In addition to the growing adoption of subnets by major domestic and international companies, a substantial number of subnets are scheduled to be launched, indicating an imminent expansion of the subnet ecosystem. Presently, a total of 1,783 subnets have been deployed and are undergoing testing on the Fuji Testnet. Many of these subnets are expected to transition to the mainnet in due course. Out of the deployed subnets on the Fuji Testnet, 395 (22%) have validators, showcasing the progress and engagement within the subnet deployment process.

Supporting this outlook, John Wu, President of Ava Labs, previously stated this year that a minimum of 100 additional subnets are anticipated to be publicly launched by year-end. With approximately 10 subnets already introduced thus far, it is highly probable that dozens more will emerge during the remaining months. Notably, the launched subnets thus far have been associated with significant Web2 companies or Web3 projects as operators, indicating a likelihood for similarly sized entities to operate the upcoming subnets.

Furthermore, Olivia Song, BD of Ava Labs Korea, expressed earlier this year that "several substantial domestic partnerships are progressing, with the intention of announcing them in the first half of the year." She emphasized that the disclosed partnerships would showcase advancements in technology and business beyond mere written Memorandum of Understanding (MOU). The recent announcement of SK Planet's subnet and OK Cashbag NFT issuance in April 2023 aligns with this expectation. It is worth highlighting that news regarding the adoption of subnets by Korean companies on par with SK Planet is anticipated in the near future.

3. Subnet Expansion Strategy and Future Outlook

3-1. Customized Evergreen Subnet: Catering to Enterprise Needs

Examining the current state of the Avalanche Subnet, we observe several noteworthy aspects. Notably, subnet operators are predominantly traditional Web2 companies rather than Web3 native projects, particularly within the gaming and financial sectors. High-performance subnets hold significant appeal for Web2 companies that are accustomed to centralized systems as they are particularly drawn to the level of control they can have over their services. Additionally, given the time-sensitive nature of gaming financial services, Web2 companies would find subnets’ high performance appealing.

With the growing trend of Web2 companies adopting subnets, Avalanche has been diligently enhancing its features, including HyperSDK and AWM, to facilitate convenience and efficiency. Undoubtedly, these advancements significantly improve development ease, service safety, and operational efficiency. However, for Web2 companies lacking expertise in blockchain and related fields, the task of designing, building, operating, and maintaining a subnet can still be daunting. This significant undertaking can pose a substantial entry barrier for Web2 companies contemplating subnet adoption.

In April, Avalanche introduced the Evergreen Subnet in direct response to the requirements of Web2 enterprises. Designed specifically for enterprise use, Evergreen functions as a comprehensive cloud service that encompasses all aspects of subnet operation, ranging from design and construction to ongoing management. Its primary objective is to facilitate the deployment of tailored subnets that align with the unique needs of each enterprise. While there may not be significant variations at the protocol level compared to existing subnets, Evergreen provides essential solutions and management services essential for constructing a chain with parameters customized to meet each company's specific requirements. For instance, if a company faces regulatory restrictions that hinder the issuance of its own token, the Evergreen Subnet can integrate Avalanche's solution, enabling transaction processing without gas fees, with the management aspect handled by Avalanche. This empowers companies to concentrate on developing and operating their services without the need for additional investments in chain design and management resources.

3-2. Accelerating Subnet Deployments, but Early Stage for Rapid Service Onboarding

We anticipate Avalanche will effortlessly draw new customers from diverse industries, thanks to its impressive track record with major domestic and international Web2 companies. Noteworthy references from industry leaders like GREE, SK Planet, T. Rowe Price Associates, Wellington Management, BMW, IBM, and others will undoubtedly expedite the expansion of the subnet ecosystem. These partnerships will contribute to the expedited rollout of subnets. Given the substantial user base and content capabilities of Web2 companies, the services they introduce possess considerable growth potential. As more subnets, driven by Web2 enterprises, emerge, we anticipate witnessing an expansion of the Avalanche ecosystem beyond DFK, with numerous subnets actively supporting its development.

However, it is important to note that the process of onboarding and activating services on subnets will require a considerable amount of time. Many of the launched subnets are focused on gaming, a sector that typically necessitates two to three years of development before reaching fruition. Shrapnel, renowned for its high-quality AAA games, is presently in Phase 1 of its five-phase development roadmap. GREE and Gunzilla Games are also targeting a release later this year, but specific launch dates have yet to be confirmed. Given the anticipated prominence of gaming-focused subnets in the future, it is premature to expect rapid service onboarding that aligns with immediate expectations. Similarly, the financial sector is currently in the testing phase of integrating blockchain technology into its services. It will take some time before these services are available to the public and commercially viable.

Avalanche's continuous efforts to cultivate its Web2 enterprise references offer a distinct competitive advantage. For Web2 companies, minimizing market entry risks is of utmost importance, often requiring them to select blockchains with robust use cases unless a clear technical advantage is evident. The accumulation of these references has played a pivotal role in Avalanche's recent expansion beyond its existing customer base in the gaming and financial sectors, extending into traditional industries like automotive (BMW, Mercedes-Benz), defense (Thales), and semiconductors (IBM). Notably, recent developments such as Mastercard partnering with Avalanche to establish cross-border digital asset transfer standards and Alibaba Cloud launching an enterprise metaverse platform on the Avalanche blockchain can be attributed to these references. Drawing inspiration from Polygon's success in diversifying its customer base with brands like Nike, Meta, and Nexon, primarily driven by its early collaborations with Disney and Starbucks, we anticipate that Avalanche will be increasingly favored by companies spanning various industries in the future.

The accelerated mass adoption of Web3 will be driven by the entry of Web2 companies armed with significant capital, loyal user bases, and established services and operational expertise. In the forthcoming landscape, the market is expected to reconfigure itself around blockchains that have successfully onboarded Web2 enterprise clients, specifically those few blockchains that were quick to capture customers during the Web2-to-Web3 transition and rapidly expand their customer base. These leading blockchains may maintain their dominance for a considerable period until a disruptive technology ushers in a transformative industry shift. In this regard, Avalanche's ability to establish references across diverse industries and amass a large customer base positions it as a potential competitive advantage in the future.

4. Subnet Ecosystem Growth and its Impact on Avalanche Stakeholders

4-1. Enabling Long-Term Value for $AVAX

How does the expansion of the Subnet ecosystem contribute to the interests of various stakeholders within the Avalanche network? It may be argued that the growth of subnets does not directly impact the value of $AVAX since subnets can utilize their native tokens for transaction fees instead of $AVAX. Notably, subnets such as DFK, StepNetwork, and the soon-to-be discontinued Swimmer Network utilize their respective tokens for gas fees, rather than relying on $AVAX. Consequently, regardless of the number of subnets created, the demand for $AVAX is unlikely to experience significant changes unless $AVAX is actively employed as a gas fee currency.

However, it is important to note that subnets require validators, and each validator must stake a minimum of 2,000 $AVAX. The analysis in the chart below examines the impact of changes in the number of subnets and the number of validators per subnet on the $AVAX staking rate. Currently, the staking volume of subnet validators represents less than 0.1% of the circulating supply and maximum supply. Even with the launch of 100 subnets in line with the roadmap within the year, assuming an average of 7* validators per subnet, the staking rate would only increase to 0.4% of the circulating supply and 0.2% of the maximum supply. In the short term, the staking volume of subnet validators has a minimal effect on the value of $AVAX. However, looking ahead, as the number of subnets increases and the number of validators per subnet rises with the transition from the current permissioned structure to the permissionless structure of Elastic Subnet, the staking rate can see significant growth. For instance, if 500 subnets were created in the future, each with 100 validators, the staking rate would reach 29.5% of the current circulating supply and 13.9% of the maximum supply. While $AVAX may not necessarily be used for gas, the expansion of the subnet ecosystem to such an extent could lead to a reduction in $AVAX circulation and potentially drive an increase in token value.

* Average number of validators on operating subnets

4-2. Avalanche Network Security Improves as the Cost of Attack Increases

The expansion of the subnet ecosystem can lead to improved security within the Avalanche network. Subnet validators play a crucial role in safeguarding both the subnets and the primary networks (P-chain, X-chain, C-chain). As the number of subnets increases, so does the number of validators and the amount of $AVAX staked, resulting in heightened security measures for the entire Avalanche network.

The chart provided below examines how changes in the number of subnets and the number of validators per subnet impact the cost of attacking the Avalanche Network. Based on the analysis, with 7* validators per subnet and the release of 100 subnets within the year as per the roadmap, the additional attack cost would amount to $24.1M. Looking ahead, in the long term, as the number of subnets and validators per subnet continues to increase, the cost of launching an attack grows exponentially. For instance, if there are 500 subnets with 100 validators per subnet, the added cost of attacking the Avalanche network would soar to a staggering $1.72B. This underscores the importance of the expanding subnet ecosystem, which contributes to the enhanced security of the network, benefiting all participants within the Avalanche ecosystem.

* Average number of validators on operating subnets

** The $AVAX price per unit used to calculate the cost of attacking the Avalanche network is the YTD average value of $17.19 as of May 19, 2023, but is subject to change based on market conditions.

Closing

Despite the slower-than-expected pace of subnet activations, Avalanche is gaining traction as a viable option for global Web2 enterprises. The upcoming months hold significant potential for widespread subnet adoption. Leveraging its Web2-oriented references, Avalanche is well-positioned to attract customers from diverse industries, giving it a competitive edge as Web2 companies venture into the Web3 market and mass adoption gains momentum. It is crucial to shift our focus towards nurturing the growth of the subnet ecosystem, as it is projected to maintain dominance in the industry for the foreseeable future, barring any disruptive technological advancements.