Messari: Avalanche third quarter ecological progress report
Compilation of the original text: Deep Tide TechFlow
Compilation of the original text: Deep Tide TechFlow
Introduction to Avalanche
The Avalanche network is a PoS smart contract platform that provides infrastructure for decentralized applications. Avalanche works by creating and implementing a new consensus algorithm, the"Avalanche Consensus", make yourself unique. After years of research, the Avalanche mainnet was launched in September 2020 and released a multi-chain framework using three chains as architecture: P-chain, X-chain and C-chain. Each chain plays a key and unique role in the Avalanche ecosystem while providing the same capabilities as a single network, often referred to as the main network.
The Avalanche consensus and mainnet is designed to support sovereign interconnected blockchains called subnetworks.
Subnets are part of the mainnet validators, running the same virtual machines (VMs), with their own rules.
Subnets enable different properties of reliability, efficiency, and data sovereignty. They provide the ability to create custom blockchains for different use cases, while isolating high-traffic applications from the congested activity of the mainnet.
The Narrative of the Third Quarter
Despite the general market downturn in the second quarter, Avalanche remains focused on realizing its vision of digitizing all assets, enhancing network capabilities, and scaling out through architectural design and subnetworks. It uses Core, the Web3 operating system, to improve user access.
performance analysis
performance analysis
Network and Financial Overview
The data used to assess quantitative aspects of the Avalanche network come from the main network, and more specifically, from the Avalanche C-chain.
Subnet activity is also considered with the C-chain, but is not listed in the datasheet, as each subnet has its own sovereign security, native token, and value accumulation mechanism. In contrast, C-Chain is currently the main value driver for AVAX.
Similar to Q2, Avalanche C-Chain saw a decline in network usage and financial performance, in addition to a slight increase in the market capitalization in circulation (i.e. network value).
While network value grew slightly (3.3%), usage and revenue generation declined sharply. Average daily transaction volume fell by 65.5%, and total revenue fell by 94.1% as transaction fees fell by 76.2%. From a valuation perspective, the relationship between network value and revenue (P/S) continues to reverse, rising from 379x to 665x.
Daily active addresses also continued to decline, with address activity averaging 38,000 per day, down from an average of 63,000 in Q2. Outside of C-Chain, the DeFi Kingdoms (DFK) and Crabada (Swimmer) subnets saw an upward trend in daily active addresses.
Address activity on the DFK and Swimmer subnets mirrors previous usage on the C-Chain.
Still, address activity on C-Chain is four times higher than it was a year ago. An increase in subnetwork activity indicates healthy subnetwork functionality.
Transaction activity on C-Chain declined more significantly than daily active address activity. Avalanche's average daily transaction volume fell to 186,000 transactions in the third quarter from 540,000 in the previous quarter. C-Chain daily transaction volume continues to decline as transaction activity shifts from C-Chain to subnets, especially DFK.
Previously, DFK and Crabada were large transaction and revenue drivers for C-Chain. These subnets now generate an average of 1.5 million transactions per day on their sovereign network. Overall, an average of more than 1.7 million transactions per day occurred on the Avalanche infrastructure during the third quarter, reaching an all-time high of 45 million total transactions in August. However, the shift of transactions from the C-Chain to individual subnets continues to put downward pressure on Avalanche transaction fees (by design) and substantial downward pressure on revenue.
Managing the relationship between security, transaction fees, revenue, and network value has been a balancing act for Avalanche since its inception.
Throughout 2021 and the first quarter of 2022, the network's average daily transaction fees fluctuate as network usage and financial metrics grow. Several Apricot Phase 5 releases and Avalanche Go (Apricot Phase 6) were implemented in Q3, which together contributed to lower average transaction fees.
Transaction fees on the main network drop even more, as subnets generate traffic on their own networks. This intent has always been and is part of Avalanche's ability to scale out. But as a result, total revenue has fallen as transaction fees have fallen.
Revenue remains a focus for many participants in the ecosystem, as Avalanche burns all revenue (transaction fees) from the network's circulating supply. In theory, this increases scarcity, creating value for all AVAX token holders.
Due to the burning mechanism, the growth or decline of C-chain revenue affects the market value of AVAX up or down. As demonstrated throughout last year, peaks and declines in daily revenue are accompanied by peaks and declines in fully diluted valuation (FDV). As the relationship between revenue and network value persists, C-Chain's network usage and revenue will continue to affect network value.
Subnets have clearly put downward pressure on revenue in the short term, and to some extent, short-term pressure on network value. The relationship between revenue and value continues to beg the question of whether subnetworks negatively impact the utility of AVAX tokens and the value of the Avalanche Primary Network (C-Chain).
How the value of the subnet accumulates
Not only are subnets a way to scale the entire network, but they are also a value proposition for developers.
Subnets allow decentralized applications to leverage the Avalanche consensus and infrastructure, and they make it easy for developers to spin up uniquely tailored blockchain environments.
When evaluating the quantitative indicators of the main network, there is an opportunity cost that is not easy to quantify. Wouldn't DeFi Kingdoms and Crabada build on Avalanche first and generate activity on the C-chain without a subnet as their final solution?
Maybe they'll find a different solution.
Hypothetically subnetting is an ideal solution for DFK and Crabada as well as the hundreds of other projects under development on the Fuji Testnet. Assuming the rationale described by game developers like Pulsar for building in subnets is valid. In this case, value accumulation manifests itself as validator growth, as each subnet stakes 2,000 AVAX and validates on the main network.
In other words, if it weren't for the attractiveness of subnets, the mainnet's infrastructure might not have built-in growth momentum. This way, there will be fewer validators staking 2,000 AVAX. Therefore, the value generated from scaling the number of validators is very different from the value generated from revenue and transaction fees burned on C-Chain on a very different time scale.
Other value accumulation mechanisms include fees for AVAX to create new subnetworks and blockchains, which allow AVAX to capture value indirectly through its burning mechanism.
Other value may come from the subnet's demand for AVAX liquidity, and the use of AVAX as the Gas for the final cross-subnet communication. Finally, subnets can also choose to use AVAX as their native token.
Several strategies to increase C-Chain adoption remain unchanged. Many applications may choose to build entirely on C-Chain because C-Chain is more suitable for them.
They can also build on C-Chain first and then migrate to their own subnets, such as DFK and Crabada.
Ultimately, each option has its trade-offs, and developers have enough flexibility to implement a product or business solution.
The launch of the subnet may have had a short-term impact on C-Chain network activity and value.
However, as more subnets come online, the value of the mainnet in terms of scale, flexibility, and robust infrastructure should accrue over the long term.
Ecosystem and Development Overview
DeFi
As Avalanche’s DeFi incentive program, Avalanche Rush, came to an end in Q3, TVL in USD and AVAX terms fell roughly 27% quarter-to-quarter.
However, TVL in AVAX terms averaged 126 million over the 12-month period of the Avalanche Rush program, which is roughly the third-quarter average.
From this point of view, AVAX's TVL is stable. As TVL returns to its mean value, it reflects a sustainable utility rather than a value catalyzed purely by incentives.
In Q3, Avalanche's two most important lending protocols, Aave and Benqi, saw their TVL move in opposite directions.
Aave is roughly in line with the overall picture of the Avalanche DeFi ecosystem (-30%), while Benqi has increased by 13%.
However, Benqi's growth can be attributed to its recent liquid mortgage product, as the TVL of its lending platform was flat during the quarter.
The dominance among the top protocols hasn't changed much as the overall TVL has declined.
The broader DeFi ecosystem was stabilized due to the TVL growth of other relatively new projects in the Avalanche ecosystem: Synapse (139%), Stargate (14%), and GMX (6%).
In addition to existing DeFi, Avalanche made a clear effort to introduce real world assets (RWA) in the third quarter.
Centrifuge, the on-chain ecosystem for RWA structured credit, has announced the integration of its Centrifuge Connectors with Avalanche.
Centrifuge Connectors is a hybrid cross-chain solution that brings real assets from Centrifuge directly into Avalanche.
Additionally, Intain (currently with approximately $5 billion in assets on Hyperledger) announced that it is building an Avalanche subnetwork to tokenize asset-backed securities (ABS). Intain said Avalanche was chosen because of its subnetwork architecture and how it supports a permissioned space that limits access to financial institutions.
Finally, KKR & Co, the world's leading investment firm, announced a partnership with digital asset specialist Securitize. Together, they plan to tokenize a portion of KKR's Healthcare Strategic Growth Fund and make it available on Avalanche's public blockchain.
NFTs
The downturn in TVL is not limited to DeFi. Avalanche's nascent NFT marketplace experienced a decline in secondary sales (-88.8%) and single buyers (-34.5%), while single sellers increased by 25.1%.
Notably, however, NFT sales rebounded early in the third quarter. Daily sales averaged $25,000 in June, followed by an average of $70,000 in July. Representing a 180% uptick from the lows seen at the end of the second quarter, the rebound can be attributed in large part to the launch of the Joepegs NFT marketplace in the second quarter, and the subsequent sale of Conscious Lines, which sold in 30 seconds It sold out and attracted interest from buyers such as Paris Hilton.
Gaming
While DeFi incentives may have slowed, Avalanches’ $200M+ ecosystem fund, Blizzard, is still running and attracting creatives and GameFi.
Along with the RWAs, GameFi is clearly starting to find its place in the Avalanches ecosystem.
Entering the third quarter, a gaming company called Razor with a strong player-centric ecosystem of hardware, software and services partnered with SHRAPNEL.
SHRAPNEL is a AAA first-person shooter game built on Avalanche by a team with backgrounds in companies like Halo, Call of Duty, and HBO.
Family Feud celebrity host Steve Harvey announced his entry into the game world of Avalanche, allowing players to earn rewards in the form of NFTs.
In addition to Razor, SHRAPNEL, and Steve Harvey, there is a range of games including Cosmic Universe (ported from Harmony), OpenBlox, and Domi Online.
RWA and GameFi are likely to drive activity on C-Chain and expand mainnet validators via subnets in the coming months.
develop
Development engagement, as measured by unique smart contract validation, has not caught up to the progress seen in RWA and GameFi. Developers trigger smart contract validation, translating the code into a higher-level language. The metric followed a similar pattern to most other quantifiable metrics quarter-on-quarter, with quarterly totals down 20%. Also, similar to addresses and transaction activity, smart contract verification has been on the rise in the DFK and Swimmer networks.
In previous reports, core developer participation was measured by a data source that tracked events in Ava Labs' GitHub repository.
The data shows that core development has grown over the past few quarters, up 33% in the second quarter and 34% in the third. By this measure, the core contributors to the network appear to have found a chance of success in infrastructure building.
However, the existing data sources on developer data are imperfect, and the data sources use imperfect methods to collect the activities of core developers.
While there is evidence that core developers are contributing to the Avalanche infrastructure, future reports will aim to assess activity with more reliable data sources and methodologies to derive accurate metrics.
Staking and Decentralization Overview
Despite a tumultuous second quarter, staking and decentralization on the network remains strong.
While the average daily staking volume and participating staking volume were relatively flat quarter-on-quarter, the total amount staked grew from 243 million AVAX to over 260 million. Validator stakes are still 6.5x larger than delegated stakes, and non-responsive validators are also flat, indicating continued participation, reliability, and network health.
Unlike the average stake amount, the average number of validators and delegators has changed significantly. The average number of validators shrinks from 1465 to 1273 (-192 validators), representing a ~13% drop in network security actors. Given the near-term access to the subnet, the average number of validators should increase with the amount of AVAX staked.
While the average amount of delegators staking was flat from the previous quarter, the average number of delegators increased significantly. The average number of delegators moved in the opposite direction of validators, increasing from 17,179 to 20,218 (+3,039), or about 12%. Delegators consistently outnumber validators.
Technically, the number of non-responsive validators decreased month-on-month, but as a percentage of the average validator count, it increased. Avalanche Go V1.8.0 (Apricot Phase 6) was released during this period as a mandatory security upgrade, and node operators were given until September 6 to upgrade or risk losing their nodes' uptime. While not a serious issue, the upgrade seems to have been put off by some validators.
Finally, low volatility in the number of stake, validators, and delegators continues to indicate that the network is healthy and moving toward greater decentralization.
Avalanche's Satoshi coefficient continues to hover around 30, but is slowly improving over the long term. Likewise, the Satoshi coefficient should gradually increase as more subnets go live and are validated on the mainnet.
This improvement continues to place Avalanche above the industry average compared to other Tier 1 networks.
competition analysis
Technological advancements, developer activity, and ecosystem growth strategies separate L1s from each other.
Here, we evaluate Avalanche's key metrics against the top five EVM-compatible chains (including Avalanche) by the largest number of TVL and DeFi protocols.
This peer group consists of the EVM chains with the largest TVL and the most protocols, as DeFi remains the structure that drives the majority of economic activity on each network.
Avalanche's valuation has been choppy throughout the quarter, but it's relatively flat (+3%) on market cap.
Ethereum, BNB Chain, and Polygon regained market capitalization dominance during the quarter and posted double-digit percentage point gains.
And Fantom is in deep trouble when it comes to price.
Avalanche's daily revenue is clearly trending down as average transaction fees and daily transactions decrease.
Peers (minus Ethereum) saw a similar trend in revenue due to lower average transaction fees and lower daily transaction volume.
Interestingly, Ethereum’s average transaction volume was up, but after the merger, they experienced a sharp drop in transaction fees, bringing down the protocol’s revenue by ~80%.
During the quarter, Avalanche's P/S ratio increased substantially compared to its peers.
Changes in P/S measure a protocol’s revenue and give a sense of the volume and price of transactions processed by a protocol.
Ethereum’s P/S increase is not due to reduced transaction volume, but rather from lower transaction fees, which is generally considered a good thing.
Avalanche, on the other hand, experienced a decline in transaction fees and daily transaction volume, making its growth even more significant.
Then, dividing the valuation (price) by the revenue (sales) gives a further insight into how much the native token is worth per unit of revenue.
On a relative basis, AVAX is now more expensive per unit of revenue compared to its peers.
Throughout Q1 and early into Q2, Avalanche (C-Chain) reached similar levels of daily transaction volume as Ethereum. With the launch of the DFK and Swimmer subnets, C-Chain’s daily transaction volume experienced a sharp drop and has remained relatively stable since then. Ethereum’s transaction volume has held steady at 1.15 million transactions per day, with Avalanche’s transaction volume reaching as high as 74% of Ethereum’s earlier this year, but now hovering around 20%. Considering the integrity of Avalanche's infrastructure and consensus, the network processes more transactions per day on average than Ethereum. In total, Avalanche's entire infrastructure currently handles approximately 2.3 million transactions per day.
The crypto DeFi market was flat in Q3, with a total TVL starting and ending around $54 billion in USD. Avalanche's TVL drop rate is the second highest among the top EVM chains (-75%), and Fantom drops even more. Since the decline in TVL is usually valued in USD, the decline in asset value represents the price change in TVL and the actual utilization rate of DeFi. While TVL in USD terms has declined, the amount locked in AVAX terms has remained relatively stable.
In Q1 and early in Q2, Avalanche quickly surpassed Ronin, Flow, and Polygon in NFT sales.
However, secondary sales declined in May around the time of the Swimmer subnet launch.
Nonetheless, Avalanche NFT activity rebounded in Q3 and cracked the top 10 for all sales last year.
With the launch of Joepegs, Lost Worlds, and other NFTs, NFT sales should continue their upward trajectory from their Q2 lows.
qualitative analysis
qualitative analysis
Key events, catalysts and strategies for ecosystem growth
Like many networks in a bear market, the third quarter's narrative has been relatively uneventful.
However, the third quarter narrative revolved around building out the Avalanche ecosystem and continuing to focus on executing its growth strategy.
As previously mentioned, the protocol has made significant progress through the deployment of Blizzard and other efforts to bring in Real World Assets (RWA) and GameFi.
The Avalanche strategy also has several (albeit indirect) core elements, which can be summarized as follows:
technology integration
Core Technology Improvement
Improve user experience (including user access)
Advance to Unique Domains and Use Cases
July 2022
In July, technology integration to enhance user experience included THORChain's integration of Avalanche C-Chain. This integration will allow C-Chain users to enter and exit the ecosystem without using cross-chain bridges. Additionally, Infura, a widely used blockchain developer toolkit, announced support for C-Chain. This integration will enable developers to leverage C-Chain with easy-to-use tools.
Additionally, an enhanced user experience is also influx through institutional liquidity staking solutions. Alluvial Finance and Rome Blockchain Labs bring a liquid staking standard to Avalanche. The platform will be managed in a decentralized manner and provide standards for know-your-customer (KYC) and anti-money laundering (AML) requirements for institutions with regulatory obligations.
Core technical enhancements have also been rolled out after the introduction of configurable subnet fees. One of the most requested features since the introduction of Subnet-EVM has been the flexibility to reconfigure charges without upgrading the network. Configurable fees became a reality in the third quarter, enhancing the user experience and value proposition for subnets.
Finally, unique use cases began to emerge in July. The Landslide Network, a subnetwork designed to reduce Tendermint consensus finality, announced that it will open an incentivized testnet in Q4 2022. In addition to reducing Tendermint finality, it will enable the Cosmos and Terra ecosystems to run any Tendermint-based application natively within the Avalanche ecosystem.
August 2022
Technology integration continued in August. The unmanaged Web3 browser extension Core rolled out support for all blockchains running the EVM and custom subnets. This integration allows seamless switching across all major blockchains, including Ethereum and Bitcoin. As demonstrated at Avalanche House Brooklyn, QuickNode enables builders to spin up a node in seconds using its global network of RPC endpoints.
Liquid staking solutions bring more user access. GoGoPool, a new deposit protocol, raised $5M in seed funding to bring liquidity staking to Avalanche. In particular, it aims to reduce the cost and friction of launching subnets. In addition to more liquidity staking, a number of financial partnerships have been established with Shapeshift, Robinhood, and Wisdom Tree to drive more opportunities to use AVAX.
More unique use cases are also emerging. CurateDAO launched an Avalanche-based"From planning to earning"A Pinterest-like database platform where participants can earn money by contributing to the database. Additionally, August brought Republic and the first tokenized film financial offering (FFO) to Avalanche. FFO began accepting investment commitments in August, ushering in a unique way to obtain and participate in film financing.
September 2022
The quarter ended with more integrations to improve user access and experience. In early September, wallet provider Bitcoin.com announced support for AVAX.
Another notable integration aimed at improving the user experience is the integration with the Boba network. Boba Network is a second-layer scaling solution, the first L2 of Avalanche C-Chain. This integration provides Avalanche developers with another means of low cost, high speed and high scalability.
Probably the most notable event in September was the launch of Banff, an upgrade of AvalancheGo that will bring resilient subnets to the ecosystem. Banff will enable subnet creators to activate Proof-of-Stake validation and uptime-based rewards. The upgrade will allow anyone to become a validator for a subnet by staking their original tokens on P-Chain. This setting will give builders more options when designing their subnets.
Ecosystem challenges
There were no material adverse results arising from technical challenges in the third quarter. However, the launch of Apricot 6 did require some attention. The mandatory security upgrade resulted in an increase in unresponsive validators, but did not put the network at risk.
The Avalanche cross-chain bridge also encountered the problem of node instability, and the transaction was not processed until the problem was resolved. Avalanche maintains nodes and quickly updates to the latest AvalancheGo version.
In addition to the impact of upgrade maintenance, a vulnerability was discovered and resolved during the quarter. Native asset call precompilation is a unique function on C-Chain, which is used to interact with Avalanche native tokens, and there is a risk of being exploited. The vulnerability was quickly resolved as all Avalanche contracts that were open to potential exploits were disabled. AvalancheGo V1.9.0 will completely abolish precompilation and introduce a more secure replacement to restore full functionality of Avalanche native tokens on C-Chain.
the way forward
So far, Avalanche has not provided a development roadmap that can be made public. However, announcements about future plans are communicated periodically.
In the coming months, many subnets on the Fuji Testnet will begin transitioning to the Avalanche mainnet. It is expected that P-Chain validators will expand with this migration.
After Avalanche's Apricot upgrade phase is complete, Banff's upgrade cycle will accelerate. Banff will unlock the value of the entire Avalanche ecosystem in terms of interoperability, similar to completing IBC on Cosmos. It will allow asset transfers across subnets, permissionless subnets, and rewards for subnet validators in their native tokens.
While the Avalanche incentive program will likely continue to catalyze ecosystem growth, major technological advancements like Banff's are expected to boost growth soon.
end summary
Overall, the third quarter was a quarter of construction and execution of Avalanche's strategy and vision. While the quarter lacked the excitement witnessed during last year's bull run, the network's underlying user base and ability to drive its market advancements has surfaced.
Integration with Core, for example, increases user access and enhances user experience.
Additionally, the ecosystem expanded beyond DeFi and ushered in unique use cases such as NFT campaigns, Real World Assets (RWA), GameFi, and FFO.
As network capabilities advance, the use of subnets continues to grow, and Avalanche's adoption mission moves forward.
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