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Visualizing Value Flows In & Out of Avalanche

Feb 26, 2021 · 4 min read

By Can Gurel

With the launch of the cross-chain Avalanche-Ethereum (AEB) bridge and community built decentralized exchange Pangolin, one after the other, Avalanche undeniably went through a very successful and exciting few weeks. Avalanche’s native token, AVAX, whipsawed from a $1bn circulating market cap up past $4bn and has now settled back at $2bn all over the course of the past 20 days. The rise of AVAX was mainly driven by the launch of Pangolin’s governance token, PNG, which was allocated 95% to community liquidity miners. As a consequence of such a generous distribution, liquidity in Pangolin rose from zero to $250m in just a few days. All these achievements sparked a lot of attention and allowed a perfect environment for many DeFi users to test drive Avalanche’s relatively new C-Chain blockchain. 

C-Chain is a new Ethereum Virtual Machine (EVM) compatible chain that supports key Ethereum tooling including MetaMask, Remix ERC tokens as well as Solidity Smart Contracts. Avalanche can achieve very fast transactions on C-Chain, partly because it’s EVM is pretty much empty, but also because of it’s novel consensus mechanism. In addition, during this period Avalanche was also able to offer a big discount on fees which was likely viewed as an appealing value proposition to market participants getting priced out of Ethereum. 

Having said all that, we know that a blockchain without applications is basically useless (except you BTC). At the very minimum, a liquid AMM must be there to allow users to engage in economic activities. Now that Pangolin filled that gap I find it fair time to make an assessment on market sentiment and potential future adoption of Avalanche. The easiest way to get insight into this is to take a closer look on the AEB Bridge which served as the main liquidity gateway of the network during this period.

AEB is operated by trusted parties under a multi-sig scheme. The way this bridge works is quite simple; users wanting to transfer tokens from one chain to another send tokens to a contract in the initiating chain, which locks in the tokens. Then an equivalent amount of tokens gets minted on the destination chain. To start, the bridge mostly supported blue-chip DeFi tokens like AAVE, COMP, CRV, UNI, YFI…. Finally we should note that this is a 2 way bridge, allowing transfers both ways between Avalanche <> Ethereum. 

Alright, enough of the intro. Let’s analyze the bridge activity to better understand how much value crossed over the bridge and how sticky it was. The visualization below illustrates value flowing across the bridge by asset over the 23 days since launch.

Let’s breakdown this chart to better understand it. All of the value that flowed to Avalanche can be seen on the right hand side. Currently the total figure accounts for 150M USD, out of which 52M bounced back to Ethereum side. The main driver for the influx of tokens was the liquidity mining incentives offered by Pangolin which resulted in a very rapid growth of liquidity in a matter of days. After a few days had passed, the liquidity eventually plateaued as the launch hype subsided a bit. This happened mainly because the chain is relatively new and there aren’t many other economic activities to support substantial trade volumes. Unsurprisingly, volumes didn’t catch up to pool growth causing a dilution in liquidity miner rewards, and partially discouraging further growth of liquidity. Throughout the craze, Avalanche served 1,245 unique Ethereum addresses and managed to capture 65% of total inflows, 75% of which found its way into Pangolin pools. As liquidity begets liquidity, this was a crucial stepping stone for Avalanche. For the next phase, I’ll be watching out for stablecoin launches on the network.

Watch out for upcoming AVAX supply inflation

A breakdown of the AVAX supply can be found in the above chart. Currently, ~20% of minted supply is in liquid form. This may change soon when the vested (locked) tokens that are quarterly released enter into circulation on Mar 9th. This time 40,662,096 AVAX will get unlocked causing ~1.5x immediate inflation in circulating supply. However it’s important to note that anyone can simply decide to re-stake their tokens and remove them back out of circulation. In fact, to counter the sudden inflation Avalanche team has already committed to immediately re-stake tokens allocated to Team & Foundation which roughly accounts for 6.15 M AVAX excluding staking rewards.

** The subsection “Watch out for upcoming AVAX supply inflation” was corrected and “Monthly AVAX Entering Into Circulation” chart was removed after realisation of an unfortunate mistake in presented data which falsely showed significantly more released AVAX than actual. I’m deeply sorry for this mispresentation and sincerely apologize for any troubles it may have caused.