What Is a Crypto Subnet? | Guide to Custom Blockchains

The blockchain world often feels like a crowded metropolis, with bustling main highways like Ethereum and Bitcoin struggling to keep up with the ever-increasing traffic. While Layer 2 solutions offer some relief, a new paradigm is emerging, promising even greater scalability, flexibility, and sovereignty: crypto subnets. 

If you’re a crypto investor, a developer exploring infrastructure, or just an enthusiast keen to understand the next evolution of blockchain architecture, you’ve likely encountered this term. But what exactly is a crypto subnet, and how does it compare to the Layer 1s and Layer 2s you already know? 

This guide will explain subnets, exploring how they work, why they’re becoming critical, and which projects are leading the charge.

What is a Subnet in Blockchain?

At its core, a crypto subnet is a sovereign, custom blockchain network that operates within a larger blockchain ecosystem, often leveraging the security and interoperability of a “primary network” or blockchain mainnet. Think of the main blockchain as a bustling internet service provider, and subnets as individual, dedicated Wi-Fi networks that can set their own rules, have their own users, and even their own specific functionalities, all while benefiting from the main provider’s infrastructure. This allows for immense customization and efficiency, moving beyond the limitations of a one-size-fits-all blockchain.

Crypto Subnets vs. IP Network Subnets

It’s important to clarify a common point of confusion. The term “subnet” also exists in traditional IT networking, referring to a logical subdivision of an IP network. 

While both concepts involve segmenting a larger network, crypto subnets are fundamentally different. In Web3, a subnet segments blockchain logic, consensus, and state, creating independent, application-specific chains. 

In contrast, IP subnets (like those used with VLANs) segment traffic within a local internet network for organizational or security purposes. Our focus here is exclusively on the blockchain definition.

The “Internet of Blockchains” Concept

Crypto subnets are a significant step towards realizing the “Internet of Blockchains” vision—a future where countless specialized blockchains can seamlessly communicate and transact. Instead of every application fighting for space on a single monolithic chain, subnets allow for an ecosystem of interconnected, purpose-built blockchains. 

Each subnet can be optimized for a specific use case, whether it’s a high-throughput gaming network, a compliance-focused institutional platform, or a decentralized AI training marketplace. 

This concept is driven by the recognition that different applications have different needs, and a heterogeneous network of specialized chains is often more efficient and scalable than a single, general-purpose blockchain.

How Do Crypto Subnets Work?

Crypto subnets function by allowing developers to launch their own custom blockchain networks that are connected to a larger foundational blockchain, often referred to as a “Primary Network.” This primary network typically provides a base layer of security and a framework for subnet creation and communication. The specific mechanics can vary between ecosystems, but common principles apply.

Validator Sovereignty (Who runs the network?)

A key characteristic of subnets is validator sovereignty. Unlike Layer 2 solutions that inherit security directly from a Layer 1, subnets often manage their own set of validators. 

These validators are responsible for confirming transactions and maintaining the integrity of that specific subnet. In some architectures, like Avalanche (AVAX), a subnet’s validators must also be validators on the Primary Network, securing both chains simultaneously. 

This shared security model (where the Primary Network validators also secure subnets) is common, but subnets still maintain control over their validator sets. 

This means they can specify who can be a validator, what resources are required, and even implement specific rules or KYC procedures for validators, giving them a high degree of autonomy.

Shared Security vs. Independent Security

The security model is a defining feature. Many subnet implementations, such as Avalanche, employ a shared security model where subnets rely on the Primary Network’s validators for their base security. This significantly reduces the overhead for new subnets to launch securely. However, the term “independent security” can also apply in the sense that subnets can define their own validator requirements and incentive structures, effectively creating a dedicated and often permissioned security layer for their specific network. This differs from Layer 2s, which strictly inherit the security of their underlying Layer 1 without managing their own validator sets. The flexibility to choose between fully independent validation, a subset of the main chain’s validators, or a combination, grants subnets immense adaptability.

Custom Tokenomics and Rules

One of the most powerful features of subnets is their ability to implement entirely custom tokenomics and rules. This level of customization allows developers to tailor every aspect of their blockchain to their application’s needs. For instance, a subnet can:

• Define its own gas token: Instead of paying transaction fees in the primary network’s native token (e.g., AVAX on Avalanche), a subnet can use its own custom token, an existing stablecoin, or even a specialized token relevant to its ecosystem.
• Implement custom virtual machines (VMs): While many primary networks are EVM-compatible, subnets can choose different VMs, allowing for different programming languages and execution environments.
• Set specific transaction limits and throughput: A gaming subnet might prioritize high transaction speeds and low fees, while a financial services subnet might prioritize security and regulatory compliance.
• Enforce unique governance models: Subnets can dictate how decisions are made, who can vote, and what parameters can be changed.

This unparalleled flexibility allows builders to create highly optimized and specialized blockchain environments, driving innovation beyond the constraints of general-purpose chains.

Why Are Subnets Important?

The rise of crypto subnets addresses several critical challenges faced by monolithic blockchains, offering a compelling array of benefits that drive their increasing adoption.

Scalability (Horizontal Scaling)

Subnets provide a powerful solution for blockchain scalability through horizontal scaling. This approach shares conceptual similarities with a sharding technique, where a network is divided into smaller, independent segments to process transactions concurrently. Instead of a single blockchain trying to process every transaction, subnets allow for the parallel execution of transactions across many independent chains. Imagine a single-lane highway versus an entire network of parallel express lanes. Each subnet can handle its own traffic, drastically increasing the overall throughput of the entire ecosystem. This means decentralized applications (dApps) no longer have to compete for block space on a congested main chain, leading to faster transaction finality and lower fees for users within a specific subnet. This distributed processing power is crucial for supporting mass adoption of Web3 technologies.

Compliance & “Walled Gardens” (KYC Subnets)

A significant driver for subnet adoption, especially for institutions and enterprises, is the ability to create permissioned or “walled garden” blockchains that enforce specific compliance requirements. For example, a financial institution could launch a private subnet where all participants (users and validators) must undergo Know Your Customer (KYC) and Anti-Money Laundering (AML) checks. 

This allows them to leverage the benefits of blockchain technology—transparency, immutability, and efficiency—while still adhering to stringent regulatory frameworks. 

These KYC subnets can operate connected to a public network, bridging the gap between traditional finance and decentralized infrastructure, offering a path for mainstream adoption without compromising regulatory integrity.

Application-Specific Features (GameFi, AI)

Subnets are perfectly suited for developing application-specific features, allowing projects to build blockchains explicitly tailored to their unique needs.

• GameFi: A blockchain game might launch a subnet optimized for incredibly fast, low-cost transactions, essential for in-game asset transfers and micro-transactions, without being bogged down by other dApps on the main chain. They could even use the in-game currency as the gas token.
• Decentralized AI: Projects like Bittensor (TAO) leverage subnets to create specialized marketplaces where different AI models compete to provide services. Each subnet within Bittensor might specialize in a particular AI task, such as text generation, image recognition, or data analysis, allowing for highly efficient and targeted computation. This allows for innovation in sectors that demand highly customized and performant blockchain environments.

Top Projects Using Subnet Technology

While the concept of application-specific blockchains isn’t new, certain projects have popularized and refined the subnet architecture.

Avalanche (AVAX) – The Pioneer

Avalanche (AVAX) is arguably the most prominent pioneer in bringing subnet technology to the forefront. The Avalanche ecosystem is built around a “Primary Network” consisting of three core blockchains (X-Chain, P-Chain, C-Chain), which secure all subnets. 

Developers can launch highly customizable blockchains as subnets on Avalanche, each capable of defining its own virtual machine, execution logic, and tokenomics. All validators of any subnet on Avalanche must also validate the Primary Network, ensuring a baseline level of security and decentralization across the entire ecosystem. 

This design allows for a vast network of interoperable chains, making Avalanche a leading platform for building custom, scalable blockchain solutions.

Bittensor (TAO) – AI & Machine Learning Subnets

Bittensor (TAO) stands out for its innovative use of subnets in the realm of decentralized Artificial Intelligence and Machine Learning. Bittensor’s network hosts various subnets, each specializing in a different machine learning task (e.g., text prompting, data storage, image generation). 

These subnets are essentially marketplaces where AI models (miners) compete to provide the best output for a given query (from a client/validator). The better the output, the more TAO tokens the miner earns. 

This architecture incentivizes the creation of high-quality, decentralized AI services, effectively creating a global, open-source intelligence network. Bittensor’s model is a prime example of how subnets can drive highly specialized, high-performance decentralized applications.

Internet Computer (ICP) & Others

While not strictly using the term “subnet” in the same way as Avalanche, the Internet Computer (ICP) by DFINITY shares a similar philosophy of horizontal scaling and specialized execution environments. ICP’s architecture utilizes “subnets” (in its own terminology, referring to collections of nodes) to host “canisters” (smart contracts/dApps) that can scale infinitely. Each ICP subnet can be optimized for different workloads, offering high performance and low latency. 

This approach allows the Internet Computer to host entire decentralized applications, including front-ends, directly on-chain. Other projects are also exploring similar architectures, such as Polkadot’s parachains or Cosmos’s zones, which, while distinct, share the overarching goal of enabling an interconnected multi-chain future where specialized chains can coexist and interact.

Subnets vs. Layer 2 Rollups: What’s the Difference?

The distinction between subnets and Layer 2 (L2) rollups is a common point of confusion for many in the crypto space. While both aim to enhance scalability, their architectural approaches and underlying principles differ significantly.

Here’s a comparison:

What is Layer 1 vs Layer 2 vs Subnet?

• Layer 1 (L1): The foundational blockchain layers (e.g., Ethereum, Bitcoin). It provides core security, decentralization, and finality. L1s often struggle with scalability.
• Layer 2 (L2): Solutions built on top of a Layer 1 to improve its scalability. L2s like rollups batch transactions off-chain and then submit a summary or proof back to the L1, inheriting the L1’s security. They don’t typically manage their own validator sets or have highly customized rules.
• Subnet: A sovereign, custom blockchain that operates alongside a Layer 1. While it may leverage the L1 for initial security bootstrapping or interoperability, it has its own validator set, can define its own rules, and often its own gas token. Subnets offer greater flexibility and sovereignty than L2s, acting more like independent, specialized chains within a larger network.

The key takeaway is that L2s primarily solve scalability by offloading computation, while subnets provide both scalability and unparalleled customization and sovereignty for specific applications.

The Future of Subnet Architecture

The trajectory of subnet architecture points towards an increasingly modular and specialized blockchain landscape. As the demands on blockchain technology grow, the “one-size-fits-all” approach of monolithic chains becomes less viable. Subnets offer a robust framework for:

• Mass Adoption: By enabling highly performant and compliant blockchains, subnets can facilitate the entry of traditional enterprises and institutions into the Web3 space. The ability to create permissioned environments with KYC requirements is particularly attractive for regulated industries.
• Hyper-Specialization: Expect to see an explosion of niche subnets tailored to specific industries or applications—from supply chain management and healthcare data to metaverse gaming and decentralized science. Each will be optimized for its unique throughput, latency, and data privacy needs.
• Enhanced Interoperability: As subnet ecosystems mature, the focus will shift not just to individual subnet performance but also to seamless cross-subnet communication. Projects are actively developing advanced messaging protocols to ensure that assets and data can flow freely and securely between these specialized chains.
• Dynamic Resource Allocation: Future subnets may even be able to dynamically adjust their validator sets, compute resources, or fee structures based on real-time demand, making them incredibly resilient and efficient.

The future of blockchain isn’t just about faster mainnets; it’s about a vast, interconnected network of specialized, sovereign chains, each contributing to a more scalable, flexible, and powerful decentralized internet.

FAQ about Blockchain Subnets

Sources:

• Avalanche Docs on Subnets
• Bittensor Whitepaper
• Internet Computer Basics
• Layer 2s vs. Sidechains vs. Other Scalability Solutions