What you need to know about the Avalanche, an Ethereum competitor, during AVAX rallies
AVAX, the native token of the Avalanche smart contract platform, has reached a all time record Sunday, which briefly makes it one of the top 10 cryptocurrencies by market value. Now ranked No.11, AVAX has grown 33% in the past seven days, according to CoinGecko, and over 3,000% in the past year.
The increase follows an announcement from Ava Labs, a team supporting the development of the Avalanche blockchain, stating that it formed a partnership with the consultancy firm Deloitte to “improve safety, speed and precision” funding from the Federal Emergency Management Agency (FEMA). Deloitte will use the Avalanche blockchain to “build more effective disaster relief platforms.“
However, the market reaction was more a case of “good news at the right time,” Matt Hougan, chief investment officer at Bitwise Asset Management, told CNBC Make It. “Its timing coincided with a spike in frustration around the rising cost of using the Ethereum blockchain.”
Avalanche is often compared to Ethereum, as both have smart contract capabilities. Smart contracts, or collections of code that execute a set of instructions on the blockchain, are crucial in the execution of decentralized finance, or DeFi, applications and non-fungible tokens, or NFTs.
However, Avalanche aims to make faster transactions with lower fees than Ethereum.
While “there is nothing specific in the Deloitte deal that can transform Avalanche,” says Hougan, “this is a signal that Avalanche may have the right ingredients to compete with Ethereum and other versatile blockchains at long term”.
Despite the hype around Avalanche, it is important to research and understand the risks of any cryptocurrency before investing. Financial experts view cryptocurrencies as volatile and speculative investments. As soon as you reach a new peak, it can go down again.
Avalanche was launched in 2020 as a platform for smart contracts, building decentralized applications, or dapps, and subnets, or custom blockchains.
âSubnets are powerful, reliable and secure private or public blockchains built as offshoots of the core Avalanche platform,â John Wu, president of Ava Labs, told CNBC Make It. “The developers of these custom blockchains have full control over the design, the only requirement being to participate in securing the core platform.”
Wu sees subnets as a powerful use case for Avalanche going forward.
Avalanche operates on a Proof of Stake (PoS) model, where validators verify transactions based on the number of coins they hold. Supporters of the PoS say it consumes much less power than other models and has less of an impact on the environment.
As Ethereum’s request, the most used blockchain network, has jumped this year, other projects have emerged in an attempt to compete.
âEthereum is the main multipurpose blockchain, but there is much more demand for the utility of Ethereum than the blockchain can currently handle,â Hougan said. “As a result, you are seeing the rise of a number of Ethereum’s competitors. Avalanche is one of them.”
Avalanche is “designed to be faster and cheaper to use than Ethereum, processing more transactions per second at a lower cost,” Hougan explains. According to Ava Labs, Avalanche can treat over 4,500 transactions per second, while Ethereum can support about 13 transactions per second.
But Ethereum still has its own advantages, including its reputation, notoriety, and capabilities.
Currently, Ethereum operates on a Proof of Work (PoW) model, where miners must compete against each other to solve complex puzzles in order to validate transactions. However, Ethereum supporters claim that the blockchain will become more scalable, secure and sustainable after its Eth2 upgrade, scheduled for 2022, during which the network will also transition to a PoS model.
What are the risks ?
Typically, financial experts warn to invest only what you can afford to lose in cryptocurrencies due to their significant risks.
AVAX has grown considerably in a short period of time. Just like with other cryptocurrencies, the potential for large price fluctuations should be considered and understood before investing.
But above all, betting on one blockchain is very risky compared to others, Hougan says. âIdentifying the winners of disruptive technologies early on is difficult. “
âIt seems clear to me that the aggregate group of versatile blockchains will be significantly larger in five years than it is today,â he says. âBut anyone who tells you that a specific blockchain will win should remember AOL â â and Myspace, Napster, BetaMax, etc.,â he says.
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