$AVAX: +24% – Avalanche’s native token $AVAX is up thanks to recent partnerships like powering Alibaba’s cloud infrastructure in Asia, helping Shopify merchants sell NFTs directly on online storefronts, and bringing FIDE chess records on-chain.

Recently, Ava Labs, the technical team behind Avalanche, announced it had partnered with Amazon Web Services (AWS) to scale blockchain solutions for enterprises, governments, and other institutions. Several speculations arose with this announcement. AVAX rose 24% on the back of this announcement. Many skeptics criticized the news postulating that Ava Labs was simply paying AWS for cloud services and that this was not a partnership of any sort. Most of this skepticism arises from the flashbacks of November 2022 when Google Cloud Services and Solana announced a partnership to scale the blockchain. The market interpreted this as bullish; however, Google Cloud only joined the Solana Chain as a validator. To this pessimism, Avalanche felt the need to respond. Emin Gun Sirer, Founder and CEO of Ava Labs, quickly tweeted via his handle, “This is a big deal. It’s not your grandfather’s “AWS partnership announcement. Let me explain in plain English.” He explained that Ava Labs was paying nothing to AWS, but instead, AWS, together with Alibaba, understands where the blockchain tech is going and wants to partner with the one chain that is delivering the vision. AWS will contribute substantial amounts of AWS credits to projects looking to deploy subnets on Avalanche.

Network Activity

Avalanche is a blockchain platform that allows for creating and managing multiple independent subnets, called virtual chains, within a single network. That allows for a high degree of customization and scalability and the ability to perform complex operations such as cross-chain transfers and atomic swaps. It uses a consensus algorithm called Avalanche-X, a variant of the Avalanche consensus protocol, to secure the network and validate transactions. The platform is designed for various industries, including finance, supply chain management, and gaming. The network consists of 3 built-in blockchains (subnets): X-Chain, C-Chain, and P-Chain. The X-Chain is used to manage assets and uses the Avalanche consensus protocol. The C-Chain is used to create and interact with smart contracts and uses the Snowman consensus protocol. At the same time, the P-Chain is used for staking and coordinating validators and uses the Snowman consensus protocol. 

Network activity has been pretty mute, though. Month-on-month website visits declined by 14.53% in December, according to Similarweb. Defillama reports a 90.5% year-on-year drop in total value locked (TVL) on the blockchain compared to January 2022. That is largely due to the bear market that ravaged the crypto industry as investors departed the space and many businesses went bust. TVL in AVAX terms declined a modest 41.5% within this period. 

However, over the last year, Avalanche has seen unique addresses on the blockchain grow from 1.45 million at the end of 2021 to 4.52 million at the end of 2022 – year over year growth of well over 200%. The overall trend in daily active addresses (DAAs), a metric synonymous with daily active users, has been negative since the collapse of Terra (LUNC-USD); however, last week, Coin98 Analytics reported a ranking of 8 for Avalanche amongst all top blockchains for 7-day daily active addresses as the entire industry continues to recover.

Also somewhat stable but boring is the lack of meaningful growth in validators on the C-chain. The C-chain had grown from 1,148 validators at the end of 2021 to over 1,600 in April of that year. That number has since retreated to 1,210 at the start of this year. That is not exactly a great trend. Also, valuing Avalanche from the Market cap/TVL ratio, it stands at a modest 5.5. That might seem high, given that it is valued five times what it holds on its network. That, nonetheless, pales compared to Ethereum and BNB Smart Chain, which both have larger MC/TVL ratios of 7 and 10, respectively. The higher the ratio, the more overvalued a chain’s native asset potentially is. One thing to keep in mind is low MC/TVL doesn’t necessarily mean a coin is cheap by itself. It could also indicate a one-dimension chain that lacks a diverse set of activities or simply can’t attract users. Another valuation metric to consider is price-to-sales. This metric compares market cap to revenue. Avalanche’s P/S ratio of 1984x is high, but in relative valuation, it is quite tame next to BNB Smart Chain’s 3409x and Ethereum’s 3142x. Here is the Data from Token Terminal.

Token Economics

A quick look at avascan.info shows an annual inflation rate of 8.58% for AVAX, with 63.95% of the circulating supply staked. Given that there are currently 311.58 million AVAX in circulation, the annual inflationary supply is about 17 million AVAX tokens. Annual projections for 2023 estimate that staking rewards, token unlocks, and other factors will increase the total AVAX liquid supply by 63 million – a huge 20%.

Centralization Concerns

Valuation and user growth stagnation are clear risks. But these aren’t risks that are exclusive to just Avalanche. Additionally, like all native assets on a public blockchain network, AVAX has risks on the regulatory front. We have seen the current SEC write language implying staked blockchain-based assets are potentially securities under United States jurisdiction because of the geographic location of nodes or validators. Over 40% of Avalanche’s validators are in the United States. Though Germany is somewhat a close second with 27%, this translates to incredibly additional risk, with 67% of a chain’s validation coming from just two countries. If either country decides to take a regulatory course, that would be detrimental to staking, and the loss of viable validators could significantly damage the network. That is not a risk that is exclusive to Avalanche. Still, it is a risk to consider, given the push for crypto regulations following the FTX collapse and increased scrutiny on the industry.

Conclusion

As global inflation keeps declining and the entire crypto industry continues to recover, Avalanche is expected to continue strongly into 2023. Developer activity remained healthy within the bear market; although user growth might be slow, it is almost certain. AVAX should be an important consideration for all crypto investors.

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