Understanding Modular Blockchains

Introduction

As blockchain technology evolves and innovates, modular narratives gradually replace traditional public blockchain narratives, becoming the mainstream trend in the blockchain field. This transformation has attracted the attention of many projects and investors, bringing about a wave of technical solutions and a race to capture market share in various modules. Against the backdrop of escalating public blockchain competition, we may witness the term “modular” gradually moving into the mainstream, bringing new changes and opportunities to the entire blockchain industry.

What are Modular Narratives?

With the ongoing development of blockchain (expanding functions, growing user base, and increasing on-chain operations), the ever-increasing data has begun to overwhelm the Ethereum mainnet. As Ethereum’s performance approaches its limits, to optimize performance, maintain competitive advantage, and prevent user attrition, Ethereum has initiated an upgrade called Danksharding. This upgrade involves iterating, upgrading, and outsourcing various modules of Ethereum to facilitate the transition from a single-chain to a layered architecture.

Ethereum On-chain Data Expansion

The traceability and transparency of the blockchain are because every full node has stored all the historical data, ensuring that every transaction in the network can be tracked and verified. However, as time passes, the amount of data in the blockchain network has been expanding at a geometric rate, leading to a continuous increase in node hardware and operational costs. Ethereum was initially operated as a single blockchain, with all tasks completed by full nodes. However, as the Ethereum ecosystem continues to develop and grow in size, it has become necessary to seek reforms to accommodate the rate of development. For this purpose, Ethereum has begun a large amount of exploration. For example, sidechains and Plasma were explored, as well as the four major Layer2 solutions that are now familiar to everyone.

The Demand for Ethereum Scalability

The Rapid Development of Layer2

When nodes are unable to handle all tasks on the blockchain, there arises a need for scalability. The explosion of Ethereum in the DeFi sector has pushed network load to historic peaks, with high transaction costs increasing the entry threshold for small funds, becoming an obstacle to attracting new users. Taking Ethereum’s Layer2 solutions as an example, it outsourced the smart contract layer and execution layer to Layer2 projects for collaboration. In this model, transactions are distributed to the Layer2 network for submission and execution, with the Ethereum main chain only responsible for verifying smart contracts and data storage. This greatly reduces the data redundancy of Ethereum and lightens the network load. At the same time, this cooperative model has also pointed out a new direction for the development of other public chains. According to L2beat data, as of March 2024, there are 46 Layer2 networks that have launched their mainnet, with more than 34 Layer2 networks about to be launched, nearly doubling the number in six months.

Source: L2Beat

Layer 2 Earnings Data

Taking Arbitrum as an example, when a user makes a transfer on Arbitrum’s Layer 2, a corresponding fee is incurred. Arbitrum, as a Layer 2 solution, is responsible for executing transactions and collecting the respective execution fees, while Ethereum, as the chain that ultimately confirms the validity of the transactions, also charges a certain fee. This portion of the fee constitutes the major part of L2’s expenditure.

According to Tokenterminal data, ARB has accumulated fee revenue over the past three months of 47.435 million USD, with an expenditure of 35.1 million USD.

Source: Tokenterminal

Committing to a Rollup-Centric Approach

The expansion of blockchain networks is generally achieved through two approaches: horizontal scaling via sharding, and vertical scaling through layering. The layering approach is more straightforward, with Rollups acting as the execution layer to alleviate the pressure on the Ethereum mainnet. Sharding, on the other hand, is considered the ultimate direction for blockchain scalability, encompassing both data sharding and transaction sharding. On December 20, 2020, Ethereum committed to a layer-oriented, Rollup-centric roadmap, positioning itself as the settlement layer and data availability layer for Rollups, with the ultimate goal of implementing data sharding. This method is known as “modularization.” By adopting a modular approach, Ethereum can integrate multiple layers, each with specific functions, thereby enhancing scalability, efficiency, and overall performance.

Source: Vitalik.eth

Summary

In pursuit of scalability, Ethereum has transitioned towards a narrative of modular expansion. Ethereum is gradually evolving from an execution layer into a consensus layer, with a development roadmap centered around Rollups that transfer the burden of on-chain activities to off-chain. By moving part of the computational load of the main network, it accelerates transaction speeds, reduces costs, and alleviates network congestion, ultimately achieving performance scalability, solidifying its position, and retaining users.

Integrated vs. Modular Blockchain Systems

In the early days of blockchain platforms, miners were often referred to as validators, responsible for maintaining the blockchain network. However, each node is actually comprised of multiple modules, each tasked with different functions such as collecting user transactions, executing transactions, updating state, proposing blocks, and voting on proposals. This streamlined and efficient setup forms the foundation of what we now refer to as integrated blockchain systems.

Integrated Blockchain Systems

In traditional integrated blockchain systems, there are typically four key layers: the smart contract layer, the execution layer, the settlement layer, and the data availability layer. All these functionalities are implemented collectively by a single foundational decision-making layer. However, this unified structure presents some challenges. Since the decision-making layer must handle a variety of different tasks and cannot optimize any single function independently, this structure often limits the system’s capacity.

Modular Blockchain Systems

Modularization involves breaking down the various functionalities of a blockchain into independent modules, each responsible for a specific function. Integrated blockchain systems refer to blockchain networks where the consensus layer, data availability layer, settlement layer, and execution layer are integrated and operate together. In contrast, modular blockchain networks decouple these layers and allow them to run in parallel.

Source: Celestia

According to Celestia, from a data perspective, public blockchains primarily need to complete five data-related tasks:

1. Where is data submitted? (Smart Contract Layer)
2. Where is data processed? (Execution Layer)
3. Where is data verified? (Settlement Layer)
4. Where is data stored? (Data Availability Layer)
5. Where does data take effect? (Consensus Layer)

The essence of modularization is transforming the approach from having a single decision-making layer handle data processing to a collaborative method involving multiple parties. Celestia’s research indicates that while the integrated approach is more general, the modular approach is more specialized.

Sources: Celestia

Why Choose Modularization?

Limitations of Single-Chain Systems

Currently, most blockchains are monolithic, meaning they execute all tasks as an integrated whole. Blockchains such as Sui and Aptos fall under this category. Integrated blockchains have explored the possibilities of utilizing blockchain to build various new DApps. However, once DApps begin to be built and utilized on these chains, several issues become apparent:

• It’s not possible to build anything you want on any given blockchain.
• The cost of building and using DApps can be prohibitively expensive, making DApps difficult to sustain.
• Due to limited Transactions Per Second (TPS), only a few smart contracts can be executed.
• The efficiency of the verification process is easily constrained by node resources, such as bandwidth and storage.
• On-chain data storage can exponentially expand over time, challenging the hardware requirements of nodes.
• The hardware requirements for the verification process on nodes become increasingly demanding, leading to fewer nodes, damaging the blockchain’s decentralization and security.

These challenges make the use of integrated blockchains difficult.

The High Cost of Data Usage

According to a chart showing the fees paid by various L2s for publishing data to Ethereum, L2 spending in this regard is substantial. As of March 22, 2024, this expenditure has already exceeded 36.24 million USD for the month.

Source: Dune

Numia Data released a report titled “The impact of Celestia’s modular DA layer on Ethereum L2s: a first look.” This report compares the costs required for different L2s to publish callData to Ethereum in the second half of 2023 with the potential costs if they used Celestia as a DA layer. The magnitude of this difference shows that adopting modularization, similar to Celestia, can significantly save on L2 Gas fees.

Data Source: @numia.data/the-impact-of-celestias-modular-da-layer-on-ethereum-l2s-a-first-look-8321bd41ff25">Medium

Characteristics of Modular Blockchain

Shared Security

Establishing validators is a crucial step when creating a blockchain. However, not all chains can find a sufficiently large validator set to ensure security. Chains relying on large validator sets gain high security, while those dependent on smaller sets have lower security. By building a public chain modularly to share its security, deploying a new blockchain can avoid creating a new validator set. For instance, Celestia provides data availability, making it easy for blockchains to verify whether their transactions have been published. Shared security also offers a scalable and effective way for the blockchain ecosystem.

Scalability

Integrated blockchains combine the smart contract layer, execution layer, settlement layer, and data availability layer functionalities within a single decision-making layer. This approach complicates the creation of blockchains and increases system risks and congestion as it attempts to handle all functionalities within a single layer. In contrast, modular blockchains distribute different functions across separate layers, enhancing the chain’s scalability. For example, modular L1s like Celestia can focus on data availability (L1 can concentrate all resources to provide data for L2s, such as through rollups).

Simplifying Blockchain Creation

When developing new blockchains, developers can create them more quickly through flexible design and modular development. This means they can choose suitable functional modules based on needs and easily expand and upgrade when necessary, thereby enhancing the blockchain’s flexibility and adaptability.

Flexibility

The layout of modular blockchains is more flexible and varied than that of monolithic blockchains because it allows developers to select, combine, and adjust different functional modules based on needs. Compared to a single structure, blockchains with modular designs can better meet the needs of different users and DApps, thus offering a broader range of functionalities and application scenarios.

In addition to providing a wider range of functionalities, modular blockchains also bring higher efficiency and scalability to developers. By breaking down blockchain functionalities into independent modules, developers can manage and maintain the system more easily and make quick updates and iterations when needed. This flexibility and customizability help improve the performance and stability of blockchains, thereby providing a better user experience.

Conclusion

In 2024, modularization is poised to become the mainstream narrative. Ethereum, as a leading smart contract platform, has been advocating for modular development and continuously exploring development pathways centered around Rollups to address challenges related to blockchain scalability and efficiency. However, despite the many positive changes brought about by modular blockchains, they also introduce some new concerns, such as whether public blockchains necessarily need to be modularized. While developers enjoy the conveniences brought by modular blockchains, they should also actively explore alternative solutions. Modularization is a good solution at present but may not necessarily be the best solution in the future.