Research
Log In

State of Avalanche Q1 2023

May 2, 2023 ⋅  18 min read

Key Insights

  • Avalanche’s market cap rebounded along with the broader market, increasing 65.8% QoQ. Avalanche revenue (in AVAX) increased 10.8% QoQ.
  • Avalanche’s daily average active addresses and transactions declined QoQ by 20.7% and 31.9%, respectively. The QoQ decline followed an anomalous spike and high growth period of subnet activity in Q4.
  • The supply of BTC.b on Avalanche increased by 64% during Q1, reaching over $250 million in market cap.
  • Mainstream interest in Avalanche network infrastructure continued with AWS and Tencent Cloud partnerships.
  • Notable developments aimed at ushering in developers included the launch of HyperSDK, Glacier API, and integration with The Graph.
  • Network health was impacted by two periods of network instability. The instability led to a dip in transaction throughput but did not halt the network.

Primer on Avalanche

The Avalanche network is a Proof-of-Stake (PoS) smart contract platform for decentralized applications. Avalanche differentiates itself by creating and implementing a consensus family known as "Avalanche consensus."

Following years of research, the Avalanche mainnet was launched in September 2020 and featured the release of a multichain framework utilizing three chains: the P, X, and C chains. Each chain plays a critical and unique role within the Avalanche ecosystem while providing the same capabilities of a single network, often called the Primary Network. Avalanche consensus and the Primary Network are designed to support sovereign, interconnected blockchains known as subnets.

Subnets are subclasses of Primary Network validators that run 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 congesting activity on the Primary Network.

Key Metrics

Performance Analysis

Network Overview

The metrics of the Avalanche network are based on the Primary Network (which includes P, X, and C-Chains) and 10 Avalanche Subnets including:

To join the Avalanche architecture, every subnet must provide at least one validator to the Primary Network (staking 2,000 AVAX). For their own consensus, each subnet utilizes anywhere from three to all P-Chain validators. Therefore, each subnet is considered when evaluating overall network activity in terms of transactions and users.

Avalanche’s daily average active addresses across the C-Chain and subnets declined 20.7% QoQ. However, the QoQ decline was largely due to an anomalous spike in Q4 driven by a surge in NFT minting. Excluding that, address activity was similar between the two quarters.

Avalanche’s daily average transactions across the C-Chain and subnets also declined QoQ. Transactions on the C-Chain declined by only 2.7%, while transactions across subnets declined by 33.6%. The decline across subnets was primarily due to a 77% decrease in transactions on the StepNetwork after its high growth period in Q4.

Despite the general decline in transactions, the DFK Subnet’s transactions spiked in early January amid its “12 days of DeFi Kingdoms” (DFK) campaign. The DFK campaign introduced several incentives, and DFK continued to dominate 78% of the transaction activity on the Avalanche network through Q1.

Financial Overview

After a turbulent 2022 with macroeconomic headwinds, the crypto market rebounded in January and demonstrated resilience through the quarter's end. Revenue in AVAX (total transaction fees paid in AVAX) increased by 10.8% QoQ (up 25.9% in USD terms). The increase in revenue was largely due to an 18.2% increase in transaction fees QoQ, much of which came from the network experiencing moments of instability in March. Simultaneously, the circulating market cap of AVAX increased by 65.8% QoQ.

For perspective, the circulating market cap of AVAX was 849x the annualized revenue in USD at the end of Q4 2022 versus 706x at the end of Q1 2023, suggesting a move to a more favorable valuation.

That said, a simple P/S ratio may not be enough to evaluate blockchain assets. Another recently introduced evaluation technique is the Expected Demand for Security Model. This model proposes that the key driver for the value accrual of a blockchain asset is the gross demand for security by all present and future infrastructure.

As detailed in the State of Avalanche Q4 2022, demand for security has largely become a value accrual mechanism for AVAX. When the hundreds of subnets under development go live, value will accrue to the network as each subnet contributes to its security (expanding infrastructure) while simultaneously demanding security for their sovereign subnets. While all current subnets use their own token for gas, some upcoming subnets will use AVAX as its native token. Nonetheless, as the addition of thousands of subnets increases demand for security (a larger validator set), demand for AVAX will also increase.

Ecosystem and Development Overview

DeFi

Along with the crypto market relief rally in January, TVL denominated in USD increased by 4.2% QoQ. However, TVL denominated in AVAX declined by 34.3%, suggesting an asset price increase in USD rather than new capital inflow.

Although excluded from the above TVL figures to avoid double-counting, liquid staking derivatives (LSDs) and yield farming platforms continued to support Avalanche and its DeFi ecosystem. Benqi liquid staking TVL grew by 88.6% QoQ to $100 million by the end of Q1, and Vector Finance, a yield optimization platform, increased by 50% QoQ to $36 million. Collectively, these two protocols finished Q1 in the top 10 by TVL, with ~$136 million in TVL.

Nearly all of the top DeFi applications on Avalanche benefited from the market rebound throughout Q1. Avalanches' most prominent protocol by TVL denominated in USD, Aave, was down slightly (5% QoQ), but Benqi Lending, Trader Joe, and GMX grew by 49%, 24%, and 70%, respectively.

While Aave TVL was down QoQ, there remained concentration risk in the leading application. Aave made up ~43% (~$432 million) of Avalanche's DeFi TVL by the end of Q1. That said, Avalanche saw significant development in expanding DeFi beyond Aave with the proposal to launch Uniswap. With the proposal passed, Uniswap is expected to launch on Avalanche in Q2.

Other notable developments expanding Avalanche DeFi included:

  • Balancer - An automated market maker (AMM) proposed and passed a motion to deploy on Avalanche.
  • Tokeny Solutions - Integrated with Avalanche to facilitate institutional asset tokenization on the network.
  • UNO.farm - A cross-chain farming solution with transparent, automated strategies integrated with Avalanche.
  • DEFYCA - Protocol launching on Avalanche aims to tap into the $1.6 trillion private debt market by tokenizing traditional debt securities and loan portfolios.
  • Savvy DeFi - An auto-repaying and non-liquidating lending platform launched on Avalanche.
  • Altitude - An asset bridge powered by LayerZero integrated with Avalanche to bring low bridging fees and single-asset liquidity pools to the DeFi ecosystem.
  • Intain - A structured finance platform, launched a new marketplace called IntainMARKETS for application-specific compliant tokenized asset-backed securities. IntainMARKETS launched its own subnet.
  • Delta Prime - An undercollateralized lending protocol launched on the Avalanche C-Chain. Delta Prime TVL grew to ~$20 million in its first few weeks, reaching a spot in the top 15 by TVL.

BTC.b

In Q4 2022, LayerZero, an Omnichain interoperability protocol that enables cross-chain applications, launched support for BTC.b. BTC.b is a token representing Bitcoin on Avalanche that can be automatically bridged in Core. Compared to other natively bridged Bitcoin assets, BTC.b allows users to freely transfer native Bitcoin without relying on custodians.

BTC.b adoption on Avalanche quickly grew after LayerZero’s support in Q4 2022. The BTC.b supply on Avalanche increased by 64% during Q1, reaching over $250 million in market cap.

NFTs

During Q4, bullish signals in the NFT space included:

Despite those developments, the Avalanche NFT sector declined in both secondary sales volume (-31.6% QoQ) and the number of unique NFT buyers (-9.8% QoQ) during Q1.

However, these trends began to reverse course by the end of Q1 as additional developments unfolded.

During Q1, Web3 community management platform TYB joined the Shopify app store. Built on Avalanche, TYB aims to provide brands with tools to expand customer loyalty programs. If successful, TYB could catalyze the growth of NFT activity on Shopify and the Venly Minter application.

Another significant development was the launch of Avaissance, an initiative to accelerate artists' careers and catalyze the Avalanche NFT ecosystem. Avaissance comprises an Artist-in-Residence program and the Mona Lisa Initiative for digital art curation. Over 50 artists will be selected to participate in the 6-month Artist-in-Residence program. The Mona Lisa Initiative will connect the Avalanche Foundation with curatorial teams to acquire Avalanche NFTs.

Other notable developments included:

  • Avalytics - An NFT analytics platform and market aggregator to simplify NFT transactions.
  • ZeroDrop - A community engagement platform that aims to assist creators in developing a fanbase and to catalyze the Avalanche NFT ecosystem with tools and resources.

GameFi

DeFi Kingdoms continues to dominate the Avalanche GameFi sector, generating the lion's share of transaction activity on the Avalanche network.

However, as highlighted in past quarterly reports, several developments are underway to usher in more gaming activity from other applications.

After the Q4 partnership with GREE (a prominent gaming and media company in Japan), Avalanche welcomed Loco, one of India's largest video game streaming platforms, to the Avalanche Multiverse incentive program in Q1. Loco aims to bring player-owned fantasy esports to the GameFi ecosystem on its own subnet.

Further, the widely known esports team, Team Solomid (TSM), chose Avalanche as its blockchain partner for building its competitive gaming platform, Blitz. TSM will launch a subnet that uses the AVAX token as gas. Blitz is the first subnet to announce AVAX as its native token.

Other notable developments aimed at expanding the Avalanche GameFi sector included:

  • Paradise Tycoon - A multiplayer metaverse announced the impending launch of its game on Avalanche.
  • Dragon Crypto Gaming - The Legend of Aurum Draconis officially went live on Avalanche.
  • DOS Labs - A gaming studio with over 400,000 daily active players is launching a subnet. DOS Labs will also provide gaming developers with an SDK for integrating Web3 features.
  • Web3 Gaming Expo - Avalanche is supporting Community Gaming, Game7, and 3XP in hosting a Web3 gaming festival. It will includes esports, creators, and brands in June 2023.
  • Stardust - A developer platform enabling devs to integrate NFTs into their games added Avalanche C-Chain and Subnet compatibility.

Other Use Cases, Infrastructure, and Tooling

Beyond the DeFi, NFT, and GameFi sectors, noticeable developments continued to stem from other use cases.

Notably, Galxe launched Galxe OAT (On-chain Achievement Token) on Avalanche. Galxe OAT is a lightweight badge standard designed for event organizers to easily distribute NFT badges for life experiences with Galxe protocol. Shortly after the launch, Galxe saw a noticeable increase in user activity at the end of Q1.

Other notable developments aimed at expanding infrastructure and tooling across the Avalanche ecosystem included:

  • Benqi - Introduced Ignite, a new base layer protocol for decentralized staking. It is designed to reduce the costs to run Avalanche validator nodes and subnets by up to 10x.
  • GoGoPool - A permissionless staking protocol built for Avalanche Subnets. At launch, GoGoPool reduces the AVAX requirement to launch a new validator node by about 50% via liquid staking.

Development Activity

Developer engagement has yet to catch up to Avalanche's growth strategy. Unique contracts verified continued to trend downward, dropping 15.9% QoQ. The metric is determined by the number of smart contract verifications, which developers trigger to translate code into a higher-level language.

Further, the number of events in Ava Labs' GitHub repository can also give insight into developer involvement. According to Electric Capital's Developer report, full-time developers on Avalanche dropped from ~132 to ~83 (-37% YoY).

In order to enhance the developer experience, the Avalanche team has rolled out several tools and integrations over the past several quarters and into Q1.

The notable Q1 developments include:

  • HyperSDK -The Avalanche team introduced HyperSDK for creating virtual machines on Avalanche. The framework aims to abstract away runtime complexities and speed up the development process for building virtual machines. The HyperSDK also supports Avalanche Warp Messaging.
  • Glacier API - This API service indexes Avalanche Subnets and gathers data from Avalanche and Ethereum. It provides real-time and historical data that developers can use for wallet services, token transfers, and other applications.
  • The Graph - This data indexer integrated with Avalanche to enable developers to build apps with rapid, robust subgraph data.

Staking and Decentralization Overview

The average number of validators, total stake, and average engaged stake (total stake divided by total supply) remained stable QoQ. At the same time, the average number of delegators grew 26.1% QoQ. The stability of stake across a greater number of validators and delegates is generally a sign of a healthy network.

Although Avalanche showed some positive network signs, there was volatility in the number of validators that went offline during Q1. Both the average amount of unresponsive stake and the number of unresponsive validators increased by over 70% QoQ. Despite the instability, the percentage of unresponsive stake and validators remained high enough to sustain block production.

These measures of network health were impacted by two periods of network instability caused by network upgrades on March 22 and 26.

The Avalanche team issued a post mortem explaining that, historically, the execution of X-Chain state transitions was spread over multiple files with many abstractions. The network instability occurred after the V1.9.12 update’s effort to unify and simplify the pre- and post-linearization code paths by moving the state transition logic to a single location, specifically, the additional OperationTx UTXOs. The release of this "refactor," introduced in V1.9.12, meant that nodes running V1.9.11 executed OperationTx transactions differently than those running V1.9.12.

The missing logic from V1.9.11 OperationTx handling was subsequently reintroduced in V1.9.14. The team then re-aligned the canonical state across nodes running V1.9.11, V1.9.12, and V1.9.14 with the release of V1.9.15. However, one remaining item from pre-V1.9.14 needed to be re-aligned appropriately, which was fixed with V1.9.16.

Ultimately, this issue led to two brief periods of delayed block acceptance on the C-Chain and P-Chain due to differences in validation behavior and non-aligned states. Most subnets continued to finalize blocks, but some subnet APIs became inaccessible. Although instability led to a dip in transaction throughput, they did not lead to a network halt. Once more validators updated to the latest version of AvalancheGo, the network regained stability.

Avalanche's Nakamoto coefficient continued to hover around 30 but slowly improved to 33 by the end of Q1. With this improvement, Avalanche continues to be above the industry average compared to other Layer-1 networks.

This measure, along with stake amount, should continue improving as more subnets come online and validate on the Primary Network.

Mainstream interest should continue to improve network infrastructure as well.

Like Alibaba in Q4, Amazon Web Services (AWS) partnered with Ava Labs in Q1 to promote blockchain adoption in enterprises, institutions, and governments. AWS will support Avalanche infrastructure and its ecosystem on the AWS Marketplace, which includes one-click node deployment and the ability to run Avalanche nodes. Ava Labs also joined the AWS Partner Network, allowing the company to help customers deploy custom offerings on AWS. Ava Labs plans to add subnet deployment as a managed service to the AWS Marketplace as part of the partnership.

Further, Ava Labs released details on its partnership with Tencent Cloud. This partnership will also enable one-click node deployment on Tencent Cloud and promote Avalanche Subnet adoption for enterprises, institutions, and governments.

Qualitative Analysis

Key Events, Catalysts, and Strategies for Ecosystem Growth

Aside from the ecosystem developments mentioned above, other aspects of Avalanche’s strategy pushed forward through Q1, spearheaded by two strategic elements:

  • User access and experience — Attract end users with improved access and user experience.
  • Community — Acquire developers and drive adoption through community building.

User Access and Experience

Core is focused on serving as a command center for Avalanche and other chains while improving end user access and experience. Technical integrations during Q1 included:

Other notable developments aimed at ushering in new users were:

  • Coinbase - Enabled users to send and receive ETH, USDC, DAI, and WBTC on Avalanche C-Chain. Further, Coinbase Pay integrated with Core Mobile to serve as an on-ramp to Core with a credit card or existing crypto balances.
  • Kucoin Wallet - Integrated with Avalanche to provide Kucoin users access to all Avalanche native assets.
  • Blockpass - A digital identity verification provider integrated with Avalanche to provide KYC and AML verification. Avalanche will also utilize Blockpass to certify ownership of digital wallets.
  • NOWPayments - A payment gateway integrated with the Avalanche C-Chain, enabling merchants and businesses to accept cryptocurrency payments.

Community

Beyond hosting regular developer events and allocating financial capital through programs like Rush and the Multiverse incentive program, the Avalanche community continued to educate developers and connect human capital to the ecosystem through non-financial means.

Notable community engagement efforts during Q1 included:

  • AlibabaCloud - Alibaba hosted an event to educate users and devs about AlibabaCloud, and its ecosystem of Web3 projects, including tools and infrastructure being built on Avalanche.
  • Robinhood - Launched the crypto Learn & Earn program with Avalanche in Q4 and surpassed over 1 million participants in Q1.
  • TaskOn - A Web3 task collaboration platform integrated with Avalanche to boost the completion for various tasks to accelerate project growth and enhance benefits to Avalanche users.

Further, at the end of Q1, the Avalanche community rallied around Avalanche Summit II, and early ticket sales sold out. Avalanche Summit II will occur from May 3 to 5, 2023, in Barcelona.

The Road Ahead

Much of the road ahead continues to reflect what the Avalanche ecosystem has been outwardly working on for several quarters.

Over the coming months, more subnets will begin transitioning onto the Avalanche mainnet. Ava Labs has indicated that many of the 100+ subnets in the pipeline will go live in 2023. As the migrations occur, the Primary Network validator set will likely expand and demand for network security will likely grow.

Like the additional flexibility offered by the Rust SDK in Q4 and progress on HyperVM in Q1, Avalanche will continue exploring custom VM solutions for subnets, including the more recent Move Virtual Machine.

At the end of 2022, Kevin Sekniqi, Co-founder and COO of Ava Labs, highlighted optimizations coming to AvalancheGo over the next year.

As such, Avalanche shared details regarding the upcoming Cortina Upgrade, which will introduce the following protocol changes:

Ultimately, plans for 2023 are robust, with parts of them beginning to go live as Avalanche looks to remain competitive through 2023.

Closing Summary

During Q1, market sentiment shifted, and the ensuing relief rally kept Avalanche’s user activity stable and improved its financial performance. Active addresses and transactions settled in at the foundational user base demonstrated during Q4 and remained steady through Q1.

Stable stake amounts and validator count paired with a growing number of delegators signaled that the network maintained continued to become more decentralized. Mainstream interest from AWS and Tencent Cloud should also continue to improve network infrastructure.

Distribution of TVL remained concentrated in Aave, but the incoming launch of Uniswap and early traction seen across new DeFi applications should expand DeFi beyond Aave. LSDs experienced significant growth, and more NFT and GameFi projects continued to launch.

Other aspects of Avalanche's strategy pushed forward through Q1. Developer tools and the developer experience continued to progress with integrations with The Graph, HyperSDK, and the Glacier API, while end user experience saw advances in Core.

Despite Avalanche's progress toward its long-term goals, Q1 presented some challenges. The Avalanche network experienced some instability, but the issue was quickly addressed through network upgrades.

Despite the challenges, whether macro forces or technical, Avalanche looks to remain competitive, continue its growth strategies, build community, and pursue its robust plans for 2023.



Let us know what you loved about the report, what may be missing, or share any other feedback by filling out this short form. All responses are subject to our Privacy Policy and Terms of Service.

This report was commissioned by Ava Labs. All content was produced independently by the author(s) and does not necessarily reflect the opinions of Messari, Inc. or the organization that requested the report. The commissioning organization does not influence editorial decision or content. Author(s) may hold cryptocurrencies named in this report. This report is meant for informational purposes only. It is not meant to serve as investment advice. You should conduct your own research, and consult an independent financial, tax, or legal advisor before making any investment decisions. Past performance of any asset is not indicative of future results. Please see our Terms of Service for more information.

No part of this report may be (a) copied, photocopied, duplicated in any form by any means or (b) redistributed without the prior written consent of Messari®.

Upgrade to Messari Pro

Gain an edge over the market with professional grade tools, data and research.

Already a member? Sign in

Upgrade to Messari Pro

Gain an edge over the market with professional grade tools, data and research.

Already a member? Sign in

James believes that the future of finance and economics will be algorithmic, decentralized, and distributed efficiently on a global scale. He is a Research Analyst with Messari focusing on Layer-1 protocols and previously held traditional finance positions at Northwestern Mutual and U.S. Bank. James also has experience as an analyst at research firms like Morningstar.

Mentioned in this report

Read more

Research Reports

Read more

Based on your watchlists

Create a new watchlist
Read more

Research Reports

Read more

Based on your watchlists

Create a new watchlist

About the author

James believes that the future of finance and economics will be algorithmic, decentralized, and distributed efficiently on a global scale. He is a Research Analyst with Messari focusing on Layer-1 protocols and previously held traditional finance positions at Northwestern Mutual and U.S. Bank. James also has experience as an analyst at research firms like Morningstar.

Mentioned in this report