PYMNTS Blockchain Series: What is Avalanche?

Throughout this series of articles, we’re looking at the top blockchains in crypto to help you make sense of the alphabet soup of so-called “altcoins” that exists beyond that of Bitcoin’s BTC and Ethereum’s ETH.

We will look at what they are, how they work, what they do, and their pros and cons.

You’ll come out of this series not only with a better sense of what cryptocurrency is all about, but you’ll also understand why the way a token works — the way its blockchain processes transactions — is key to its success or failure as a digital asset.

PYMNTS Blockchain Series: What is Solana?

PYMNTS Blockchain Series: What is Cardano?

So, what is Avalanche?

Avalanche is one of the Ethereum Killer blockchains seeking to steal DeFi, NFT and really any other type of blockchain project from the No. 2 blockchain. Like Ethereum, it is a smart contract platform on which the self-executing contracts and decentralized apps (DApps) that are the building blocks of all crypto and blockchain projects and protocols run.

More here: PYMNTS DeFi Series: What Is a Smart Contract?

With a nearly $22 billion market capitalization as of this writing, it is the No. 12 blockchain. And like a number of the top Ethereum Killers, it has an eminent creator: Emin Gün Sirer, an associate professor of computer science at Cornell University, where he runs the IC3 – The Initiative for Cryptocurrencies & Contracts initiative, aimed at advancing the science and applications of blockchain.

Sirer is also the founder and CEO of AVA Labs, which developed the decentralized, open-source blockchain. Note that despite the company’s name, its native token goes by the exchange symbol AVAX. (The Travala travel booking platform beat Sirer to the AVA token).

Avalanche currently offers a speed of 4,500 transactions per second, with the full, production-ready blockchain set to handle 20,000 TPS when work is done. If needed, a Layer 2 build adding another transaction processing layer on top of Avalanche could add orders of magnitude to that. (See the Cardano article linked above for more on this technology.)

The blockchain got a big vote of confidence in November, when Deloitte selected it as the host for its Close As You Go (CAYG) platform that lets “state and local government officials simplify and streamline disaster reimbursement applications to the Federal Emergency Management Agency (FEMA),” AVA Labs said in a statement.

CAYG “can play a critical role in helping these leaders be prepared to aggregate and validate the documentation necessary to demonstrate eligibility for funding and reduce the risk of adverse audit findings down the road,” said Alex Haseley, principal at Deloitte & Touche, at the time.

Finality and Security

There’s another statistic that Avalanche’s developers point out that is an important one in payments: one-second “time to finality.”

We’re going to side-track on this briefly, because it’s worth understanding, particularly in the payments industry.

Blockchains are immutable, meaning once transaction data is written onto it, that data cannot be changed. Everyone knows that, and when “everyone knows” something, it’s usually wrong — or at least not wholly right.

We’ve discussed the 51% attack elsewhere, but briefly, it’s a very difficult way to double-spend a cryptocurrency before its transactions are written onto a blockchain by taking control of more than half of the computer processing power being used to mine new blocks onto the blockchain.

You may also like: The 51% Attack: Crypto’s Double-Spending Achilles Heel

A 51% attack can roll back and change transactions before the block they are included on “achieves finality.” That takes more than just writing a new block.

The way all blockchains work is that each block has a code that ties it to the blocks before and after it. That code is created by “stamping it with the mathematic equivalent of a photograph of the block immediately preceding it and a timestamp” that establishes its place in the chain. This is then “hashed” to prove it is a valid block to be added to the blockchain.

Hashing is a mathematical way of transforming any set of data into a predictable format — a code that will always come out the same — but cannot be used to take that code and turn it back into data.

The thing is, security experts believe that for a block to be truly unaffected by a 51% attack, it needs at least six blocks behind it. (Some say more — the Kraken exchange requires 20 in many cases.) So, with a new Bitcoin block written onto its blockchain every 10 minutes, it will take an hour for the transactions in it to be finalized. Ethereum does this in a minute. Avalanche’s one second “time to finality” is brief enough not to matter at the point of sale, its developers argue.

Now back to the Avalanche blockchain.

Transacting Faster

The Avalanche blockchain is actually three blockchains working in concert.

The first is the Exchange Chain — known as “X” — on which crypto assets are created, transactions are made and recorded, and transaction fees are settled.

Second is the Contract Chain — known as “C” — on which the smart contracts run and the actual activity happens. This keeps them from slowing down the X Chain as it only records the results of the transaction rather than the details of what happened.

The third is the Platform Chain — known as “P” — on which subnets are created on demand by users. In essence, you create your own private blockchain. More to the point, it tracks the active subnets and coordinates validation.

See more: PYMNTS DeFi Series: What is Staking?

Avalanche is an environmentally friendly proof-of-stake, or PoS, blockchain, which uses validators rather than power-hungry, Bitcoin-style miners.

Read also: Can Proof-of-Stake Solve Crypto’s ESG Problem?

Another feature of Avalanche is that it is Ethereum compatible, and has a transaction bridge to the No. 2 blockchain. Its AVAX token, and any other tokens created on it by individual blockchain projects, use the Ethereum’s ERC-20 technical standards — by far the most common on blockchains built on Ethereum or its competitors.

An ERC-20 token is used for transactions. A different standard, ERC-721, is used for NFTs, for example. But both can run on Ethereum, Avalanche, and many other blockchains.