Subnets (or Subnetworks) are a scaling solution on Avalanche that allows anyone to create their own Layer-1 blockchain. A subnet can be a single blockchain or a group of blockchains validated by a common set of validators. All subnet validators must also be members of Avalanche’s Primary Network by staking AVAX. Subnets leverage the Avalanche consensus protocol, inheriting its speed and security, making them a key component in the network’s scalability.
Understanding Avalanche’s Network Structure
Launched in Q3 2020, Avalanche operates on the concept of an “Internet of Blockchains.” It utilizes the Avalanche Consensus protocol for trustless communication and interaction within the network. Avalanche aims to be an open-source platform for building decentralized applications with near-instant transaction speeds and high scalability. Its unique architecture features three primary chains, each with a distinct function:
- X-Chain (Exchange Chain): Facilitates the creation and trading of digital assets with custom rulesets. All transactions on the X-Chain are paid for using AVAX.
- C-Chain (Contract Chain): Enables the creation of smart contracts using the C-Chain API. This chain is Ethereum Virtual Machine (EVM) compatible and hosts most of the decentralized applications (dApps) users interact with on Avalanche.
- P-Chain (Platform Chain): Coordinates validators and tracks subnets. It is also the chain where new subnets are created.
The P-Chain and C-Chain utilize the Snowman consensus mechanism, optimized for high throughput and smart contract execution. The X-Chain uses the Avalanche consensus mechanism. Crucially, all three chains are secured and validated by the Primary Network.
The Primary Network is a special subnet. All members of other subnets must also be members of the Primary Network by staking a minimum of 2,000 AVAX. This contributes to Avalanche’s high security, with over 1,200 validators currently securing the network. This interconnected structure highlights the integral role subnets play within the broader Avalanche ecosystem.
Key Features of Subnets
Subnets offer a range of features that unlock significant scalability and flexibility for the Avalanche network:
- Horizontal Scaling: Subnets enable the creation of multiple interconnected blockchains, facilitating horizontal scaling.
- Interoperability: Assets on different subnets can interact and be transferred seamlessly without bridging, eliminating bridge-related risks and fees.
- Extensibility: Subnets can connect to various virtual machines, including EVM, Bitcoin Script, Cardano’s UTXO model, and Solana’s engine, expanding the possibilities for developers.
- Unlimited Creation: There’s no limit to the number of subnets that can be created. Not only can dApps build their own subnets, but entire blockchains can also become subnets. This opens the door for large Ethereum dApps or even entire blockchains like Solana or Cosmos to create versions on Avalanche, benefiting from lower fees and faster transaction speeds.
- Customizable Tokenomics and Fee Structures: Subnet owners have complete control over their tokenomics and fee structures. They can choose any token, including stablecoins, as the gas fee, increasing utility and potentially reducing circulating supply. Gasless transactions are also possible, enhancing user experience.
- Regulatory Compliance: Subnets allow for complex validator requirements, enabling compliance with regulations like KYC/AML and KYB (Know Your Business). This opens the door for institutional adoption by addressing compliance concerns. Major companies like Deloitte and Mastercard have already partnered with Ava Labs to explore subnet solutions for internal governance.
These features demonstrate the immense potential of subnets to transform the Avalanche ecosystem and the broader blockchain landscape.
The Multiverse Incentive Program
In March 2022, the Avalanche Foundation launched the Multiverse Incentive Program, a $290 million initiative (4 million AVAX) aimed at accelerating subnet development and expansion. The program’s name reflects Avalanche’s vision of a “multiverse” of interconnected blockchains and dApps.
Initially, the program focused on supporting new ecosystem development, including blockchain gaming, DeFi, NFTs, and institutional applications. Avalanche also announced collaborations with prominent companies like Aave, GoldenTree, Wintermute, Jump Crypto, Valkyrie, and Securitize to create an institution-focused DeFi subnet alongside the existing C-Chain.
Creating a subnet typically requires staking 2,000 AVAX. The Multiverse program can cover this cost for qualifying projects and can also provide rewards for subnet users and liquidity mining programs. This initiative underscores Avalanche’s commitment to subnet growth and its potential to drive further adoption.
The previous Avalanche Rush incentive program, launched in August 2021, focused on DeFi development and resulted in a significant increase in Total Value Locked (TVL) and AVAX price. This historical precedent suggests the Multiverse program could have a similar impact, attracting new projects and users to the Avalanche ecosystem.
Pioneering Subnet Projects
Several projects are already leveraging subnets, particularly in the gaming and NFT space.
DeFi Kingdoms
DeFi Kingdoms (DFK), initially launched on Harmony, is a play-to-earn game that combines gaming elements with DeFi features like DEXs, liquidity pools, and an NFT marketplace. DFK introduced its own subnet, the DFK Chain, an EVM-compatible blockchain using a Proof-of-Stake consensus mechanism developed by Ava Labs.
The DFK Chain integrates JEWEL, the project’s native token, as the gas token, expanding its utility beyond governance. Gas fees are allocated to reward validators, burn JEWEL (reducing supply), and fund in-game rewards. DFK was the first recipient of Multiverse program incentives, receiving $15 million to further develop its subnet and ecosystem.
Crabada
Crabada, a play-and-earn game set in an underwater world, also launched its own subnet, Swimmer Network. This dedicated gaming blockchain utilizes TUS (Treasure Under Sea), the in-game currency, as the gas token. This transition aims to reduce gas fees significantly, with a portion of the fees being burned to decrease TUS supply. Crabada also implemented a fee-covering mechanism to facilitate user onboarding.
Swimmer Network validators are required to run an Avalanche node and stake CRA (Crabada’s governance token) to earn a share of the TUS transaction fees. These mechanisms enhance the tokenomics of both CRA and TUS, incentivize gameplay, and improve network performance.
Other Subnet Projects
Several other projects are developing their own subnets, including DEXs like Dexalot and Pangolin, and gaming projects like Ragnarok, Shrapnel, and Ascenders. This growing list demonstrates the increasing interest in leveraging subnets for diverse applications.
The Impact of Subnets on Avalanche
Subnets have the potential to significantly impact the Avalanche ecosystem:
- AVAX Price: Increased AVAX staking for subnet validation could drive demand and potentially increase the price of AVAX in the long term.
- Reduced Congestion: Offloading activity to subnets can alleviate congestion on the C-Chain, improving transaction speeds and overall network performance.
- Institutional Adoption: Subnets’ compliance features can attract institutional investors and large companies, driving further growth and adoption.
- Ecosystem Expansion: Incentives and improved scalability can attract projects from other ecosystems, increasing TVL and expanding the range of applications on Avalanche.
While the potential benefits are substantial, there are still factors to consider:
- Value Capture: How will projects using non-AVAX gas tokens contribute value back to the AVAX ecosystem?
- Long-Term Viability: The long-term success of subnets depends on their ability to deliver on their promises of scalability, performance, and value creation.
The future of subnets relies on the ingenuity of developers and their ability to leverage this technology effectively. The early successes of projects like DFK and Crabada suggest a bright future for subnets and the Avalanche ecosystem as a whole.
FAQ
What is the main purpose of a subnet?
Subnets primarily enhance scalability and allow for customization of blockchain parameters like gas tokens and validator requirements.
How do subnets benefit the Avalanche network?
Subnets reduce congestion on the main chain, attract new projects and users, and potentially increase the value of AVAX.
Can any project create a subnet?
Yes, any project can create a subnet, but it requires technical expertise and staking a minimum amount of AVAX (or receiving incentives to cover the cost).
What are some examples of projects using subnets?
DeFi Kingdoms, Crabada, Dexalot, and Pangolin are examples of projects utilizing subnets on Avalanche.
What are the potential challenges for subnets?
Challenges include ensuring value capture for AVAX and demonstrating the long-term viability and effectiveness of the subnet model.
Do you have any further questions about subnets? Please share your questions in the comments below! We encourage discussion and community engagement.
