Avalanche (AVAX) price is up, but do fundamentals support the rally?

Avalanche (AVAX) has witnessed a strong start to 2023, gaining 98% in 30 days, and now traders are wondering if the rally will last through February. AVAX YTD earnings for 2023 have surpassed Bitcoin (BTC) and Ether (ETH) earnings.

The recent reasons for the AVAX rally may be related to the announcement of a partnership with Amazon on January 11th. The partnership is designed to easily deploy nodes on the Avalanche blockchain using Amazon Web Services (AWS). Ava Labs, which powers the Avalanche ecosystem, hopes the partnership will increase the use of blockchain for businesses and governments.

While the price of AVAX benefited from the news, some analysts predict that the move could be a bull trap.

Let’s dive into the basics to see if network activity supports the recent AVAX rally.

DeFi AVAX Fees Rise

Following the AWS news, the price of AVAX was not the only metric that rose rapidly. On January 14th, the Avalanche network hit an annual high of $31,218 in AVAX fees. The increase in fees compared to the previous 30 days was 59%, indicating that the positive price increase helped increase the fees received by the network.

Avalanche network fees and AVAX price. Source: Tokenterminal

While Avalanche’s fee base is increasing, it still lags behind leading EVM-compatible blockchains such as Ethereum, Binance Chain (BNB), Optimism (OP) and Polygon (MATIC). Over the past 30 days, Avalanche fees have generated 9th place among all blockchains.

The best blockchains sorted by fees. Source: Tokenterminal

Notably, Tier 2 competitor Polygon earned almost four times the fees compared to Avalanche. Even with the astounding growth that Avalanche has experienced in 2023, the network will need to significantly increase its fees in order to overtake more blockchains.

Active addresses and users do not work

A sign of blockchain health is the number of active addresses, users, and transactions. Despite hitting an annual high of 1.84 million transactions on January 18, Avalanche transaction numbers are on a downward trend.

A similar downward trend is seen when looking at active addresses in the Avalanche ecosystem. Active addresses denote transactions made on unique wallets on a given day. After reaching a yearly peak of 54,978 active addresses on January 31st, only 34,624 active addresses were registered the next day.

Active addresses and transactions. Source: Avalanche

The downtrend in Avalanche activity is creating a further division between other blockchains. According to TokenTerminal, Avalanche’s record number of daily active users (ATH) is 131,000, which is negligible compared to Polygon’s ATH of 737,000. Avalanche is now far from its record number of daily users, registering just 44,000 people.

Blockchains sorted by daily active users, Source: TokenTerminal

In order for blockchains to generate sustainable fees, active users must participate on the network on a daily basis.

AAVE dominates Avalanche dapps

Heavy Avalanche users seem to prefer using Aave (AAVE) on the AVAX blockchain. Over 36% of all Avalanche transactions go through the Aave protocol. Investors have staked more than $353 million on Aave’s version of Avalanche, far surpassing the second most popular protocol in terms of verified total value locked (TVL), Trader Joe’s decentralized exchange (DEX).

Best Decentralized Applications Avalanche. Source: Defillama

While Aave and Trader Joe lead the Avalanche blockchain, looking at DEX activity on other blockchains, they see much less trading volume. The amount of DEX is directly related to the fee that the protocol receives.

Ethereum DEX activity leads the way with over $1.6 billion in daily volume, while Avalance only sees around $104 million.

DEX activity on the blockchain. Source: Defillama

Even though Avalanche is currently seeing huge growth since the AWS announcement, the blockchain is still small compared to the competition. The goal of the partnership with AWS was to help increase network activity by lowering entry barriers. Achieving this goal could increase the distribution of Avalanche, but other ecosystems seem to be pulling ahead.

The views, thoughts and opinions expressed here are those of the authors only and do not necessarily reflect or represent the views and opinions of Cryptooshala.

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