What is Avalanche?
Avalanche is a smart contract platform that is eco-friendly and has fast and low-cost transactions. It can support many blockchain-based projects such as decentralized applications (DAPPs) and autonomous blockchains.
As a smart contract platform with no inherent impermissible activities, we believe Avalanche is halal. However, care needs to be taken to ensure that Avalanche doesn’t overwhelmingly become associated with haram activities. Read on for a much deeper dive into Avalanche itself and the Islamic views on it.
What does Avalanche do?
Avalanche is a smart contract platform that is a direct competitor to Ethereum. Smart contracts are self-executing agreements that automatically execute certain actions once the predetermined conditions have been met. It can be summarised as an if-then protocol. If the conditions are met then an action is performed.
Smart contracts allow for transactions to be carried out without the need for a third-party authority, as the code will automatically execute. This could result in cost savings and increased transaction speeds. For example, if you are a footballer, you could create a smart contract that automatically triggers bonuses for you when you score a goal or make an assist by connecting the contract to the official match statistics.
Smart contracts form the basis of decentralized applications (DAPPs), which is a key functionality of Avalanche. Avalanche also allows you to create autonomous blockchains on its network for a subscription fee. We will cover these use cases in more detail below.
The key differentiator of Avalanche compared to Ethereum is that Avalanche is more eco-friendly and has quicker and cheaper transactions.
How does Avalanche work technically?
Unlike Bitcoin and Ethereum, Avalanche is built upon three blockchains instead of one. Each blockchain specialises in a certain task:
- The primary blockchain is the Exchange Chain (X-Chain) which is responsible for creating and exchanging assets. The most popular asset is naturally Avalanche’s native token, AVAX which is used to pay fees.
- The next chain is the Contract Chain (C-Chain). This is the chain that provides Avalanche’s smart contract functionality. The chain is also EVM (Ethereum Virtual Machine) compatible which means any Ethereum-based smart contracts can be deployed on Avalanche.
- The final blockchain is the Platform Chain (P-Chain) which keeps track of validators and enables the creation of new blockchains called subnets.
Avalanche’s subnet feature is arguably its greatest competitive advantage. A subnet is simply a blockchain that is a clone of Avalanche’s primary network that can be created and customised by users. This effectively allows Avalanche to continuously scale as subnet creation is unlimited.
As whenever a subnet has reached its transaction limits, a new subnet could be created to free up capacity. This means that Avalanche doesn’t have a practical transactions per second (tps) limit compared to the 7tps for Bitcoin and 14tps for Ethereum.
Avalanche uses a proof of stake (POS) consensus mechanism to approve transactions and add them to the blockchain. This is in contrast to Bitcoin and Ethereum (for now) which use proof of work (POW). POW is where miners compete to solve problems to win the right to certify blocks of transactions and obtain a block reward of tokens in the process as well as the transaction fees.
In POS, instead of miners certifying transactions you have ‘validators’. These validators are chosen at random based on how much of the network’s token they have locked up (i.e. their stake). This system is popular as it requires considerably less energy than POW although POW proponents argue that their method is more secure.
What are the use cases of Avalanche?
Avalanche has three broad use cases:
- . Decentralized Finance (DeFi). DeFi is essentially finance conducted without a central authority (banks, governments etc). Rather, it is an internet-based peer-to-peer financial system based on blockchain technology. For more on DeFi, check out our deep dive here.
- . Institutions, Enterprises, and Governments. Avalanche wants to be the go-to platform for businesses and governments to create digital assets such as Central Bank Digital Currencies (CBDC) and digital identity platforms. They also want to facilitate smart contract products in fields such as real estate and supply chains.
- . Non-Fungible Tokens (NFTs). NFTs are digital tokens that can represent a unique asset, allowing them to be traded, supporting digital artwork marketplaces to digital ticketing. For more on NFTs, check out Ibrahim’s video here.
Are people using Avalanche right now?
Yes at the time of writing, over the past week there have been ~ 700k daily average transactions on the Avalanche network. This is less than Ethereum’s ~1m daily recorded transactions. When evaluating DeFi platforms, a useful metric to use is Total Value Locked (TVL). The TVL represents the total value locked in a network’s DeFi protocols and indicates how popular a network is. Avalanche’s TVL of $3.8bn is the fifth largest in the space. However, this is dwarfed by Ethereum’s TVL of $69bn, which for now is still the undisputed king of the DeFi space.
What are the strengths and weaknesses of Avalanche?
- Fast processing times
- Near zero transaction fees
- Widely available on crypto exchanges
- Environmentally friendly
- Avalanche is compatible with the same programming language used by Ethereum which makes it easy for any Ethereum-based projects to migrate over to Avalanche’s network
- Subnet functionality allows it to continuously scale, addressing one of Ethereum’s main weaknesses
- There is a lot of competition as the smart contract space is quite congested
- Avalanche has some way to go to catch up to the runaway leader Ethereum
- If Ethereum successfully executes its planned migration to POS, this could reduce Avalanche’s competitive advantage
- Many chains use the Ethereum Virtual Machine (EVM) which means there is a lot of competition for EVM-skilled developers. This could slow Avalanche’s development
- Avalanche has high price volatility and thus is a high-risk investment
Is Avalanche a good investment?
Avalanche (AVAX) is one of the most established cryptocurrencies and currently is the 14th largest cryptocurrency with a market capitalization of $17.7bn. AVAX can be bought from most exchanges including Coinbase and Binance. It reached a peak of $146 in November 2021 and is currently trading around $25 at the time of writing, having lost a whopping 83% of its peak value.
The smart contract platform space is congested with many competitors. Yet Avalanche’s fast transactions, low costs and subnet functionality give it a clear competitive advantage.
Its subnet functionality is a key strength, allowing it to continuously scale, addressing one of Ethereum’s main weaknesses. However, Ethereum is indisputably the key leader in this space and if it successfully delivers its planned migration, it could mitigate many of Avalanche’s advantages.
As the industry is still new, it’s hard to definitively say which projects will come out on top. Therefore, it could be prudent to be conservative and refrain from over-committing to any single project. Instead, you should spread your investments across multiple projects.
Alternatives to Avalanche
Ethereum is the second-largest cryptocurrency and is the original smart contract platform. Avalanche is trying to disrupt Ethereum but Ethereum has a big lead over it, in terms of active developers and platform usage.
Ethereum is also planning a migration from the proof of work consensus system to a proof of stake system. This would help it bolster its eco-friendly credentials and result in cheaper and quicker transactions. However, this migration has already been delayed many times and carries plenty of execution risk. For more on Ethereum, read our deep dive here.
Polkadot was founded by Ethereum co-founder Gavin Wood after becoming disillusioned with the development of Ethereum. It currently is the 11th largest cryptocurrency with a market capitalization of $11 billion.
It already uses a proof of stake consensus mechanism unlike Ethereum and has a strong focus on ‘interoperability’. Polkadot was founded on the belief that there will be no one single winner in the cryptocurrency but instead will be multiple successful projects.
Their goal is to facilitate this ‘interoperability’ by connecting multiple blockchains. This team-player approach gives them a strong edge over other similar projects.
Solana is another smart contract platform that was one of the biggest success stories of the recent bull run. Its price sensationally went from $0.5 in May 2020 to $260 in Nov 2021.
Its price has now settled at $37 in the current market downturn but it is still the 9th largest cryptocurrency. Solana is known for its lightning-fast processing speeds and low transaction costs. However, it has struggled with network outages on seven separate occasions over the past year showing that there is still work to be done.
Is Avalanche Halal?
When it comes to cryptocurrency in general, our view is that investing in crypto is halal as long as the project itself is halal. We see cryptocurrency as a type of digital asset (with the potential for some to become fully-fledged currencies).
We don’t find there to be anything problematic from an Islamic perspective about blockchain technology, and cryptocurrency which is a use of blockchain and seeking to profit from it. For more on our approach to crypto, check out this article.
You want to avoid projects where:
- the technology underpinning the project is intrinsically linked to a haram transaction (e.g. interest-based lending)
- the ecosystem that they are creating is so inextricably tied up with illicit/immoral activities that it would be inappropriate to support such an ecosystem (e.g. a project geared solely towards gambling)
The case for yes and why
Just like Bitcoin, most scholars hold Ethereum to be halal. We also share this view. Avalanche is similar to Ethereum and therefore by extension, we would deem it to be halal due to a similar analysis to ETH. However, it’s worth paying attention to Avalanche’s DeFi activity as unfortunately many of the activities in that space are riba-based. If the association between Avalanche and impermissible activities becomes overt, then this analysis would change.
The case for no and why
If you follow the opinion that crypto isn’t permissible, then Avalanche by extension would also not be permissible.
In summary, Avalanche is a solid smart contract platform that is eco-friendly and has fast and low-cost transactions. Its subnet functionality in particular is a key strength, allowing it to continuously scale, addressing one of Ethereum’s main weaknesses. However, Ethereum is still the undisputed leader and it’ll take some effort to dislodge it.
We are satisfied that it is indeed a halal asset and thus permissible for Muslim investors to buy.