What is Avalanche?
Sometimes described as a competitor to Ethereum, Avalanche is a layer one blockchain (meaning its own blockchain distinct from Bitcoin or Ethereum or any other blockchain) designed to be a platform on which decentralized applications (or dApps) can be built. The Avalanche ecosystem includes many projects and platforms which can be viewed on their website.
One of Avalanche’s unique characteristics is its chain architecture. In contrast to Bitcoin’s single blockchain, Avalanche operates three individual blockchains each with its own purpose. The Exchange Chain (X-Chain) mints and exchanges the AVAX token, Avalanche’s native token, with a standardized approach similar to ERC token standards. The Contract Chain (C-Chain) hosts smart contracts that power the dApps built on the Avalanche platform, and uses a consensus mechanism unique to Avalanche called Snowman. (Consensus mechanisms are the process by which a blockchain validates its transactions and secures its blockchain.) The Platform Chain (P-Chain) coordinates the subnets — sets of validators created to validate custom chains created on the Avalanche platform. Subnets can set their own requirements which gives more control and compliance functionality to participants in the Avalanche network. All three of these chains are validated by the Primary Network, which is also the network on which members take AVAX tokens.
Avalanche was developed by Ava Labs, a team dedicated to developing decentralized finance applications, located primarily in New York City and Miami. While the project is open source and consensus is decentralized, the Ava Labs team continues to play an important role in the ongoing development of the Avalanche protocol. The Avalanche Foundation also supports the development of the Avalanche project by raising and distributing funds “dedicated to accelerating development, growth, and innovation across the ecosystem of builders and users of the Avalanche public blockchain.”
What is AVAX?
The AVAX token is the Avalanche network’s native token. Transactions on Avalanche require the payment of a transaction fee which is paid in AVAX. Holders of AVAX can also stake their tokens on Avalanche’s primary network and earn rewards for participating in and validating the network.
There is a max supply of 720,000,000 AVAX tokens, with a circulating supply of just over 220 million (as of November 2021). Transaction fees paid in AVAX are burned (removed from the ecosystem) and AVAX is added to the supply via staking rewards and events like airdrops.
Please note that Wealthsimple Crypto does not currently allow for clients holding AVAX in their account to participate in staking of their tokens.
How does AVAX compare to Bitcoin?
AVAX differs from Bitcoin in that AVAX powers the proof-of-stake process for Avalanche, a blockchain entirely separate from the Bitcoin blockchain. Since Avalanche uses proof-of-stake instead of the proof-of-work method of Bitcoin, AVAX tokens are staked as part of the validation mechanism, in contrast to BTC which are mined as a result of the proof-of-work algorithm.
Another difference between Avalanche and Bitcoin is their age. Avalanche’s mainnet launched in September of 2020 compared to Bitcoin’s 12 or so years of operation. Avalanche’s shorter history and notably smaller market size present some risks that buyers should be aware of in that its economy and scalability is less proven.
However, it should be noted that although AVAX is different from Bitcoin, it is far from independent from it. Bitcoin, the coin with a larger market (by a long shot), can influence the price of all other cryptocurrencies. If Bitcoin crashes, there’s a good chance that AVAX will feel the burn too (not directly as they operate entirely distinctly, but through overall market sentiment.) It is not clear, but unlikely, that a significant drop in AVAX’s value would have a material impact on Bitcoin.
Before trading any crypto assets it is important to understand the risks. This overview is a starting point for you to perform your own research prior to investing in a crypto asset. First and foremost:
No Canadian securities regulatory authority has expressed an opinion about Avalanche, including an opinion that AVAX is not itself a security and/or derivative.
Wealthsimple has performed a legal assessment of AVAX prior to making it available on Wealthsimple Crypto and has concluded that AVAX is not and is unlikely to be deemed a security or derivative. However, there is a risk that this conclusion could change in the future and the impact of this on an asset’s value is outlined in our Product Disclosure.
We evaluated AVAX based on publicly available information, including (but not limited to):
- The creation, governance, usage and design of AVAX, including the source code, security and roadmap for growth in the developer community and, if applicable, the background of the developer(s) that first created Avalanche;
- The supply, demand, maturity, utility and liquidity of AVAX;
- Material technical risks associated with AVAX, including any code defects, security breaches and other threats concerning AVAX and its supporting blockchain (such as the susceptibility to hacking and impact of forking), or the practices and protocols that apply to them; and
- Legal and regulatory risks associated with AVAX, including any pending, potential, or prior civil, regulatory, criminal, or enforcement action relating to the issuance, distribution, or use of AVAX.
Like all other crypto assets, there are some general risks to investing in AVAX. These include short history risk, volatility risk, liquidity risk, demand risk, forking risk, cryptography risk, regulatory risk, concentration risk, electronic trading risk and cyber security risk. Each of these risks are described in more detail in our in-app Product Disclosure. As the founding team, Ava Labs, continues to play an important role in ongoing development of Avalanche, fixes to any issues or bugs with the Avalanche software may be dependent on the Ava Labs team. Avalanche also presents higher short history risk because it has only been operational since September 2020.
Ava Labs, the Avalanche Foundation, and the Avalanche community are not under any legal or regulatory obligation to disclose material information to the public regarding their activities. Holders of AVAX have no recourse to Ava Labs, the Avalanche Foundation, or Wealthsimple if AVAX declines in value for any reason.
As stated above, Wealthsimple Crypto does not currently allow for clients holding AVAX in their account to participate in staking or to earn staking rewards..
We emphasize that this Crypto Asset Statement is not exhaustive of all risks associated with trading AVAX. Investors should perform their own assessment to determine the appropriate level of risk for their personal circumstances.
WDA is offering Crypto Contracts in reliance on a prospectus exemption contained in the exemptive relief decision Re Wealthsimple Digital Assets Inc. dated June 18, 2021. Please be aware that the statutory rights of action for damages and the right of rescission in the securities legislation of each province and territory of Canada would not apply to a misrepresentation in this Statement.