State of Avalanche Q2 2023

Key Insights

• Avalanche’s average daily active addresses and transactions on the C-Chain increased by 132.1% and 162.2%, respectively. The growth was primarily driven by a rise in stablecoin liquidity and activity from LayerZero.
• Renewed network activity positively impacted revenue, which increased by 173.1% in AVAX QoQ (up 150.3% in USD terms).
• Ava Labs introduced Avalanche Arcad3 to accelerate gaming development with partners like GREE, Loco, and TSM.
• Evergreen Subnets and Spruce were launched during Q2. Spruce ushered in several partners, including T. Rowe Price, WisdomTree, Wellington Management, and Cumberland.
• Alibaba Cloud launched Cloudverse, a launchpad for businesses to deploy metaverses on Avalanche.
• SK, one of South Korea’s largest conglomerates, launched its dedicated Avalanche Subnet, UPTN.
• The Cortina network upgrade was activated on the Avalanche mainnet and introduced three key optimizations.

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.

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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 15 Avalanche Subnets including:

• DFK
• DEXALOT
• STEPNETWORK
• NUMBERS
• XPLUS
• SHRAPNEL
• WRAPTAG
• LOCO LEGENDS
• PLAY3ULL GAMES
• HUBBLE EXCHANGE
• MELD
• UPTN
• SWIMMER
• DOS
• XANACHAIN

To join the Avalanche architecture, every subnet must provide at least one validator to the Primary Network (staking 2,000 AVAX). For its own consensus, each subnet utilizes anywhere from three to all P-Chain validators. Therefore, every 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 increased by 107.8% and reached all-time highs QoQ. The QoQ increase was dominated by address activity on the C-Chain, up 132.1% QoQ versus a 22.6% increase across the other 15 subnets.

Avalanche’s daily average transactions also increased QoQ. Transactions on the C-Chain increased by 162.2%, largely due to a rise in stablecoin liquidity and LayerZero. However, transactions across subnets declined by 33.4%. This decline was primarily due to a 31.7% decrease in transactions on the DFK (DeFi Kingdoms) subnet.

LayerZero is a lightweight, generalized cross-chain messaging protocol. To showcase its use cases, LayerZero Labs launched support for BTC.b in Q4 (which has grown significantly on Avalanche). The team also developed Stargate, a bridge built on top of LayerZero. It avoids using wrapped tokens and removes attack vectors, while also increasing user experience and capital efficiency.

Counting Avalanche transactions with LayerZero or Stargate contracts in the event logs, the cross-chain protocols accounted for 45-60% of Avalanche’s growth in each of the following four metrics: average daily transactions (162%), active addresses (142%), new addresses (235%), and transaction fees (166%).

Financial Overview

Despite the renewed activity seen through Q2, AVAX’s financial performance suffered in June given the challenging regulatory climate. On June 5, 2023, the Securities and Exchange Commission (SEC) alleged that several exchanges unlawfully engaged in unregistered offers and sales of cryptoasset securities.

The SEC complaint coincided with downward pressure on AVAX’s price, which declined 22.2% versus the broader market’s 1.3% increase QoQ. Avalanche concluded the quarter as the 18th largest cryptoasset by market capitalization reaching $4.5 billion.

The renewed activity, however, positively impacted revenue in AVAX (total transaction fees paid in AVAX). Revenue in AVAX increased by 173.1% QoQ (up 150.3% in USD terms). The increase in revenue was partly due to a 5.9% increase in transaction fees, but it was primarily due to the activity stemming from LayerZero. Additionally, the spike in revenue in late April was driven by XEN Crypto, a free-to-mint token known for clogging networks. Given that Avalanche burns 100% of revenue (gas fees), the greater activity contributed to the burn of AVAX and token value accrual.

Nonetheless, the difference between the change in revenue versus market cap (in USD) suggests that the overall fundamental network utility was more significant than market behavior in Q2. The circulating market cap of AVAX was 795x the annualized quarterly revenue at the end of Q1 2023 versus 247x at the end of Q2, suggesting a move to a more favorable valuation.

While a simple P/S ratio may provide directional insight into fundamental value accrual versus speculative market behavior, it is not necessarily adequate for evaluating blockchain assets. Other valuation techniques, including the Expected Demand for Security Model (EDSM), have also been introduced to gain a better picture.

Demand for security has largely become a value accrual mechanism for AVAX. When the hundreds of subnets under development go live, value will also accrue to the network according to the EDSM. As each subnet contributes to its security (expanding infrastructure), it will simultaneously demand security for its sovereign subnets. While all the current subnets use their own token for gas, some upcoming subnets will use AVAX as their 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

Following the crypto market relief rally in Q1, TVL denominated in USD was down QoQ, decreasing by 19.4%. However, TVL denominated in AVAX increased by 9.7%, suggesting that new capital inflow drove TVL versus asset price increases in USD.

Although excluded from the above TVL figures to avoid double-counting, liquid staking derivatives (LSDs) continued to support Avalanche and its DeFi ecosystem. After launching its Ignite protocol and growing TVL by 88.6% in Q1, Benqi liquid staking cooled down, and its TVL declined by 13.3% QoQ to ~$88 million.

Nearly all of the top DeFi applications on Avalanche experienced declines in TVL. Of these, Avalanche’s most prominent protocols by TVL denominated in USD were Aave (20%), Benqi Lending (10%), Trader Joe (33%), and GMX (22%). However, with renewed activity on LayerZero and Stargate, TVL on Stargate increased by 21% and contributed to the new capital inflow denominated in AVAX.

Even though Aave TVL was down QoQ, it still carried some concentration risk for Avalanche. By the end of Q2, Aave made up ~43% (~$345 million) of Avalanche's DeFi TVL.

That said, Avalanche made several moves to expand its DeFi ecosystem beyond Aave, including:

• Arrow Markets — An options AMM and decentralized settlement system. It introduced Arrow V2 and launched Call Spread Option Vaults (CSOVs) in the first deployment of its Generalized Options Vaults (GOVs) infrastructure on the C-Chain.
• Cables Finance — A hybrid DEX with non-custodial access to centralized liquidity. The DEX went live on the C-Chain during Q2.
• Circle — Launched Euro Coin (EUROC) natively on Avalanche. EUROC was subsequently integrated with Trader Joe, Cables Finance, and Glacier Exchange.
• MELD — DeFi infrastructure that launched its subnet during Q2.
• Voltz — Announced its TradFi rate trading venue with the launch of a Secured Overnight Financing Rate (SOFR) rates market.
• Struct Finance — A structured finance protocol went live with its first vault during Q2. The application subsequently received a strategic allocation of Avalanche Rush incentives from GMX.
• Hubble Exchange — A purpose-built central limit order book subnet launched its testnet in Q2.
• Altitude — An asset bridge subnet powered by LayerZero launched its testnet during Q2 and experienced initial traction.
• Unchained Music — A music platform announced deploying artist royalty capital to various vetted DeFi protocols on the C-Chain.

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 that represents Bitcoin on Avalanche and 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 continued its long-term trend upward but declined from 6,961 to 6,056 (-13% QoQ) after high growth (64%) during Q1.

NFTs

As was the case for many networks, the Avalanche NFT sector declined for the second consecutive quarter in both secondary sales volume (-38.3% QoQ) and the number of unique NFT buyers (-49.8% QoQ) during Q2.

Despite declining secondary sales, Avalanche's developer ecosystem continued its efforts to expand its NFT sector.

During Q1, the Avalanche ecosystem launched 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. During Q2, 70 artists were selected to participate in the 6-month Artist-in-Residence program. Further, the Mona Lisa Initiative, which connects the Avalanche Foundation with curatorial teams to acquire Avalanche NFTs, announced the initial group of participating DAOs.

On the heels of Avaissance, three new marketplaces laid the groundwork for launching on Avalanche. Superchief Gallery NFT, Zeroone, and Peek NFT announced partnerships with Avalanche and Ava Labs to launch unique NFT marketplaces.

Another significant development was the Professional Bowlers Association (PBA) entry into Web3. The PBA, parent company of Bowlero, and Layer 3 Labs launched The League of Bowler Certification (LBC) Awards Program. The LBC Awards will be distributed to approximately 300,000 participants from Bowlero center leagues as soulbound tokens.

The PBA intends to expand the program beyond Bowlero center leagues by offering physical products and real-world benefits alongside digital rewards for bowling achievements.

Other notable developments included:

• NFT-TiX — Events ticketing platform that announced its migration to Avalanche to power NFT ticket offerings. The platform also announced several event organizers elected to use the Avalanche-powered platform.
• Moongate — A platform that uses dynamic NFTs for ticketing and membership. Moongate will design “Phygital” NFT campaigns, enabling event attendees to unlock rewards and access based on real-life interactions. It also offers a no-code solution for enterprises to create and manage NFTs.

Gaming

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.

Previous developments included those with GREE (a prominent gaming and media company in Japan), Loco, one of India's largest video game streaming platforms, and a widely known esports team, Team Solomid (TSM).

During Q2, Ava Labs introduced Avalanche Arcad3 to accelerate gaming development with partners like GREE, Loco, and TSM. The program will connect traditional gaming publishers with Web3 studios so they can receive guidance around regulation, tokenomics, marketing, and other support services.

Avalanche also introduced the popular gaming DAO Merit Circle's launch of Beam. Beam will be a subnet catering to both gamers and game developers. It will offer existing Merit Circle products, new gaming-focused tooling, and an NFT marketplace.

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

• Gunzilla Games — An independent AAA game studio. It announced the launch of GUNZ, a digital economy platform built on a subnet customized for seamless gameplay. The game will enable players to turn in-game assets into tradeable items.
• Battle for Giostone (BFG) — A multiplayer online battle arena (MOBA) built for esports announced the launch of its subnet and cited the benefits of the Avalanche Subnet design as its reason for choosing Avalanche as its blockchain solution.
• Draft Labs — Introduced its sports emulator Draftables and announced its launch on Avalanche during Q2.
• Defimons — A massively multiplayer online role-playing game (MMORPG) by Mon Studios announced it will be offered through Epic Games Store later this year.
• NEOBRED — A horse racing gaming experience announced its launch on Avalanche during Q2.

Enterprise Adoption, Infrastructure, and Other Use Cases

Beyond the DeFi, NFT, and GameFi sectors, noticeable developments continued to stem from enterprise adoption and other use cases during Q2.

Notably, Ava Labs launched Avalanche Evergreen Subnets, a suite of institutional blockchain deployments, customizations, and tooling. These subnets aim to preserve the advantages of public blockchain networks while incorporating features from enterprise solutions. Institutions can establish their own private, permissioned Evergreen subnets for research, development, or production purposes while still interacting with other subnets through Avalanche's native communication protocol, Avalanche Warp Messaging (AWM).

Following its launch, the first deployment of Evergreen was on the Spruce subnet. The Spruce subnet provides institutions with a controlled, low-risk environment to explore using blockchain rails, tokenization, and decentralized applications to upgrade legacy capital markets infrastructure. Initially, institutional partners, including T. Rowe Price, WisdomTree, Wellington Management, and Cumberland, will use Spruce to test public blockchain applications. Later in the quarter, several platforms, such as Fireblocks, joined Spruce as network partners for providing institutions with the infrastructure for building their solutions. Fireblocks is an all-in-one platform that enables users to custody Spruce subnet tokens and initiate transactions on the Spruce testnet directly from the Fireblocks console and API.

In Q4 2022, Alibaba chose Avalanche as its first blockchain partner. Alibaba Cloud began offering services to host validator nodes and offer Avalanche developers credits toward any of their services. In Q2 2023, Alibaba Cloud launched Cloudverse, a launchpad for businesses to deploy metaverses on Avalanche rapidly. Cloudverse is an end-to-end solution for enterprises to seamlessly customize, launch, and maintain their metaverse space, creating new dimensions for engaging customers.

Finally, SK, one of South Korea’s largest conglomerates with over 200 subsidiaries, including SK Planet, launched its dedicated Avalanche Subnet, UPTN. UPTN introduces Avalanche Digital Collectibles, Web3 wallets, and community features to SK’s millions of users.

Other notable developments across enterprise, infrastructure, and other use cases included:

• Mastercard — Avalanche was selected as a partner network for their Mastercard Crypto Credential initiative. The initiative aims to enhance the verification of NFTs, ticketing, enterprise, and other payment solutions.
• Snickerdoodle Labs — Announced its decentralized marketing platform that allows customers to control how they share their data with brands, maintain privacy, and receive rewards.
• Kaleido - A blockchain business cloud that announced its integration with Avalanche. It plans to provide enterprises, gaming companies, institutions, and governments with turnkey solutions to accelerate development with the Avalanche network and subnets.

Development Activity

Developer engagement has yet to catch up to Avalanche's enterprise adoption and ecosystem growth strategy. Unique contracts verified (C-Chain only) trended downward, dropping 19% before stabilizing 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 83 to 69 (-17% QoQ).

Avalanche rolled out several tools and integrations geared towards developers over the past several quarters and into Q2.

Notable Q2 developments included:

• AvaCloud -—Allows for deploying no-code and custom blockchains. It aims to reduce the complexity and cost associated with developing a blockchain. AvaCloud enables the creation of permissionless, independent networks and permissioned, regulatory-optimized ecosystems.
• Move Virtual Machine — A modular Move-based Layer-1 is launching as a subnet. It will use the Avalanche Subnet architecture to enable functionalities such as Avalanche Warp Messaging for cross-chain liquidity, the ability to deploy multiple Move implementations, permissioned developer environments, multichain load balancing, and control over validator configurations.
• Chainlink Functions Integration — Enables developers to connect smart contracts to existing Web2 APIs. Chainlink Functions is a serverless developer platform that operates as a decentralized compute runtime. It offers a more "trust-minimized and blockchain-enabled" version of existing cloud-based serverless solutions.
• Biconony SDK — Software development kit enabling developers to leverage account abstraction (AA).
• Lava Network — A protocol and SDK that enables developers to interact with subnets through decentralized RPCs.

Staking and Decentralization Overview

The average engaged stake (total stake divided by total supply), average number of validators, and average validator stake remained relatively stable QoQ. At the same time, the average number of delegators and delegator stake grew by 27.1% and 23.4%, respectively. In general, the growth of total stake across more validators and delegates is a sign of a healthy network.

Although Avalanche showed positive signs of a healthy network, there was a continuation of a higher average of validators going offline during Q2. Both the average amount of unresponsive stake and the number of unresponsive validators increased by over 50% QoQ. Despite the uptick, the percentage of responsive stake and validators remained high enough to sustain block production.

Avalanche's Nakamoto coefficient continued to hover around 30 and finished at 31 by the end of Q2. 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.

Other developments continue to improve network infrastructure including:

• GoGoPool — A permissionless staking protocol built for subnets went live during Q2. The protocol aims to grow the subnet economy by solving the issues of sourcing validators, inefficient tooling, and lack of community onboarding. GoGopool reduces the AVAX requirement by about 50% via liquid staking and simplifies the process of launching validators.

Qualitative Analysis

Other Key Events, Catalysts, and Strategies for Ecosystem Growth

Aside from the ecosystem developments and growth strategies mentioned above, other aspects of Avalanche’s strategy pushed forward through Q2. Three strategic elements stood out during Q2 in particular:

• Technical developments — Evolve network architecture and improve functionality.
• User access and experience — Attract end users with improved access and user experience.
• Community — Acquire developers and drive adoption through community building.

Technical Developments

As part of the Avalanche Go V1.10 series, the Cortina network upgrade was activated on the Avalanche mainnet during Q2.

As such, the Cortina Upgrade introduced three key optimizations:

• X-Chain Linearization — The X-Chain migrating to Snowman++ moves the entire network to a single consensus engine, enabling faster development and integration of Avalanche Warp Messaging.
• Batched Delegator Rewards — Simplifies fee distribution for validators with large numbers of delegators.
• Increased C-Chain Gas Limit — Developers previously expressed that 8 million gas per block wasn’t enough for their use case. Cortina increases the C-Chain block gas limit to 15 million gas.

User Access and Experience

Core serves as a command center for Avalanche and other chains while improving end user access and experience. Technical integrations during Q2 included:

• Core Web — Enabled support for Bitcoin. It allows users to send, receive, and bridge Bitcoin using the Avalanche bridge and transfer BTC to BTC.b. The Avalanche bridge also enabled a new pricing model for the EVM bridge, providing cost-effective offboarding and competitive rates.
• Keystone — A hardware wallet integrated with Core during Q2, enabling an additional layer of security.
• AvaGPT — Core introduced an AI-driven chatbot trained on Core's knowledge base, Avalanche documentation, and developer docs. It aims to enable quick insights, receive real-time support, and access to in-depth source information.

Other notable developments aimed at ushering in new users were:

• Pip — A crypto payments platform integrated with Avalanche across all its products.
• Circle — Launched Cross-Chain Transfer Protocol (CCTP), a permissionless on-chain utility that facilitates USDC transfers between Avalanche and Ethereum through native burning and minting.
• Flexa — A payment network that enabled the transfer of Avalanche-native USDC to facilitate payment at any of the supported stores in Flexa's network.
• Onramp — Launched support for and enabled the deposit, withdraw, and fiat conversion of AVAX.

Community

The Avalanche community continued to educate developers and connect human capital to the ecosystem through non-financial means. In addition, it hosted regular developer events and allocated financial capital through programs like Rush and the Multiverse incentive program.

During Q2, the Avalanche community attended Avalanche Summit II in Barcelona. Early ticket sales sold out, and the event hosted over 3,000 attendees, 300 speakers, and 125 panels.

Other notable community engagement efforts during Q2 included:

• StackUp — StackUp enables developers to level up and connect with a global dev community while being rewarded for their time. Avalanche and StackUp teamed up again to help developers learn about the network, featuring new content based on Avalanche's latest technological advancements.
• Revolut — A growing financial services application launched its Crypto Learn course. It featured Avalanche and the AVAX token, offering AVAX rewards to users for learning about the network.

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.

Just as the Spruce network ushered in institutional partners such as T.Rowe Price and Wellington Management, the Avalanche Evergreen Subnets may continue onboarding Web2 companies. In turn, this could drive further enterprise adoption with its suite of institutional solutions.

Avalanche will continue exploring custom VM solutions for subnets to attract development and expand the network horizontally. Its efforts ride on the momentum from previous quarters: the additional flexibility offered by the Rust SDK in Q4’22, the progress on HyperVM in Q1’23, and Move Virtual Machine in Q2’23.

At the end of 2022, Kevin Sekniqi, Co-founder and COO of Ava Labs, highlighted optimizations coming to AvalancheGo through 2023. The most notable highlight was what rolled out with the Cortina upgrade in Q2.

Ultimately, the plans for 2023 remain robust, with parts of them already live as Avalanche looks to remain competitive through the rest of the year.

Closing Summary

During Q2, Avalanche's daily average active addresses across the C-Chain and subnets increased by 107.8% and reached all-time highs. Meanwhile, transactions on the C-Chain increased by 162.2%. The increase in Avalanche C-Chain activity was largely tied to a rise in stablecoin liquidity and LayerZero.

Despite the renewed activity, the financial performance of AVAX suffered in June, when the Securities and Exchange Commission (SEC) alleged that several exchanges unlawfully engaged in unregistered offers and sales of cryptoasset securities. The SEC complaint coincided with downward pressure on the value of AVAX, which declined 22.2% QoQ. However, renewed network activity positively impacted revenue, which increased by 173.1% in AVAX (up 150.3% in USD terms).

Avalanche's strategy pushed forward through Q2. Ava Labs introduced Avalanche Arcad3 to accelerate gaming development, and Evergreen Subnets and Spruce were launched. The latter launches ushered in institutional partners, including T. Rowe Price, WisdomTree, Wellington Management, and Cumberland.

Looking ahead, the Avalanche Evergreen Subnets may continue onboarding Web2 companies, driving further enterprise adoption with its suite of institutional solutions. Along with the additional flexibility offered by the Rust SDK, HyperVM, and Move Virtual Machine, Avalanche will continue exploring custom VM solutions for subnets to attract development and expand the network horizontally.

Ultimately, Q2 was a positive for the ecosystem, and Avalanche’s plans for 2023 remain robust as it looks to remain competitive through the rest of the year.

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