadily increasing, and transaction volume marches upward. The question is now whether the Avalanche community has the patience to cross the ecosystem building chasm.
Thank you for reading Avalanche Part 3! While not as technical as the first two parts, the purpose of Part 3 is to share why I’m bullish on Avalanche from a strategy perspective. The topic of legitimacy is conceptual so I welcome any and all feedback – you can reach me via Twitter DMs @dicekay__ (two underscores after the y).
Disclaimer: I hold investments in Avalanche tokens and Avalanche specific projects. This is not investment advice.