Avalanche aims to overcome the blockchain trilemma, which states that blockchains cannot establish a sufficient level of decentralization at scale, as is typically the case on Ethereum, exorbitant gas fees.
Avalanche devised three interoperable blockchains to address this issue.
The native AVAX coins and other assets are created and exchanged via the Exchange Chain (X-Chain). These tokens follow a set of established norms, similar to the ERC-20 standard on Ethereum. The Avalanche consensus mechanism is used here.
Smart contracts and decentralized applications are hosted on the Contract Chain (C-Chain). It has its own Avalanche Virtual Machine comparable to the Ethereum Virtual Machine and allows developers to create interoperable DApps. The Snowman consensus technique is used here.
The Platform Chain (P-Chain) coordinates network validators, keeps track of active subnets, and allows new subnets to be created. Subnets are a collection of validators akin to a validator cartel. Each subnet can validate multiple blockchains simultaneously, but a blockchain can only be validated by one subnet at a time. It also makes use of the Snowman consensus algorithm.
The Exchange Chain, which uses its Avalanche consensus method, is where AVAX is traded. The Avalanche consensus mechanism, unlike proof-of-work or proof-of-stake, does not have a single leader processing transactions that are then validated by others. Instead, a directed acyclic graph (DAG) protocol is used by all nodes to process and validate transactions. As a result, transactions are processed in parallel, and random polling by validators assures that transactions are correct with statistical confidence. This consensus technique has no blocks, allowing for rapid completion and a considerable increase in blockchain performance.