In the evolving landscape of blockchain technology, the discourse surrounding the efficacy and future direction of modular versus monolithic blockchain architectures continues to intensify. This analysis delves into the comparative advantages and challenges of both frameworks, focusing on key aspects such as transaction costs, scalability, decentralization, and the broader implications for the blockchain's role as a "non-national space" in the digital era. Drawing on insights from industry experts, including notable contributions from Gulu, this report aims to provide a comprehensive overview for investors and users within the cryptocurrency domain.
Borrowing from modular design principles, these blockchains differentiate themselves by separating essential functions such as execution, consensus, settlement, and data availability.
- Execution Layer: This is the initial stage where transactions and changes in the blockchain's state are processed. It is the layer with which users commonly interact and transaction computation occurs.
- Settlement Layer: The settlement layer verifies the execution of transactions and adjudicates disputes. Notably, this layer is absent in monolithic chains and represents an optional component within the modular structure of the blockchain.
- Consensus Layer: The consensus layer is pivotal in maintaining the order and finality of transactions within the blockchain. It involves a network of full nodes that download and execute block contents, subsequently reaching a consensus on the legitimacy of state transitions.
- Data Availability Layer: This layer is responsible for publishing and storing the data needed to validate state transitions. In cases of attacks where malicious block producers might withhold transaction data, the availability of this data for verification is crucial.
Source: BINANCE Research
The implications are significant: Modular blockchains offer increased flexibility and scalability compared to their monolithic counterparts while retaining the security and censorship resistance expected in a blockchain. By separating the critical layers of a protocol, the modular chain divides the total work done among the different specialized layers/nodes so that, on net, more total throughput is produced compared to what any individual node could have processed, e.g., a divide-and-conquer approach.
Many leading L1 blockchains implement a modular approach to their chains and the scalability problem. Ethereum and rollups, Polkadot, Cosmos, Avalanche, Celestia, Polygon, NEAR, etc., are all working on different approaches to scaling that involve splitting the blockchain’s total work among different layers and nodes so that greater throughput can be achieved than a single node.
The Pros of Modular Blockchains
Modular blockchains hold particular appeal for developers looking to increase the throughput (transactions per second) of their applications without building resource-intensive application-specific blockchains from scratch. The modular blockchain structure allows developers to construct scalable execution layers for decentralized applications (dapps) while utilizing the robust security of an established blockchain.
By dedicating blockspace and increasing transaction per second capacity, modular blockchains permit high-throughput, low-cost computation. Such capacity is key for applications such as high-frequency trading, gaming, and social networks, which demand high throughput. App chains or rollups anchored in an entirely modular blockchain protocol eliminate redundant constraints often seen in their monolithic counterparts. Their design capitalizes on specialized blockchain layers, each fine-tuned for a unique role. Within a monolithic chain, all transactions compete for the same blockspace independent of the rest of the chain’s activity. However, a modular approach can optimize for different applications and thus more efficiently price resources.
It's worthy of note that a multitude of EVM-aligned L2 systems are charting the course to craft customizable L3s on their respective L2 platforms. This trajectory points to more modular blockchains emerging. The essential takeaway is the prediction that app chain innovations will predominantly manifest as L2s and L3s on modular blockchain architectures, sidelining the monolithic models. By synergizing the EVM's decentralization and security frameworks with the scalability of L2s/L3s, the modular environment hopes to trump the monolithic app chain ecosystem.
Modular Limitations
Yet, as we migrate to this new model, we must be mindful of challenges that could potentially undermine the advantages of modular design. It's important to note that blockchains have often been likened to “islands” due to their inability to share value (assets) natively and information (state). Adopting a modular blockchain architecture exacerbates this interoperability problem by dividing state and liquidity across multiple execution and settlement layers.
Two primary issues arise from this:
- State Fragmentation: In a modular blockchain architecture where the state of an application is dispersed across different execution layers, data retrieval and verification become more challenging. This issue is not as significant for applications running on monolithic blockchains, as all contract states, both current and historical, reside on the same network. In a cross-chain future where a single application exists on numerous Layer 1, Layer 2, and Layer 3 blockchains, state fragmentation could have far-reaching implications.
- Liquidity Fragmentation: Liquidity refers to the efficiency with which an asset can be converted to fiat or another asset without significantly affecting its price. Liquidity is critical for DeFi applications as it impacts slippage users encounter, especially on large trades. DeFi protocols on a single, monolithic chain generally face fewer liquidity issues as all users transact on the same network. Conversely, a DeFi application spread across multiple chains will have varying liquidity levels, limiting users to the liquidity available on a particular chain.
Overcoming these challenges is crucial not only to the overall user experience but also to the future growth of DeFi projects. Users might avoid low-liquidity blockchains due to fears of high slippage or difficulties exiting a large position. This calls for a more robust approach to developing modular blockchain architectures that address these interoperability challenges head-on, ensuring the potential of this innovative technology is fully realized.
Transaction Costs and Scalability
The debate between modular and monolithic blockchains is significantly influenced by considerations of gas costs and scalability. Monolithic blockchains, characterized by their all-encompassing approach where each consensus node verifies every transaction, face considerable challenges as transaction volumes increase. For instance, a scenario requiring each node to process 100,000 transactions per second would pose a formidable challenge, potentially compromising efficiency and scalability.
Conversely, the modular blockchain architecture, exemplified by the Ethereum Rollup scaling solution, presents a more economical alternative. In this model, the Layer1 blockchain serves as the foundation, providing computing and data storage services, while Layer2 networks handle the bulk of transaction processing. This division of labor allows for a significant reduction in gas costs, as not every node is required to process every transaction. Post the Cancun upgrade, the cost of data storage on Layer2 is expected to decrease dramatically, further enhancing the cost-effectiveness of modular blockchains. This architecture not only promises to lower transaction costs by at least 80% but also offers a scalable solution capable of processing 100,000 transactions per second across multiple Layer2 networks.
Decentralization
The principle of decentralization stands at the core of the blockchain ethos. However, the monolithic blockchain's approach to decentralization is potentially at risk as the network may eventually consolidate around a limited number of nodes, often operated by centralized data centers. This concentration of control could render the blockchain vulnerable to external interventions, thereby undermining its foundational principle of independence.
Modular blockchains, however, propose a nuanced approach to decentralization. By design, Layer2 networks possess a degree of autonomy, yet ultimate control is retained by the foundational Layer1. This structure is believed to preserve the decentralization and integrity of the Layer1 network, ensuring its resilience against attacks and external pressures. Platforms like Arbitrum have demonstrated the feasibility of this model, achieving trustless and permissionless operations within a decentralized framework.
Blockchain as a "Non-National Space"
The concept of blockchain as a "non-national space" draws parallels with historical non-state territories, offering a modern digital realm that exists beyond the confines of national jurisdictions. This space is envisioned as a decentralized network, free from centralized governance, where individuals can exercise greater control over their data and assets. Bitcoin's emergence as the first application within this space underscored the blockchain's potential to facilitate a decentralized currency market.
The advantages of operating within this "non-national space" are manifold. Blockchain applications enhance trust among users, as data integrity is assured through transparency and immutability. The scalability of this space is evident in the proliferation of DeFi, NFTs, and lending platforms, which collectively signify the blockchain's evolution into a global financial hub. Moreover, the blockchain's facilitation of low-cost, efficient cross-border payments exemplifies its superior product-market fit, particularly in the context of stablecoins and the broader process of dollarization.
The ongoing discourse between modular and monolithic blockchain architectures is a testament to the dynamic nature of blockchain technology. While monolithic blockchains offer a unified approach to transaction processing, they face significant challenges related to scalability and decentralization. Modular blockchains, with their layered structure, present a viable solution to these challenges, promising enhanced efficiency, reduced transaction costs, and a robust framework for decentralization. Furthermore, the conceptualization of blockchain as a "non-national space" highlights its potential to redefine financial transactions and asset management in the digital age. As the blockchain ecosystem continues to evolve, the insights and analyses provided by experts like Gulu will be invaluable in navigating its future trajectory.
