Guide to Avalanche

Avalanche is a high-speed smart contract platform with fast finality and EVM support. Its primary network is comprised of three main chains, each with their own types of transactions and consensus mechanisms: 

• Platform Chain (P-Chain): Coordinates all Avalanche validators, uses the Snowman consensus mechanism, and is used to create and manage custom blockchains called Subnets. On the P-Chain, validators can stake AVAX, its native currency across all chains, to validate the network.

• Exchange Chain (X-Chain): Creates, manages, and exchanges assets and tokens, employing the Avalanche DAG (direct acyclic graph) for consensus. 

• Contract Chain (C-Chain): Creates and executes EVM-compatible smart contracts using the Snowman consensus mechanism. Similar to Ethereum, users can create decentralized applications and tokens like ERC20s and ERC721 non-fungible tokens (NFTs).

To summarize Avalanche’s two consensus mechanisms:

• Avalanche: A DAG consensus protocol that is high-throughput, parallelizable, and simple to prune. 

• Snowman: A chain-optimized consensus protocol that is high-throughput, totally-ordered, and great for smart contracts.

Developers building on Ethereum, the pioneer smart contract platform with the largest developer community, can easily port their applications and work with Avalanche. For developers, Avalanche offers a number of benefits including less than one second transaction finality; exceptionally high transaction-throughput (in part enabled by the creation of Subnets); and Proof-of-Stake (PoS) consensus mechanism, enabling greater energy efficiency. 

Avalanche is currently secured by over a thousand validators working together to come to consensus on the state of a set of blockchains, comprising the P, X, and C-Chains in addition to Subnets. One of the first Avalanche Subnets recently launched – DeFi Kingdoms. Meanwhile, the Avalanche Foundation recently announced a $290 million development fund to incentivize the creation of subnet blockchains.

Key network statistics

Development activity and number of transactions significantly grew on Avalanche over the past year. The network reached over 800 thousand daily transactions on the C-Chain in April (and surpassed over 1 million in February).

Avalanche’s C-Chain enables the creation and execution of smart contracts for a universe of applications such as for decentralized finance (DeFi) and NFTs. As of April 2022, over $10 billion worth of tokens were locked across the Avalanche network. Some of the most popular applications include Aave, a popular lending and borrowing protocol that ported over from Ethereum, and Trader Joe, a protocol for decentralized exchange, lending, and other DeFi solutions.

Further, Avalanche has a rich and expanding NFT ecosystem. As of March 2022, nearly $60 million worth of NFT sales were conducted on Avalanche.

How to participate on Avalanche

Coinbase Cloud offers an array of products for those wishing to participate on Avalanche. 

Today, Coinbase Cloud offers public validators for delegators to easily and securely stake their AVAX. Delegators can contribute to validators doing the important and resource-intensive work of verifying transactions, participating in consensus, and adding blocks. To get started, delegators need a minimum of 25 AVAX to stake, plus funds to cover the gas fees. Here is our step-by-step guide to delegating AVAX tokens.

Further, those who wish to run their own full and dedicated validators on Avalanche can do so using our Participate product. Coinbase Cloud’s staking infrastructure is built to the highest security standards and offers 99% uptime guarantee, making it easy for anyone to spin up a validator in just a few steps from their dashboard. Staking via Coinbase Cloud is non-custodial and requires no engineering resources on the part of the client. 

Why run an Avalanche node and become a validator?

Validators play a key role in securing the Avalanche network and maintaining its long-term stability and growth, and they are rewarded with AVAX rewards for doing so. The AVAX staking dynamics specifically encourage participation as a validator by capping delegation to a validator (see “initial bond” below) and by setting a network-wide minimum delegation fee of 2%.

Avalanche validators also play an increasingly important role in the ecosystem’s expansion by validating Avalanche Subnets, a new and growing opportunity. Subnets can only be validated by a subset of Avalanche dedicated validators, which means this opportunity is reserved specifically for Avalanche validators (and not delegators). Subnets will offer their own incentives to validators, increasing the reward potential for running an Avalanche validator. Keep in mind that becoming a dedicated validator requires a bond of at least 2,000 AVAX.

Dynamics, rewards and economics of staking on Avalanche

AVAX, the native currency for Avalanche, has a maximum supply of 720 million tokens. At launch, 360 million AVAX were distributed with varying lockups, and as of April 2022 there are approximately 400 million AVAX in circulation. The remaining AVAX not yet circulating are distributed as rewards for staking AVAX. The rate of supply is proportional to the total amount of AVAX that is staked on the network (e.g. if more AVAX is staked, the remaining AVAX is distributed more quickly to the network).

There is no cap on the number of dedicated validators staking AVAX — a core feature of the consensus mechanism. However, to participate as an active validator, validators must put up a bond of at least 2,000 AVAX. A validator's bond is then locked for the length of the selected validation period, from at least two weeks up to a year, and all rewards are earned after the staking period ends. In order to successfully verify the network and earn rewards, validators require 80% minimum uptime, but should not rely on this margin of error. All validators should target 100% responsiveness by maintaining node connection to the network and participating in upgrades as soon as possible. Coinbase Cloud guarantees 99% uptime for hosting your dedicated validator.

The estimated AVAX reward rate for staking as of April 2022: 

• 7.9% annual reward rate for minimum 2 week lockup

• 9.4% annual reward rate for maximum 52 week lockup

Each validator votes in the Avalanche network consensus with a weight proportional to its total amount staked (i.e. the validator bond + the total stake delegated to the validator). 

A validator’s initial bond amount determines how much AVAX can be delegated to that validator. After the initial validator bond, delegation is capped at 4x the amount bonded by the validator (e.g. a bond of 2,000 AVAX can receive 8,000 AVAX in delegation). The maximum amount staked to a node (the validators bond + total delegated stake) is capped at 3 million AVAX. 

Rewards are paid out at the end of a staking period for validators and delegators if the validator they’ve staked to meets the minimum uptime requirement measured over that period. Validators receive their percentage of a delegator’s rewards at the end of the delegator’s staking period (with a fee between 2-100% as specified by the validator).

Risks of participation in Avalanche

There is no slashing on Avalanche, a common risk associated with other Proof-of-Stake networks where stake may be subject to penalties for misconduct or even accidental issues arising from situations like a power or internet outage. 

Avalanche attempts to counteract its lack of slashing by requiring stakers to predetermine the length of their lockup and withholding staking rewards until that time elapses, thereby increasing the opportunity cost for stakers.

Why use Coinbase Cloud?

• Ease of use: Despite the robustness of the underlying technology, the user experience of managing your nodes is very intuitive. You can spin up your nodes in minutes from your dashboard, and easily manage your infrastructure. 

• Non-custodial: Our infrastructure is non-custodial, meaning you can retain custody of your tokens.

• Reliable: Our multi-cloud, multi-region infrastructure offers 99% uptime guarantee, giving you peace of mind that your nodes are live and validating transactions.

• Enterprise-grade security: Coinbase Cloud team are experts in decentralized infrastructure, and embed security best practices through the design, implementation, and deployment for all our products and services. We continuously verify the stability, and security of our platform and underlying systems. 

• Dedicated support: We have a dedicated customer success team to ensure you have a seamless experience every step of the way, from onboarding to managing your infrastructure. 

• Protocol Specialists: Coinbase Cloud customers also have access to the industry’s first team of Protocol Specialists who specialize in network dynamics, strategy, governance, etc. on Avalanche and other protocols.

Contact us to learn more about running an Avalanche validator

This document and the information contained herein is not a recommendation or endorsement of any digital asset, protocol, network, or project. However, Coinbase may have, or may in the future have, a significant financial interest in, and may receive compensation for services related to one or more of the digital assets, protocols, networks, entities, projects, and/or ventures discussed herein. The risk of loss in cryptocurrency, including staking, can be substantial and nothing herein is intended to be a guarantee against the possibility of loss.This document and the content contained herein are based on information which is believed to be reliable and has been obtained from sources believed to be reliable, but Coinbase makes no representation or warranty, express, or implied, as to the fairness, accuracy, adequacy, reasonableness, or completeness of such information, and, without limiting the foregoing or anything else in this disclaimer, all information provided herein is subject to modification by the underlying protocol network.Any use of Coinbase’s services may be contingent on completion of Coinbase’s onboarding process and is Coinbase’s sole discretion, including entrance into applicable legal documentation and will be, at all times, subject to and governed by Coinbase’s policies, including without limitation, its terms of service and privacy policy, as may be amended from time to time.