Avalanche: The AVAX Conundrum

Summary AVAX’s ecosystem growth is primarily off C-Chain, which doesn’t drive AVAX token demand, making it difficult to justify a ‘buy’ rating. Despite a 25% year-over-year transaction increase, active addresses and staking rewards have not shown significant growth, impacting AVAX’s investment appeal. Avalanche’s stablecoin supply has grown 75% year-to-date but remains small compared to other chains, limiting its competitive advantage. I hold AVAX but maintain a ‘hold’ rating due to its weaker fundamental setup and better alternatives like Polygon and Binance Smart Chain. When I last covered Avalanche ( AVAX-USD ) in February, I called the AVAX token a ‘hold’ and was generally underwhelmed with the chain’s usage growth. While the primary reason for that article was to explore the token’s historical reaction to supply unlocks, I left readers with the following: Going forward, I’d like to see meaningful growth in users, transactions, and stablecoin footprint before I’d entertain a larger position. There were several very good comments to that piece from numerous different contributors, including fellow SA analyst Dominic Lombardo . However, where I want to give a cap-tip is to ‘ A Credit Risk Guy ‘ for saying the following: the other problem that I see is the demand for the token. This will become an issue at some point as the subnet adoption becomes bigger around their current bullish narratives of gaming and RWA. Each subnet can run with ~8 validators for 2,000 AVAX each (which is cheap), so moving the transactions to a subnet is good for the ecosystem but not good for the token demand. This is a terrific point and mirrors similar concerns I’ve had about Ethereum ( ETH-USD ) scaling through L2 blockchains rather than on mainnet following the Dencun upgrade earlier this year. In this AVAX update, we’ll look at how the ecosystem has grown over the last 9 months and what impact, if any, that network usage has had on AVAX token demand. Network Usage Recall, the AVAX token benefited from a large spike in transactions during the month of December last year. For the full month, there were over 137.6 million transactions last December, which happened to be almost three times the number of transactions from November 2023 and still stands as the single month record for the network. After a somewhat underwhelming year for most of 2024, we’ve started to see monthly transactions move higher again beginning in October: Avalanche Transactions (stats.avax.network) There were 68.5 million Avalanche transactions in October and 98.1 million in November of this year. So far, there have been 13.4 million transactions just four days into December 2024; this would project a little under 104 million transactions expected by the end of this month. With the understanding that December 2023 was a large outlier month, the year over year growth picture for the full quarter is pretty good, in my view: Monthly Transactions (millions) 2023 2024 YoY Change October 27.5 68.5 149.1% November 50.7 98.1 93.5% December* 137.6 103.7 -24.6% Q4 Sum 215.8 270.3 25.3% Source: stats.avax.network, *December 2024 total is projected based on month to date trend through 12/4/24 At a projected 25% increase year over year, the 270.3 million transactions on Avalanche in Q4 is encouraging. And I’ll clarify that the December figure for 2024 is using a very small 4 day sample size to project the rest of the month at the current pace. It’s very possible, if not likely, this 103.7 million number will be very different when the month is actually complete. The sustainability of this growth is tough to project because the transaction spike is happening in a very different way than it did last December: Avalanche: All vs C-Chain (Snowtrace) Data from Snowtrace shows the overwhelming majority of the increase in transactions is coming from the broader Avalanche ecosystem rather than from the C-Chain – which does not appear to have been the case last December. The recent trend in transactions seems more similar to the one that happened toward the end of 2022 – which didn’t last all that long and began to fizzle out at the beginning of 2023. In any case, transaction growth is solid for now. But is that having an sort of impact on AVAX token demand? AVAX Token Demand Since AVAX is the gas that makes Avalanche move, one way to look at raw demand for the AVAX token is through gas used on the network: Avalanche Gas Used (stats.avax.network) Here we can see daily gas usage of all Avalanche L1s has indeed been increasing rather quickly beginning in October. Gas used was up 35.7% in October and 22.7% in November from a month over month standpoint. Interestingly, this two month-long jump in both gas and transactions has not appeared to produce a noticeable spike in active addresses: Avalanche Active Addresses vs Gas Used (subnets.avax.network) At 32.4k daily active addresses (or DAAs) in October and 38.2k in November, DAAs over the last two months have been about in-line with the figures from the prior year and actually well below what we saw for most of January through April. To the commenter’s point that I shared in the introduction of this piece, broader ecosystem growth may not actually be of benefit to AVAX because the subnets don’t actually require AVAX as gas. Something that I think AVAX investors should consider is where the network fees are coming from. Avalanche 7 Day Fees By Blockchain (Snowtrace) In the last 7 days, Avalanche has generated over $716k in blockchain fees. Nearly 93% of those fees have come from the C-Chain. And the stronger multi-year uptrend in gas used is happening away from C-Chain: Gas used trend (Snowtrace) So the question then does remain; what is the benefit to AVAX if ecosystem growth is mainly happening off C-Chain yet it’s the C-Chain fees that primarily drive the organic bid for AVAX? Staking & Additional Considerations AVAX is still used for staking and offers a very competitive reward rate of 7.8% – this is higher than smart contract networks like Solana ( SOL-USD ) or Binance ( BNB-USD ) but well behind the reward rate offered by similar ecosystems like Polkadot ( DOT-USD ) or Cosmos ( ATOM-USD ). Platform/Ecosystem Staking Reward Real Rate Staking Ratio Avalanche 7.79% 3.18% 51.9% Polkadot 11.96% 4.00% 51.4% Cosmos 21.94% 8.59% 50.6% Source: StakingRewards, as of 12/5/24 Adjusting for token issuance, the real reward from staking AVAX is 3.2% annually. Which is again behind similar blockchain ecosystems that have a ‘subnet’ structure. Staked AVAX vs RewardRate (StakingRewards) The 12 month trend in the AVAX reward rate is down. Staked AVAX has fallen by 29 million, or 11%, over the last 12 months. The year to date trend in C-Chain validators has also been down a little bit: C-Chain Validators (subnets.avax.network) Since the start of the year, C-Chain validators have fallen about 10% percent from 1,643 down to 1,484 as of article submission. Finally, Avalanche is ranked 9th in TVL behind Sui ( SUI-USD ) with just $1.6 billion in Total Value Locked. The chain has had some growth in stablecoin footprint year to date, however: Stablecoin Supply Growth (Artemis) The chart above is showing total stablecoin supply growth in a stacked bar format. Don’t get too excited about those blood red bars, those are actually Tron ( TRX-USD ). Avalanche is much harder to see as the chain makes up just $2.1 billion of the $187.5 total stablecoin market. That said, Avalanche has seen stable supply grow 75% year to date while the broader market has increased 53%. Avalanche has better supply growth, but it’s from a much smaller starting point than most other chains in the broader digital asset landscape. And the $2.1 billion stable supply on Avalanche is well below the $4.3 billion peak from 2021. Closing Thoughts I like Avalanche as a user. I’ve never personally had a problem with it. As an investment, it’s difficult for me to call AVAX a ‘buy’ long term due to what I’ve laid out in this post. ‘The AVAX Conundrum’ is that most of the usage growth appears to be happening off C-Chain. Yet it’s the C-Chain that pays the bills for the network with the AVAX token. This is a bit more concerning than the situation that Ethereum is facing, in my opinion, because most L2 networks built on top of Ethereum still require bridged ETH to pay gas. The other thing that I find so interesting is Avalanche should theoretically be the ‘high fee’ refuge from Ethereum because its an EVM-compatible chain. Yet, Polygon ( MATIC-USD )(POL-USD), Arbitrum ( ARB-USD ), and Base ( COIN ) seem to be benefiting more from any potential application migration away from the relative high fee environment that is Ethereum mainnet. I do still hold a little bit of AVAX, but it’s not an asset that I feel has the strongest fundamental setup at the moment. That could certainly change in the future, but for now it’s still a ‘hold’ rather than a ‘buy.’

Source: Seeking Alpha