What Is Avalanche (AVAX) and Should You Buy It?

Get ready for an avalanche of info about AVAX.

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Key points

• Avalanche is a smart contract cryptocurrency that boasts near instant finality.
• AVAX gained 3,000% last year making it one of the top cryptos by market cap.
• There’s a risk it could be overtaken by newer cryptos, or — like the rest of the industry — be severely impacted by increased regulation.

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Several smart contract cryptos like Avalanche (AVAX) shot to fame last year. The programmable blockchain began the year in 64th position in terms of market cap, and finished in 10th place. Ethereum (ETH), the biggest (and first) smart contract cryptocurrency, struggles with high transaction fees and network congestion, pushing developers and investors to look for alternatives.

With a price gain of over 3,000% in 2021, Avalanche was slightly overshadowed by the extraordinary growth of another so-called Ethereum killer, Solana (SOL). But it was still one of the top performing cryptos of the year. And, as we’ll cover in this piece, Avalanche is ahead of Solana in a couple of key areas.

Finality matters

With so many programmable cryptocurrencies on the market, you may be wondering what makes Avalanche stand out. To understand that, we need to understand something called finality. Finality is the point where a transaction can’t be altered. Without getting too technical, it’s a bit like making a card payment. The purchase is processed immediately, but the payment may then be listed as pending on your account for several days before it goes through.

Where Solana has one of the fastest processing times around, Avalanche says it is the “fastest smart contracts platform in the blockchain industry, as measured by time-to-finality.” This is crucial for decentralized finance and other applications as it is the point where you know for sure you own whatever it is you’re trying to buy.

Avalanche achieves this by having three interconnected blockchains instead of the usual one. Different chains perform different tasks, which — in theory — means the network can be fast without sacrificing security or scalability.

Crypto developers seem to have confidence in the ecosystem: So far over 150 projects are running on Avalanche. In addition, according to DeFi Llama, Avalanche actually has more total value locked on its platform than Solana — showing that serious decentralized finance applications are opting for Avalanche. These include popular lending app, Aave (AAVE), several decentralized exchanges, and Immunefi, a Web3 bug bounty program.

Avalanche basics

• What it does: Smart contract crypto with near-instant finality.
• Management team: The company behind Avalanche is called Ava Labs. The CEO is Emin Gün Sirer, a computer science professor who led the research into Avalanche.
• Date launched: Mainnet launch in September 2020.
• Market cap: $16.9 billion (CoinMarketCap, Jan. 25, 2021).
• Availability: Most major U.S. cryptocurrency exchanges.

Should you buy?

Avalanche checks a lot of boxes in terms of its management team and overall credentials. It has a solid purpose and appears to have attracted a number of interesting projects. Plus, it announced a partnership with Deloitte at the end of last year. Deloitte will run a new disaster recovery platform on the Avalanche blockchain.

But if you’re considering buying, it’s important to do your homework. Visit Avalanche’s website, read its whitepaper, and dig into its history. Take a look at its competitors and try to understand how it fits into the competitive landscape — that way you’ll also get a better idea of how the smart contract space might evolve longer term. It’s your money and you know your investment priorities better than anyone.

There are also some risks to be aware of, including the following:

• There are already a lot of smart contract cryptocurrencies on the market, and more will arrive. This is a fiercely competitive space, and just as Avalanche overtook older cryptos like EOS (EOS) and Tron (TRON), newer players may emerge with different, faster technology.
• There’s always the possibility of security or technical issues. Simply put, Avalanche is not as road-tested as Ethereum and unknown problems could throw a wrench in the works. Just as Solana’s had several outages in the past six months, Avalanche may falter, especially as it continues to grow.
• Increased crypto regulation is almost inevitable, though we don’t yet know what shape it will take. This is going to have an impact on all cryptocurrency prices, and could particularly hit the decentralized finance industry.
• Wider economic conditions have already caused the overall cryptocurrency market to shrink by around 30% in the past month. Governments are pulling back on their pandemic stimulus measures, which pushes people away from riskier assets like crypto. We don’t know what will happen to the global economy in the near future, nor what the knock-on impact for crypto will be.

If you want to buy Avalanche, you need to be prepared for volatility — crypto prices can rise and fall dramatically in a short amount of time. That’s why it’s important to only spend money you can afford to lose, and to first make sure you’re on top of other financial goals like your emergency fund and retirement savings. If the price does suddenly drop, you don’t want to be forced to sell at a loss or face financial ruin.

Emma Newbery owns Avalanche, Ethereum, Solana, and Aave. The Motley Fool owns shares of and recommends Bitcoin.