“Please give me what I need, and you will also get what you need.” Adam Smith first proposed the concept of division of labor and cooperation in “The Wealth of Nations,” systematically explaining how it enhances overall market efficiency. The essence of modularity is division of labor and cooperation. A complete system can be divided into interchangeable modules, each of which is independent, secure, and scalable. Different modules can be combined to achieve the operation of the entire system. A free market will inevitably move towards division of labor and cooperation, leading to significant improvements in overall efficiency. Currently, modularity is one of the core narratives in the blockchain industry. Although the market’s attention is not on such underlying infrastructure projects right now, the improvement of foundational infrastructure is a crucial force driving industry development. This article will provide an in-depth analysis of modular blockchains, covering their development history, current market landscape, and future directions.

01 What is modularity

In fact, the development of modularity in the blockchain industry has a long history. We can revisit the entire industry’s evolution from the perspective of modularity. The earliest Bitcoin chain was a complete system with tightly integrated modules that enabled functions such as Bitcoin transfers and bookkeeping. However, the main issue with the Bitcoin chain was its limited scalability, which could not support more use cases. This led to the emergence of Ethereum, often referred to as the “world computer.” Ethereum can be seen as a modular extension of Bitcoin, adding an execution module known as the Ethereum Virtual Machine (EVM). The virtual machine serves as the execution environment for program code. Bitcoin can only perform simple operations like transfers, but complex code requires a virtual machine. Consequently, Ethereum enabled various blockchain applications, such as DeFi (Decentralized Finance), NFTs (Non-Fungible Tokens), SocialFi (Decentralized Social Media), and GameFi (Blockchain Gaming).

Later, Ethereum’s performance also failed to meet the increasing demands of various applications, leading to the development of Layer 2 networks. These Layer 2 solutions represent modularity for Ethereum by moving Ethereum’s execution module off-chain, effectively achieving scaling. Layer 2, or the second layer, builds an additional network on top of the Ethereum base layer, shifting much of the computation to this new network and then sending the results back to Ethereum. This reduces the computational load on Ethereum and improves its speed. With the modularization of Ethereum’s execution layer and the emergence of various Layer 2 solutions, Ethereum has further evolved into a four-layer structure:

• Execution Layer: Responsible for handling transactions and executing smart contracts (analogous to playing a game according to its rules).
• Settlement Layer: Validates the state of the execution layer and resolves disputes, completing the final settlement of transactions and ensuring that asset transfers and records are permanently stored on the blockchain, determining the final state of the blockchain (resolving issues that arise during the game).
• Data Layer: Typically includes functions for data storage, transmission, and verification, ensuring the transparency and trustworthiness of the blockchain network (broadcasting or recording the game).
• Consensus Layer: Uses specific consensus algorithms to validate transactions and create new blocks, ensuring consistency of data and transactions across the network (ensuring that everyone has the same understanding of the game’s outcome).

Each layer has seen the emergence of various projects, with efficiency improvements across the board. Assembling different projects makes it easy to build a new blockchain. This can be compared to the development in the computer industry. Initially, Apple offered integrated machines. With the advent of Microsoft’s Windows system, many custom-built PCs emerged. You could buy high-spec components and assemble them into a high-performance computer.

In the blockchain world, if a chain needs inexpensive storage, it can use a standalone data availability layer, similar to an external hard drive: large capacity, affordable, and effective. Besides the data layer, each module is plug-and-play and can be flexibly assembled. However, custom-built PCs did not completely replace integrated machines like those from Apple. Many users do not want to or cannot spend time researching configurations and simply want a well-functioning computer. Integrated machines offer the best coordination between components, making them more efficient and providing a better experience than high-spec custom-built PCs.

For example, Solana, one of the mainstream Layer 1 blockchains, is a typical “integrated machine.” It is not modular but still offers high performance and has given rise to many popular projects. Thus, we can observe both the significant advantages and inherent disadvantages of modularity. Advantages include:

• Decentralization: By separating the data layer, hardware requirements for nodes are reduced, which increases the number of nodes and enhances network decentralization without introducing additional trust assumptions.
• Simplified Chain Deployment: Utilizing modular design lowers the startup costs and development costs for designing and deploying new blockchains.
• Improved Chain Performance: Each module’s performance has significantly improved, as seen with Ethereum’s scaling solutions.
• Fostering Ecosystem Prosperity: Different modules handle various functions while ensuring overall security.
• Enhanced User Experience: For example, reduced complexity and lower transaction fees.

Disadvantages:

• Security: Unlike integrated blockchains, delegating the data layer to a third party may introduce risks and cannot guarantee security in the same way as an all-in-one chain. Therefore, modular architectures can be less secure, especially when extensive cross-chain communication is required, increasing the attack surface for hackers.
• Complexity: The complexity of modular design introduces higher risks. With numerous modules to choose from and potential “blind box” risks between different modules, building a stable modular system becomes a critical concern.

02 Key project analysis

From a global perspective, the whole can be divided into three major layers:

• Application layer:
  • Various DApps (Decentralized Applications) are built on top of blockchains.
  • Currently, they include several major categories: Wallets (portals to the Web3 world), DeFi (Decentralized Finance), NFTs (which can be understood as digital collectibles), SocialFi (Decentralized Social Media), and GameFi (Blockchain Gaming).
• Middle layer:
  • If applications interact directly with blockchains, their performance and user experience are greatly constrained by the characteristics of blockchain technology. This is especially true in the current multi-chain landscape, where many different blockchains with varying technical architectures and system features affect application development difficulty and user experience.
  • To enhance user experience and ease application development, an intermediary layer has emerged. This layer connects various blockchains horizontally and encapsulates blockchain characteristics, providing various technical middleware for application development. This includes account abstraction (allowing user accounts to be programmable and supporting complex functionalities) and chain abstraction (enabling users to interact with different blockchains without needing to understand their differences, based on their own intentions).
• Public chain layer:
  • Execution Layer: Includes EVM (Ethereum Virtual Machine), Equivalent EVM (VMs compatible with EVM), Parallel EVM (EVMs supporting parallel transactions), and Modular VM (non-EVM type virtual machines).
  • Settlement Layer: In addition to settlement on Ethereum, the main modular settlement project currently is Dymension.
  • Data Layer: Also known as the Data Availability Layer, this layer has the most projects because data storage costs are a major part of transaction fees. There is strong market demand for affordable and effective storage modules. Ethereum’s storage is too expensive, with Celestia being a leading project in modular data storage, and Nubit being a leading project in the Bitcoin ecosystem.
  • Consensus Layer: Celestia also provides a consensus layer, but this challenges Ethereum’s foundation. The Ethereum community does not recognize public chains using Celestia as their consensus layer as Ethereum Layer 2. Additionally, Celestia’s security has not been validated by time as Ethereum’s has, leading to concerns about its security.

Next, we will specifically analyze three key projects: Celestia, Dymension, and AltLayer.

2.1 Celestia

• Basic introduction
  • As the first project to propose the concept of modular blockchains, Celestia can be considered a pioneer in the modular track. Especially after its token price surged, it attracted significant market attention and opened up the entire track’s potential.
  • Celestia aims to build a scalable data availability layer to enable the next generation of scalable blockchain architecture—modular blockchains. Its goal is to allow anyone to easily deploy their own blockchain with minimal overhead.
• Operating mechanism
  • Data availability sampling
    • Celestia does not handle the validity of transactions or execute them. It only packages, sorts, and broadcasts transactions, with all transaction validity rules enforced by the Rollup nodes of the clients (i.e., decoupling the consensus layer from the execution layer).
    • Data verification method: Abstractly, blockchain data can be divided into a matrix (e.g., 8x8). By encoding and adding extra “check” rows and columns to the original data, a larger matrix (e.g., 16x16) is formed. By randomly sampling and verifying the accuracy of parts of this larger matrix, the integrity and availability of the overall data can be ensured. Even if some data is lost or damaged, the checksum and data can still recover the entire dataset.
  • Sovereignty Rollup
    • Transaction Verification Method: The main difference between Sovereign Rollups and Smart Contract Rollups (such as Optimism, Arbitrum, zkSync, etc.) lies in the transaction verification method. In Smart Contract Rollups, transactions are verified by smart contracts deployed on Ethereum. In Sovereign Rollups, the Rollup nodes themselves are responsible for verifying transactions.
    • Upgrade method:
      • For Smart Contract Rollups, upgrades depend on the smart contracts on the settlement layer. To upgrade the Rollup, changes must be made to the smart contracts, which may require multiple signatures to control who can initiate the update. While it is common for teams to control multi-signature upgrades, governance-based control of multi-signatures is also possible. Since the smart contracts are on the settlement layer, they are subject to the social consensus of that layer.
      • Sovereign Rollups, on the other hand, upgrade through forks similar to Layer 1 blockchains. After a new software version is released, nodes can choose to update their software to the latest version. Nodes that do not agree with the upgrade can continue using the old software. This option allows the community of node operators to decide whether to accept new changes. Even if most nodes upgrade, they cannot force others to accept the update. This feature makes Sovereign Rollups truly “sovereign” Rollups.
  • Quantum Gravity Bridge (QGB)
    • Acts as a bridge between Celestia and Ethereum (or other EVM Layer 1 chains), facilitating data and asset transfers between the two networks.
    • By introducing the concept of Celestium (EVM L2 Rollup), it leverages Celestia for data availability while using Ethereum as the settlement layer. This approach fully utilizes the strengths of both networks: Celestia’s scalability and data availability, and Ethereum’s security and decentralization.

2.2 Dymension

• Basic introduction
  • Dymension is a Sovereign Rollup built on Cosmos, aiming to simplify the development of RollApps (blockchains focused on custom applications) through Dymension Chain (settlement layer), RDK (RollApp Development Kit), and IRC (Inter-Rollup Communication).
  • Dymension’s core feature is the modularization of the settlement layer while also offering RaaS (Rollup as a Service) capabilities, positioning itself as a competitor to AltLayer.
• Operating mechanism
  • Frontend → RollApps: RollApps are high-performance modular blockchains on Dymension specifically designed for particular applications. They are built using the Dymension RollApp Development Kit (RDK).
  • Backend → Dymension Hub: Dymension Hub, built using Cosmos SDK, serves as the settlement layer and uses IBC for secure message transfer between Dymension RollApps.
  • Database → Data Availability Network: The data availability network is decentralized and stores data for a relatively short duration.

2.3 AltLayer

• Basic introduction
  • A Lego-like modular RaaS (Rollup as a Service) platform that spans the concepts of modularization and Restaking.
  • It enables the rapid creation of fast, scalable, and application-specific Rollups protected by Layer 1. This platform allows developers to build custom Rollups efficiently and enables even those with minimal coding experience to set up a custom Rollup in just a few clicks within 2 minutes.
• Operating mechanism
  • One-click chain deployment capability (based on OP Stack, Arbitrum Orbit, zkSync ZK Stack, Polygon CDK)
  • Restaking services (based on EigenLayer)
  • Third-party DA (based on Celestia, EigenDA, Avail)
  • Third-party sequencers (based on Espresso, Radius)

03 Modular future narrative

The future narrative of modularity mainly revolves around three directions: further deepening of Ethereum modularity, expansion of the Cosmos ecosystem, and the rise of the Bitcoin ecosystem.

Modularity began with Ethereum and is maturing there, but two other ecosystems should not be overlooked: Cosmos and Bitcoin. Cosmos emerged to address cross-chain issues and build a multi-chain ecosystem. Chains based on Cosmos technology components can share security and facilitate cross-chain interactions. To achieve this, Cosmos developed one-click chain deployment capabilities with a high degree of modularity and has been evolving for years. Many well-known projects have originated from the Cosmos ecosystem, including Celestia, Dymension, and the popular BTC staking project Babylon.

Bitcoin, as the founding chain of the blockchain industry and the largest public chain by market cap—nearly three times that of Ethereum—also holds significant potential. The Bitcoin ecosystem is thriving, and many technologies already validated on Ethereum are being adapted for use in the Bitcoin ecosystem.

• Further deepening of the Ethereum module
  • Data Availability Layer: This layer has the most projects and is the most competitive sector. Currently, Celestia leads, but faces significant challenges. With Ethereum’s EIP-4844 upgrade, Rollup data can be stored as Blobs, drastically reducing data storage costs and diminishing Celestia’s cost advantage. Additionally, Celestia faces strong competitors like NearDA from the trusted L1 blockchain Near and EigenDA from the leading restaking project EigenLayer.
  • Middleware Layer: In a multi-chain landscape, users and liquidity are fragmented. To enhance user experience at the application layer, numerous middleware services have emerged. Popular concepts include Account Abstraction (programmable user accounts with complex functions) and Chain Abstraction (abstracting chains so users can interact with multiple chains without needing to understand their differences).
  • RaaS: One-click Layer2 deployment integrates various modular base services, offering enterprise-grade solutions for rapid Layer2 construction. This lowers development barriers, indicating that future Layer2 competition will focus more on ecosystems, operations, and application layer services rather than just technology.
  • ZK Technology: Zero-knowledge proof (ZK) technology serves two main purposes in blockchain: verifying the correctness of computations faster without recalculating, and protecting privacy by providing ZK proofs without revealing raw information. Currently, ZK technology is primarily used for verifying computation correctness in Layer2, with future directions focusing on ZK-enabling virtual machines. In Ethereum’s roadmap, ZK is a core component of the Verge phase, integrating SNARKs into L1 EVM. Various Layer2 solutions are also adopting ZK technology. Ethereum founder Vitalik Buterin has stated, “In 10 years, all Rollups will be ZK.”
• Expansion of the Cosmos Ecosystem
  • After the collapse of Luna in 2022, the Cosmos ecosystem was significantly impacted. However, despite the downturn, the ecosystem did not perish. Instead, it has seen the emergence of many pioneering projects, including Celestia as a leader in data availability layers and Dymension as a leader in settlement layers.
  • The Cosmos ecosystem uses a multi-chain architecture that supports multiple independent blockchains operating simultaneously and interacting with each other, offering strong interoperability.
  • Cosmos employs a modular design, allowing developers to select and combine different modules to build their own application chains, providing substantial autonomy and flexibility.
  • However, Cosmos also faces several challenges, including the high costs associated with establishing and maintaining application chains, the lack of a revenue model for Cosmos Hub, and an unsustainable economic model. These are issues that will need to be addressed in the future.
• The rise of the Bitcoin ecosystem:
  • Since the introduction of the Ordinals protocol, there has been significant attention on the Bitcoin ecosystem. Over the past year, we have seen a surge in inscription trends, BTC Layer 2 developments, and Bitcoin restaking enthusiasm.
  • The development directions for the Bitcoin ecosystem are primarily twofold: one is to expand based on Bitcoin’s own technical characteristics, and the other is to integrate with EVM (Ethereum Virtual Machine), bridging liquidity between the Bitcoin and Ethereum ecosystems.
  • Ethereum can be considered as a modular extension of Bitcoin, or even as a testing ground. Many mature technologies from Ethereum can be directly applied to the Bitcoin ecosystem. This has led to the emergence of various modular projects, including data availability projects like Nubit, Layer 2 projects such as Merlin and BitLayer, and Bitcoin shared security services (restaking) like Babylon.

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