Ethereum Watch

One of the most common tropes in the crypto community is that of the so-called “Ethereum Killer.” Commentators include projects like Cardano, EOS, and Zilliqa. As of late, Ava Labs has also been included on this list. 

But after raising $42.5 million last month, the Ava team and its blockchain, Avalanche, aren’t focused on taking down the number two blockchain. Instead, they’re hoping to reinvent all of traditional finance.  

Bringing DeFi to TradFi

Insofar as the majority of DeFi applications are built on Ethereum, moving funds from various yield farms, flash loan platforms, and into new digital assets has been seamless. 

Unfortunately, this composability may not last.

Layer two solutions are currently the need of the hour. They will relieve congestion on Ethereum, lower transaction fees, and allow the network to continue growing. Similarly, ETH 2.0 hopes to boost the network’s transactions per second and security. 

The cost of such improvements may, however, be the free flow of funds throughout the ecosystem.

Current layer two solutions will hinder composability, as explained by Vitalik Buterin. And the launch of ETH 2.0 will fragment liquidity further as DeFi protocols will exist on disparate shards.

Improving speed and security may mean Ethereum gives up the “open” in open finance. Resolving these two issues is Avalanche blockchain’s primary goal. 

So far, the protocol boasts speeds of 4,500 transactions per second and three-second finality. As for security, Quantstamp, a leading blockchain security firm, is working with Ava Labs to audit the network.

To fast track DeFi development, Ava labs has set up a grant program for developers to make the switch from Ethereum. Avalanche-X offers crypto enthusiasts several ideas, including an Avalanche tipping bot, a stablecoin built on Avalanche, as well as various synthetics and derivatives products. 

The list of grants has a definite bent towards rebuilding many of the popular DeFi apps on Avalanche.

Over the longer term, Avalanche differentiates itself from Ethereum by targeting existing financial incumbents.

Rather than persuading institutions to migrate their business to Avalanche, the idea is to get companies to use the blockchain for information and data-heavy backend services. 

J.P. Morgan doesn’t care about decentralization, but if they can save 2% on technology costs by moving many of their support activities to Avalanche, they will happily jump aboard. And after the Wall Street veterans spent $9.82 billion on technology in 2019, this jump could be a lucrative one for Ava Labs.

Institutions are further enticed to use Avalanche due to the network’s hybrid blockchain, which offers both permissionless and permissioned varieties. This feature lets anyone run their own sub-network and set it to private or open governance. The latter version is the most attractive for large, private companies.

Let’s say a stockbroker launches a subnet to coordinate with a hedge fund client. The subnet acts as the backend database for the broker’s trade settlements. One way to do this is by designing network governance in a way that lets management at the hedge fund and the brokerage be the only validator nodes that enforce consensus.

This design allows clients to verify data and ensure that everything is acceptable while keeping the information private.

With subnets, permissionless finance and traditional finance can co-exist on the same database. Legacy institutions looking for a profitable venue to park idle capital will be able to leverage this composability by, say, depositing stablecoins in a DeFi money market that offers a higher yield than traditional counterparts.

Further, it makes accounting and compliance simpler because these processes can be customized and baked into the network.

Financial services on a blockchain network permit the creation of unique financial products without the traditional system’s opacity. 

John Wu, President of Ava Labs and a Wall Street veteran, believes this is one of the many benefits of bringing finance to the blockchain:

“Structured finance on the blockchain will enable anyone to build creative assets in a transparent manner. In 2008, not many people knew what was in these structured instruments, which led to an abundance of risk. With blockchain, anyone involved in the network will know what’s happening.”

Ava Labs Recognizes Regulations 

One major obstacle that remains for DeFi is that of regulation. The SEC’s latest charge against Abra’s synthetic instruments has highlighted the need for DeFi protocols to decentralize fast or risk being shut down.

Wu believes DeFi needs to concede to regulators eventually. This belief is a far cry from Ethereans who believe that regulators cannot enforce action against a protocol so long as there are no points of centralization.

“DeFi should recognize it needs to comply with the underlying instruments and regulations. They can take advantage of innovation by institutions, but these protocols need to ensure they are compliant,” said Wu.

Stablecoins, for example, are the lifeblood of DeFi, and regulators are already eyeing restrictions on them.

Ultimately, Ava Lab’s vision isn’t to decentralize everything but to create a platform that lets any financial service thrive. 

Finance is the most prominent and viable candidate for immediate disruption. Still, unlike Ethereum, and its cohort of “killers,” the Ava team’s thesis is that blockchains provide utility whether the underlying activity is permissionless or not. 

In this way, Ava Labs hopes to cast as wide a net as possible. They hope to onboard financial engineers from big Finance, DeFi developers building at breakneck speed, and regulators who are waking up to the world of crypto. Only time will tell which group will join them first. 

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