What is Modular Blockchain? Enhancing Scalability and Revenue Models

Introduction

Modular blockchains have become a hot topic in the crypto industry, but what exactly do they mean? How are they different from the traditional monolithic blockchains we're familiar with? And why are more projects incorporating modular components into their blockchain designs?

In this article, we'll explore the concept of modular blockchains and uncover their significance in the market. We'll dive into the basic principles, advantages, and real-life examples to understand how modularity enhances scalability, decentralization, and customization in the blockchain space.

What is a Modular Blockchain?

To understand the concept of a modular blockchain, it's important to know its basic components and how they differ from traditional monolithic blockchains. A modular blockchain focuses on specific tasks while assigning others to separate layers. To grasp how modular blockchains work, let’s explore the main functionalities found in regular blockchains: consensus, execution, data availability, and settlement.

• Consensus

Consensus means reaching an agreement among validator nodes in a blockchain network about the validity and correctness of data. It decides the order of transactions and how new blocks are added to the chain.
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• Execution

Execution involves processing transactions by nodes on the blockchain, which leads to changes in the system's state. Nodes that participate in consensus execute transactions using their local copy of the blockchain to confirm and validate blocks.

• Data Availability

Data availability in a blockchain ensures that transaction data is readily accessible to all participants in the network.

• Settlement

Settlement ensures that transactions committed to the blockchain are final and cannot be changed. The blockchain verifies transactions, checks proofs, and resolves disputes to provide this guarantee.

Monolithic Blockchain x Modular Blockchain

A monolithic blockchain is like an all-in-one system; everything happens on a single layer. It handles four essential tasks: reaching an agreement on transaction order (consensus), making transaction data available to everyone (data availability), processing transactions (execution), and ensuring transaction validity (settlement).

In contrast, modular blockchains take a different approach. They split these tasks across multiple chains, allowing each chain to specialize in a specific function. This modular design offers a more customized and optimized solution for different user needs.

Imagine a monolithic blockchain as a generalist, capable of doing everything but not excelling in any specific area. On the other hand, modular blockchains are like specialists, focusing on one task and doing it exceptionally well.

The following image illustrates the difference between monolithic and modular blockchains:

Advantages of Modular Blockchains

Modular blockchains offer several advantages over monolithic blockchains, particularly in terms of the blockchain trilemma: scalability, decentralization, and security.

Scalability

Scalability refers to the ability to process a high number of transactions without significantly increasing verification costs. One way to achieve scalability is by increasing block sizes, but this can harm decentralization by requiring more powerful hardware (PoW) or capital (PoS).

A modular approach, on the other hand, involves moving transaction execution to separate chains (Layer-2 solutions), while using proofs to verify transactions on the main chain. Ethereum has embraced this modularization, leading to the emergence of Layer-2 solutions like Optimism and Arbitrum, enabling greater scalability.

Decentralization

Decentralization is crucial for maintaining a robust and resilient network. Monolithic blockchains often rely on the same set of validators to execute transactions and verify blocks, limiting decentralization.

In a modular blockchain, block production and verification can be separated, allowing for larger block sizes and higher resource requirements without sacrificing decentralization. Block production can be handled by a smaller group, while verification is performed by a large and decentralized group of validators. This approach aligns with Ethereum co-founder Vitalik Buterin's vision of maintaining trustless block validation while preventing censorship.

Security

Blockchain security can be viewed from two perspectives: consensus and validity. Consensus mechanisms, such as PoS or PoW, provide settlement assurances by creating economic costs for malicious behavior. The modular blockchain approach can leverage the security built by established blockchains like Ethereum, using their crypto-economic security as a foundation.

Validity security, on the other hand, depends on the ability of participants to run full nodes and verify the blockchain's rules. A modular approach that divides the roles of block producer and verifier ensures a sufficient number of independent verifiers, enhancing both decentralization and security.

A New Perspective

Following the launch of Ethereum in 2015, many new layer 1 blockchains emerged with the goal of “Killing Ethereum”, particularly during the bull market of 2020/2021. However, the modular approach may present a shift in perspective. Rather than prioritizing blockchains that sacrifice security or decentralization for scalability, new projects now have the opportunity to ensure their safety by leveraging the secure base layer of established networks such as Bitcoin or Ethereum, while focusing on scalability through a modular framework.

Modular Blockchains in Practice

Now that we have uncovered the concept of modular blockchains, it's time to dive into practical implementations, where pioneering projects like Celestia and others are seizing this incredible growth opportunity.

Celestia: Data Availability Sampling

Celestia is a project that is focused on the data availability and consensus layer of modular blockchains. As the project states, if Bitcoin is a calculator and Ethereum a computer, Celestia is a cloud computer.

“Bitcoin showed that it was possible to build a decentralized application but was very limited in what it could be used to build.

Ethereum showed that it was possible to build a programmable blockchain that anyone could use to launch a decentralized application. Celestia will show that it is possible to build a network that enables anyone to launch their own blockchain."

Celestia works through a technology called data availability sampling. It allows smaller devices (lightweight nodes) to check if data in a block is available without downloading the whole block. These lightweight nodes do multiple rounds of random sampling to verify small parts of the block. As they conduct more rounds, they become more confident that the data is indeed available. Once they reach a certain level of confidence, like 99%, they consider the block data as available.

This approach in Celestia enables lightweight nodes to contribute to the network's security and processing speed using less expensive hardware compared to full nodes.

Rollups

Rollups play an important role in modular blockchains. In the case of Ethereum's Layer-2 (L2) rollups, they focus on transaction execution. There are two types of rollups: optimistic rollups, like Arbitrum and Optimism, and zero-knowledge rollups, like zkSync and StarkNet. What makes them attractive is that they are much cheaper to use compared to Ethereum's base layer, which attracts users and developers.

Rollups execute transactions outside of Layer-1 (L1) and then submit the data to the L1 for consensus and settlement. This way, they benefit from Ethereum's security. However, there is a cost associated with posting transaction data to the L1, known as publishing fees. Rollups like Arbitrum, StarkNet, and zkSync are among the top gas consuming on Ethereum, creating a new source of revenue for L1s. As rollups continue to gain market share, other L1s are also working on their own solutions to enter the security market.

Validiums

Validiums are solutions designed to make transactions faster on Layer 1 blockchains. They achieve this by processing transactions outside of the main network. To ensure the validity of these off-chain transactions on the Layer 1 blockchain, validiums use special proofs known as zero-knowledge proofs.

Zero-knowledge proofs act as evidence to confirm the security and accuracy of the off-chain transactions. Validiums utilize either ZK-SNARKs or ZK-STARKs as zero-knowledge proofs, effectively preventing any unauthorized or incorrect changes to the state of the validium chain.

The key difference between validiums and ZK-rollups lies in their approach to data availability. Both methods store data differently, which has implications for the level of security and trust in the system.

In a recent announcement, Polygon revealed its plan to migrate the PoS Chain to a unique ZkEVM Validium chain. This migration allows them to leverage the security of Ethereum, embracing the modular architecture.

Ethereum roadmap in modularization

Since its launch, Ethereum has become the go-to blockchain for building applications and engaging users. However, it has faced a well-known problem: scalability issues. This means that transactions on the Ethereum network are slow and expensive, which is unsuitable to meet the demands of a global user base.

The Ethereum Foundation has long been aware of this challenge. Even back when Ethereum operated on a Proof-of-Work (PoW) consensus mechanism, its founder, Vitalik Buterin, was discussing Ethereum 2.0 and the idea of sharding to scale the blockchain. However, realizing that sharding would be a complex undertaking, they decided to focus on Layer 2 scalability instead. This shift in strategy may have revolutionized revenue models for Layer 1 blockchains.

Rollup Schedule

As we discussed earlier, rollups play a crucial role as an execution layer where transactions are processed faster and at a lower cost compared to the main chain.

Layer 2 solutions are significant for Ethereum as they maintain its security while handling transactions on a separate chain before transferring the data to the main network. This process benefits Ethereum since transactions conducted outside the network still incur publishing fees, which generate revenue.

Recognizing the significance of this, the Ethereum Foundation has put forward an Ethereum Improvement Proposal (EIP) called Danksharding to enhance the user experience with rollups.

Danksharding

The Ethereum Foundation has introduced a plan called Danksharding to improve the capabilities of rollups. Danksharding aims to enhance transaction throughput on the blockchain by enabling a larger number of transactions to be processed more quickly and cost-effectively.

The Danksharding process involves several updates. The first update is called Proto-Danksharding, which enables rollups to include data in blocks at a more affordable price. As a result, users experience lower transaction costs. The second part is the complete implementation of Danksharding, which expands Ethereum's storage capacity for transaction data from rollups. With this enhancement, Ethereum will be able to accommodate multiple rollups and process millions of transactions per second.

Ethereum Re-Staking

We're currently witnessing a paradigm shift in the Layer 1 industry. Instead of using the main network for everything, why not use its security to create better applications outside of it? That's where re-staking comes in.

Even though it's not part of the official roadmap like rollups, projects such as EigenLayer are developing new technologies on Ethereum and other layer 1 blockchains. These advancements bring exciting possibilities for the future.

Let’s understand re-staking:

The issue of fragmented blockchain security can be solved with re-staking. When someone wants to create a decentralized network, they need to ensure its security. On the Ethereum blockchain, security is achieved by staking ETH tokens.

However, problems arise when other services or projects want to establish their own networks. It can be inefficient and expensive for them to build their own security system from scratch. They would have to create their own token and convince participants to stake it, which comes with risks and costs compared to staking ETH.

Additionally, building sufficient security takes time, and even then, it may not match the strength of Ethereum's security. This often leads projects to issue their own tokens unnecessarily and struggle to establish their own security model.

Re-staking tackles this issue by pooling the security of Ethereum. It enables other applications and projects to leverage Ethereum's security instead of creating their own. This way, they can benefit from the established security without the complexities and time-consuming process of building their own crypto-economic security.

Can Bitcoin follow the same path?

Yes, Bitcoin has the potential to follow a similar path as Ethereum in terms of being a secure layer for building applications. With a market capitalization exceeding **US$600 billion**, Bitcoin holds a dominant position in the crypto market, surpassing Ethereum by more than twice its size.

The strong market presence of Bitcoin, coupled with its extensive network of nodes and the high cost associated with attempting a 51% attack, has sparked discussions within the community about utilizing Bitcoin as a reliable security layer. This means that Bitcoin's security measures and infrastructure can be leveraged by other projects and applications.

For example, projects like Stacks and Babylon have already started building applications on top of the Bitcoin blockchain. They are harnessing the security and robustness of Bitcoin to introduce innovative solutions such as the implementation of smart contracts (Stacks) and the enhancement of security in other applications (Babylon).

Conclusion

The blockchain / Crypto industry is a fast-changing place. The modular approach has caught the attention of many enthusiasts and investors and is definitely something that we should be looking forward to seeing in practice.

The paradigm shift of Layer 1 blockchains acting as secure layers, enabling other applications to leverage their capabilities without compromising scalability, has the potential to be a game-changer for Bitcoin and Ethereum. This shift could further solidify their leading positions in the market.

However, it's important to note that these technologies are still in their early stages and undergoing continuous development. As an investor, it is crucial to conduct thorough research before making any investment decisions in the cryptocurrency space.