The Evolution from Monolithic to Modular Blockchains

While monolithic blockchains have laid the foundation for decentralized systems, they are increasingly being challenged by a more flexible and dynamic contender: modular blockchains. This article will delve into the fundamental differences between these two types of blockchains and elucidate why modular blockchains are poised to shape the future of this groundbreaking industry. As we navigate the ever-shifting landscape of blockchain technology, it is crucial to understand the transformative potential of modular blockchains and their impact on the development of decentralized applications and ecosystems.

Introduction

The blockchain space has grown accustomed to technological innovations; however, most recent cryptocurrency-related revolutions have been skeuomorphic – despite their upgrades, new iterations of chains have retained fundamental features of prior versions to increase familiarity. Although this might have brought short-term adoption to novel blockchains, they failed to achieve their purpose of entirely rectifying problems faced by preceding generation(s) of decentralised networks.

Coined by an anonymous individual known by the pseudonym Polyna, modular blockchains represent an entirely novel technology stack that can solve these platforms’ scalability deficiencies. Such blockchains are sharded into four unique layers; the consensus, execution, settlement and data availability layers. Each layer of modular blockchains solely focuses on achieving their unique function, hence do not sacrifice effectiveness in striving to monolithically perform all required tasks of blockchains. 

Monolithic Blockchains: The Current Standard

The current standard of layer 1 blockchains is monolithic. Each “novel” blockchain comes with its own nuances that iterate by implementing minor differences which slightly ameliorate previous flaws. Since the first monolithic blockchain, Bitcoin, the infrastructure level of layer 1s have gradually improved, however, still independently completes all tasks required by chains, thus establishing severe barriers to scalability. These tasks include executing transactions, coordinating both validators and miners such that consensus can be reached and storing block data.

Without allowing for specialisation regarding the fulfilment of these responsibilities has resulted in each successful block appended to monolithic chains’ histories being crippling, pyrrhic victories; inefficiencies are constantly emerging and acute burdens are placed on network participants. This has manifested itself in the slow transaction throughput capacity of layer 1s, such as the Bitcoin blockchain which can process up to 7 transactions per second, yet usually hovers around 3 transactions per second. Whilst other layer 1 chains, including Solana, which facilitates, on average, 3k transactions per second, have become more efficient, this accolade is achieved at the expense of security and decentralisation.

As a dynamic market, innovations in the cryptocurrency space are ostensibly perennial and revolutionary. Accordingly, the cryptocurrency industry would fundamentally suit Karl Marx’s theories around creative destruction; this sees creators and builders motivated to outdo each other, consequently destroying old ideas and replacing them with novel concepts. Under this theory, blockchains arising out of prior iterations and technological breakthroughs would lose their value upon the release of new blockchains. However, evident from Bitcoin’s market capitalisation, old ideas are not being entirely destroyed. In response to this, Mustafa Al-Bassam, co-founder and CEO of Celestia, identified “The Monolithic L1 Loop”. This cycle highlights how new, monolithic, layer 1 blockchains are created despite being deprived of foundationally novel innovations. The pattern additionally accentuates the intrinsic motivation of entities launching what they deem to be evolved blockchains; this fatal flaw in perception is emblematic of the lack of true innovation within the layer 1 blockchain industry.

Modular Blockchains: The Next Standard

To break free of this cycle and spark a paradigmatic shift in the cryptocurrency space, modular blockchains, premised on the idea that responsibilities should be delegated to external parties that leverage independent layers, emerged. As detailed by Polyna, modular blockchains are foundationally based on the economic concept of specialisation.

Modular chains cease to be liable for all aspects traditionally assigned to blockchains and instead become one part of the larger modular stack. Layers in this stack are not native to the primary blockchain, hence can be selected by a foundation or community where appropriate. As such, modular blockchains have the potential to herald a new latticework for the industry whereby layers coordinate to create effective, efficient and optimised chains. In this context, the blockchain trilemma, initially coined by Vitalik Buterin, which foregrounds how blockchains cannot achieve scalability, decentralisation and security simultaneously, can be overcome by modularity and the underlying specialisation that encourages each layer to specifically improve its offerings.

The Components of Modular Blockchains

In examining the shift from monolithic to modular blockchains, key responsibilities emerge that are being taken up by unique, separate layers. These layers make up the modular blockchain stack and are fundamental to ensuring web3 can facilitate a sufficient number of transactions per second to support mainstream adoption. Certain monolithic blockchains natively have the capacity to act as multiple layers, however, through time, it is likely that all of these roles are distributed according to specialisation.

Consensus

At the core of the blockchain revolution is the ability to ensure all nodes are in agreement on the history of the network. This overcomes the age-old Byzantine Generals Problem that was first referenced in 1982; a cryptographic issue relating to reaching consensus in a distributed environment, without the assistance of centralised parties. The story goes that several generals were preparing to attack the city of Byzantium, however, each knew that if they failed to attack in union, the Byzantine army would successfully defend itself. In order for the attackers to emerge victorious, they must communicate and coordinate to lay siege to Byzantium simultaneously. Yet, given the possibility of messages being intercepted and the challenge of recursively confirming them, consensus cannot be reached.

This feature of the modular blockchain stack concentrates on coordinating the relevant nodes in a blockchain to ensure that messages are sufficiently broadcasted on a distributed ledger, such that all network participants agree on the contexts, order and history of blocks. The dominant approaches to attaining consensus include proof of work (PoW) and proof of stake (PoS). As consensus is native to a blockchain itself, the work required by this layer does not need to be delegated to independent parties.

Execution

The next fundamental layer of the modular blockchain stack is execution. Blockchains have obtained most of their adoption in their execution capacity as it refers to how chains can execute transactions. As such, this is primarily the layer with which users interact with. New layer 1s concentrate on providing efficient and scalable execution of transactions, often at the expense of security and decentralisation. Transactions go on a journey from once they have been sent out to when they have been executed on chain. Subsequent to a wallet signing their transaction with their private key and the transaction being sent to the remote procedure call (RPC) being used, the transaction ends up in the memory pool, more commonly known as the mempool. Depending on the gas fees that the transactor offers, their transaction will be picked up by a network participant and added to a block. Once a validator that has included the relevant transaction in their block has been selected to mint the next block and append it to the blockchain, this transaction will have been executed.

Although the last phase of the transaction execution journey bleeds into the consensus layer, it is evident that execution can be delegated to specialised parties. With a unique layer for execution, the actualisation of transactions can be optimised in a multitude of ways. Regardless of the specific method used, this can significantly lower gas fees and herald meaningful increases with respect to efficiency. Already, execution is beginning to be delegated to other layers; rollups that exist on top of layer 1 blockchains, like Ethereum, execute a substantial number of transactions via its network, before compressing these transactions and posting the bundle onto the mainnet. Each compressed rollup contains, on average, 2,000 transactions; as this rollup is included in a single block, gas fees are distributed amongst transactions. Notably, though 2,000 transactions worth of calldata still exists, rollups ultimately consume far less storage in comparison to the various transactions natively executed and stored on the Ethereum mainnet.

Settlement

Another role of blockchains is to act as a settlement layer in response to disputes relating to the validity of transactions. In order to provide a trusted settlement platform, this process must be performed in accordance with consensus in the sense that the blockchain’s security and decentralisation is adequately leveraged. Although the blockchain infrastructure can intrinsically prevent some malicious and false transactions from reaching the mempool, intelligent programmers can find loopholes in this minor security layer. Fortunately, transactions will not be deemed final until a majority of nodes are convinced of that transaction’s validity. Herein lies the settlement function that needs a diverse, global, decentralised set of validators to resolve disputes arising from the verification of proofs, transactions and blocks.

Settlement is particularly important for optimistic rollups. When optimistic layer 2 networks, like Arbitrum and Optimism, compress transactions into a bundle, there exists an underlying assumption that all transactions are valid. There are insufficient inherent checks and balances levied by the rollup networks, hence relying on fraud proof. Instead of state commitments published on Ethereum being instantly deemed valid, there is a window of time in which layer 2 participants can challenge the authenticity of transactions in a rollup. Optimism allows for a 7-day challenge window until state commitments become final. Notably, this ensures that as long as a single honest node is participating in verifying transactions, the entire network can prevent malicious activity. Though fraud proofs emerge in relation to layer 2s, the layer 1 blockchain itself is the settlement layer by which these proofs are resolved.

Data Availability

The data availability (DA) layer is arguably the most important and fundamental aspect of modular blockchains. Currently, the integration of DA to congested blockchains is perceived to be the greatest solution to scalability limitations given information relating to a chain’s history can be natively stored on a layer that is independent of the state of the blockchain itself. DA refers to the foundational guarantee of blockchains that all data relating to the execution of smart contracts will be available to network participants given that the block proposer has published all relevant information on-chain. This is primarily crucial for layer 2s as nodes on the layer 1 mainnet must be definitely positive that all block information has been posted on-chain, otherwise malicious activity conducted on the rollup may go undetected.

Ironically, although layer 2s were created to minimise gas fees, due to the importance of maintaining DA and the sheer increase in data consumed by these networks, the reduction in transaction costs has thus far been atrophied by calldata costs. Hence, as layer 2s grow more dominant, pushing through over 75% of Ethereum transactions, the need to improve the DA design and layer becomes exponentially more evident. Notably, the DA layer can be sharded far more efficiently and effectively than a blockchain’s native execution layer. Accordingly, future Ethereum Improvement Proposals (EIPs), such as EIP-4844 (Proto-Danksharding), EIP-4444 (Bounding Historical Data in Execution Clients) and Danksharding, all focus on how to condense, store and prune DA so as to reduce node storage requirements.

The Path Where it All Leads

Modularity is not specific to blockchains. c natural world, inherently emerging as organisms evolve. Most plants demonstrate modularity at a cellular level. Each facet of a cell serves a unique and important purpose. Even when examining human evolution, comparative advantage with respect to specialisation is unequivocally what has enabled our species to build skyscrapers, go to space, design a global communication network (the internet) and many more ideas that were initially perceived as impossible to actualise. If every human were required to perform every single activity necessary to survive, we would likely still be living in caves and hunting for food.

Similarly, although the blockchain industry is still nascent, due to the dynamic nature of the market, development and improvements happen at a rapid pace. As such, the shift away from monolithism in the blockchain stack to one that is modular is already beginning. This evolution of blockchains lines up with how effective technology mirrors nature. Subsequent to the design and creation of bullet trains, the engineers encountered a problem; when the train left a tunnel, the sound became trapped on the nose of the train, creating pressure waves that emitted a sonic boom. To resolve this problem, the Japanese engineers looked to nature – The Kingfisher. This bird obtained its name from the unique shape of its bill that allowed it to effectively dive into the water and catch fish. The Kingfisher’s streamlined bill is designed such that water and air pass over it; when replicated for bullet trains, the sound problem was fixed given that air passed over the train’s nose, as opposed to it being trapped at the front. 

Likewise, blockchains are mirroring how nature leverages specialisation as the wider environment shifts to adopt and utilise modular layers for efficiency and scalability. Although this narrative is just beginning to emerge, most dominant blockchains are starting to weigh up the benefits of modularity. Ethereum has already begun laying the groundwork to become a modular blockchain.

Ethereum’s Journey to Modularity Starting With The Merge

Ethereum’s journey to becoming a modular blockchain began with The Merge. This historic event for Ethereum resulted in its novel PoS consensus chain being merged with its execution chain. Although these chains have been amalgamated, it is evident that they can be separate. As such, when optimised execution or consensus chains are launched, Ethereum will be capable of delegating this responsibility so as to leverage certain platforms’ expertise and specialisation. 

As elaborated above, layer 2s are dominating Ethereum’s block space. Although settlement for rollups still occurs on Ethereum, it is becoming increasingly clear that execution is more efficient on layer 2s. For this reason, most protocols are moving onto rollups so that their users are not subjected to exorbitant gas fees. Consequently, it is inevitable that layer 2s eventually become the popular execution layer for Ethereum. In this context, although users will still be able to utilise Ethereum for its execution capabilities, the blockchain will edge closer towards modularity as rollups built on layer 1 continue seeing meaningful adoption.

Modular Sharding for Ethereum

In addition to becoming modular following the merge of its consensus and execution chains, Ethereum rollup-centric roadmap makes numerous mentions of a unique, sharded DA layer. This roadmap will be achieved through Ethereum Improvement Proposals (EIPs); the next major proposal, EIP-4844, Proto-Danksharding, focuses on scaling Ethereum’s DA layer. It is expected that Proto-Danksharding will be implemented in line with the Shanghai upgrade in the second half of 2023. Additionally, EIP-4444 is seeking to ensure that the difficulty for nodes to store information on the DA layer is not too significant by pruning data after a month. Accordingly, sharding ceased to be concentrated on creating execution/consensus chains that function in parallel, instead distributing DA requirements to mitigate costs for layer 2s. The DA layer will be divided up into sharded chains that share common characteristics but do not necessarily know about each other’s state or stored information. Early estimations have depicted that Proto-Danksharding will reduce transaction fees on layer 2s by up to 100x.

The Vanguard of Modular Blockchains: Celestia

Celestia is the first inherently native modular blockchain that scales by decoupling execution from consensus and introducing a DA layer that leverages data availability sampling (DAS) for simplicity and scalability. Additionally, as part of Celestia’s offerings, the chain provides a pluggable consensus layer that developers can make use of with their own execution and settlement layers. The design of Celestia’s blockchain stack strives for scalability, flexibility and security without sacrificing compatibility with existing decentralised applications on Ethereum and other layer 1s.

Despite the nuance of the evolution of blockchains to modular blockchains, given the importance of scalability, Celestia primarily receives attention for its ability to scale. This accolade emerges from its concentration on the DA problem. Blockchains face the DA problem because nodes require access to full data to generate fraud and validity proofs for transactions posted on the execution layer. Notably, the only way to find incorrect proofs which do not contain a transaction is to download all transactions; as a result of storage requirements, not all nodes have the capacity to store all of this data, hence cannot be involved in validating the chain.

Celestia resolves the DA problem through DAS. As we explained in this piece, polynomial-based cryptography allows for the reconstruction of blocks by nodes without them storing all of Ethereum’s transaction data. This solution relies on Erasure Code; at a high level, this cryptography fragments data and encodes it such that all information can be fully recovered with half of the original data. By ensuring that blocks can be more accurately sampled by a wider range of participants, the data per block can be increased, resulting in each block housing more transactions. Celestia scales given that larger blocks that can be collectively sampled equate to a higher number of transactions per second pushed through its execution layer. 

Although Celestia is an earlier adopter of the modular blockchain architecture and thus ahead of the web3 curve, the company behind the project is already seeing support from venture capitalists. In its Series A round, led by Bain Capital Crypto and Polychain Capital, Celestia raised US$ 55 million to expedite the launch of its mainnet. In addition, the other participants of this round indicate the underlying expectations of reputable companies relating to modular blockchains; Celestia reported that Celestia, Delphi Digital, Protocol Labs, Spartan Group, Jump Crypto and more were involved in its Series A round.

The Other Player in the Data Availability Layer Space: Polygon Avail

As well as Celestia, Polygon Avail is working on a DA layer that acts as standalone sidechains that can be leveraged by modular blockchains to scale without concern for transaction data. In this sense, Avail operates as an independent chain that stores on-chain data, verifies it via DAS and enables the settlement layer of other modular blockchains to retrieve data when requested. Like Celestia, Avail makes use of polynomial interpolation, Erasure Codes and KZG commitments to reduce requirements for nodes to store transaction data, thereby scaling execution and settlement layers. Currently, Polygon’s DA layer is in its testnet phase, which launched in the middle of 2022; thus far, no date for the mainnet launch has been announced. 

Conclusion

The narrative forming around modular blockchains is starting to spread and flourish in the minds of the crypto community, irrespective of its many nuanced layers and nascency. Fundamentally, the value proposition is clear: modular blockchains are a novel solution to solving the blockchain trilemma based on the economic model of specialisation which, through the passage of time, has proven highly successful. The division and delegation of responsibilities relating to the modular blockchain stack will enable new use cases and possibilities for developers, subsequently bringing adoption to the cryptocurrency ecosystem.

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FAQs

What is the difference between monolithic and modular blockchains?

Monolithic blockchains, like Bitcoin, are the current standard where each blockchain independently completes all tasks required by chains, which can lead to scalability issues. On the other hand, modular blockchains, like Celestia, are designed to solve these scalability issues by dividing the tasks into four unique layers: consensus, execution, settlement, and data availability. Each layer focuses on its unique function, improving the overall efficiency and scalability of the blockchain.

What are the components of modular blockchains?

Modular blockchains are divided into four unique layers. The consensus layer ensures all nodes agree on the history of the network. The execution layer is where chains execute transactions and is the layer with which users interact. The settlement layer acts as a platform to resolve disputes about the validity of transactions. Lastly, the data availability layer guarantees that all data relating to the execution of smart contracts will be available to network participants.

How do modular blockchains solve the blockchain trilemma?

The blockchain trilemma, coined by Vitalik Buterin, states that blockchains cannot achieve scalability, decentralisation, and security simultaneously. Modular blockchains aim to overcome this trilemma by leveraging the concept of specialisation. By dividing tasks among different layers, each layer can focus on improving its specific function, potentially allowing a blockchain to achieve scalability, decentralisation, and security all at once.

What is the role of data availability in modular blockchains?

The data availability layer is a crucial component of modular blockchains. It guarantees that all data relating to the execution of smart contracts will be available to network participants. This is particularly important for layer 2 solutions like rollups, as nodes on the layer 1 mainnet must be certain that all block information has been posted on-chain, otherwise malicious activity conducted on the rollup may go undetected.

What is the future of modular blockchains?

The shift from monolithic to modular blockchains is already beginning, with Ethereum laying the groundwork to become a modular blockchain. Projects like Celestia and Polygon Avail are also pioneering the development of modular blockchains. As the blockchain industry continues to evolve, it’s expected that more blockchains will adopt a modular architecture to improve scalability, efficiency, and optimisation.