Despite a strong start to the year, Avalanche (AVAX -3.82%) continues to underperform the broader crypto market. While Avalanche is up 22% year to date, layer 1 blockchain rivals such as Ethereum (ETH -0.12%), Aptos (APT -1.63%), and Solana (SOL -5.37%) are up anywhere from 55% to 150% for the year.
Avalanche's underperformance is all the more concerning, given that it was once a high-flying crypto. Just 12 months ago, Avalanche was the next great "Ethereum killer" due to its incredibly fast speeds and unmatched scalability. But a lot has happened between now and then, and Avalanche is now down 90% from an all-time high of $146. So is there any reason for investors to be excited about Avalanche right now?
Blockchain performance
Avalanche's blockchain performance metrics for the second quarter of 2023 just came out, and the numbers are a mixed bag. If you're a glass-half-full type of person, you'll be impressed that the number of daily active addresses (the blockchain world's equivalent of daily active users) has more than doubled since the start of the year. That's a good sign that users are returning to the Avalanche ecosystem after a disastrous 2022.
Image source: Getty Images.
However, if you're a glass-half-empty type of person, you should be concerned by the fact that key metrics related to decentralized finance (DeFi) appear to be trending down. For example, Total Value Locked (TVL) -- a key metric used to gauge overall DeFi strength -- actually fell 19% for the quarter. TVL is now 90% below its all-time high for the Avalanche blockchain, and that should be a huge point of concern. After all, Avalanche burst onto the scene two years ago as the type of super-fast, super-scalable blockchain needed for DeFi success.
Asset tokenization trend
Based on the above, it's hard to recommend Avalanche as any sort of long-term buy. However, that's not the end of the story. Avalanche is a key player in the emerging area of asset tokenization, which is arguably one of the hottest trends in the crypto industry these days. The Boston Consulting Group (BCG) has called it a $16 trillion (yes, trillion) market opportunity, while BlackRock (BLK 0.69%), the largest asset manager in the world, highlighted the asset tokenization trend in this year's letter to shareholders.
In layperson's terms, asset tokenization is the transformation of real-world assets into digital assets (i.e., digital tokens) via smart contracts. Just about anything can be tokenized. For example, traditional financial instruments, such as equities, can be tokenized. Physical assets such as artwork, luxury goods, real estate, and expensive cars can be tokenized. And entirely new types of digital assets can be created and then tokenized.
There are several advantages to asset tokenization, including higher liquidity, improved transparency, and lower transaction costs. Once you put a digital asset on the blockchain, you can trade it globally. Moreover, you can fractionalize ownership interest in a physical asset, such as a really expensive piece of artwork.
So where does Avalanche fit into this asset tokenization story? For one, Avalanche has the underlying blockchain infrastructure where these tokenized assets can live. And secondly, Avalanche has tremendous expertise in helping to tokenize real-world financial instruments. In 2022, for example, Avalanche helped to tokenize part of a $4 billion private equity fund from KKR.
This summer, Bank of America published a report on the asset tokenization trend, specifically citing Avalanche as one of the three major layer 1 blockchains (the others being Ethereum and Solana) that are most likely to profit from asset tokenization. According to Bank of America, this is a long trend that could play out over the next five to 15 years. Thus, asset tokenization could end up becoming a huge potential growth catalyst for Avalanche for quite some time.
Short-term vs. long-term prospects
Over the short to medium term, it's hard to be bullish on Avalanche. However, if you take a much longer-term view of the blockchain space, there's an argument to be made that Avalanche could be significantly undervalued. There are a lot of "ifs" here, but if Avalanche can rebuild some of its underlying blockchain performance metrics and if it can fend off competitors like Ethereum, it might be at the forefront of a very important growth trend.
Thus, I'm keeping my eye on future developments in this space. Avalanche recently announced the launch of a brand-new $50 million initiative to buy tokenized assets on its blockchain in the hopes of boosting adoption of this trend. That's a solid start, and as long as Avalanche can continue to find new asset tokenization opportunities, this beaten-down crypto might just be worth a closer look for your portfolio.
