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Modularity is transforming the cryptocurrency landscape
Disclosure: The views and opinions expressed herein are solely those of the author and do not represent the views and opinions of the crypto.news editorial.
The first smart contract blockchain, Ethereum, was monolithic in nature, meaning it manages its own execution, settlement, consensus, and data availability. Over the years, new decentralized applications have developed, leading to an increased demand for blockspaces. When demand for blockspace exceeds its supply, limited availability narrows the range of potential applications, causing a significant barrier to utility and widespread adoption.
This limitation is called the scalability trilemma, or simply put, the idea that no public blockchain can simultaneously achieve maximum decentralization or security to achieve optimal scalability. To overcome the limitations of the scalability trilemma, modularity has emerged as a way to outsource core components optimized to solve critical functions.
Courtesy of the Inco team
The modular blockchain thesis focuses on role specialization. It proposes decentralizing traditional blockchain functions, such as execution or data availability, across specialized networks. By segmenting these functions from a single L1 into distinct layers, blockchains can be tailored for optimal performance in specific areas, significantly increasing customization, efficiency and, where necessary, decentralization, security and scalability.
Given the wide range of use cases, these functions can be different. A modular network could be specialized to push oracle price feeds and deliver zero-knowledge testing servicesmake data available or enable a more scalable execution layer on top of another underlying blockchain.
The need for modularity in the cryptocurrency industry
Ethereum exemplifies the gradual transformation into a modular world. The chain was initially launched with a monolithic design, following in the footsteps of Bitcoin. Arbitrum, a layer 2, represents rollups’ success story in decoupling the intense computation needed for off-chain scaling while rolling back on-chain. Many other projects have adopted this design due to the resource efficiency and less expensive design of transaction processing using rollups.
It does not end here. Networks that help developers see and exploit the value of modularity are on the rise. Celestia is a great example of solving an obvious problem: the significant cost of storing data availability (DA) on Ethereum. Although rollups enable higher throughput, the transaction cost is still relatively high because it ultimately depends on the storage cost of the settlement layer. One solution to this problem is to offer an alternative DA layer.
The realization that a single monolithic design cannot meet today’s blockchain needs without compromise is why the space is moving towards modularity. Ethereum is the most secure blockchain with smart contracts, but it has continued to face various shortcomings in transaction processing and gas fees.
In addition to solving blockchain’s architectural challenges, it is becoming clear that additional services are needed to enable new use cases and drive web3 adoption. Examples of such additional services include Oracle services, decentralized RPC, ZK prover networks, AI, to name a few. However, blockchains cannot support these services natively due to additional costs, hardware requirements, or technical incompatibilities. Given the composable nature of modular architecture, blockchains no longer need to support everything themselves – everything can be plug-and-play like Lego.
For example, one unresolved issue that this space will continue to face concerns privacy. Most widely adopted blockchains today are transparent and cannot add on-chain confidentiality without requiring resource-intensive hardware for their validators when using encryption methodologies such as zero-knowledge proofs (ZKP) or fully homomorphic encryption (FHE).
In addition to the four existing blockchain layers (execution, settlement, data availability, and consensus), a privacy layer on top of existing dApps is a critical missing piece that will enable neat new use cases that are not feasible on transparent blockchains. Inco is an example of a modular protocol that serves as the fifth layer, i.e. confidential processing, introducing fully homomorphic encryption (FHE) to Ethereum and other blockchains without changing the core protocol.
Today, modular protocols are gaining ground and, with the widespread adoption of decentralization, will likely become the standard for building in web3. This standard will undoubtedly disrupt the vertically integrated approach of monolithic chains and draw on specific Lego blocks that can be combined to create distinct modular stacks. This means that projects will use the modules they need for their specific needs instead of trying to do everything.
This will unlock infinite scalability because a network could depend on Ethereum for security, Move as an execution environment, Celestia for data availability, and Inco for confidential processing. The ultimate goal is for the different modules of the ecosystem to coexist and grow together.
The blockchain technology landscape is poised for significant expansion with the advent of modular architectures in 2024 and beyond. These new blockchains delegate at least one of the essential functions – regulation, consensus, confidentiality, data availability (DA), or execution – to another distinct blockchain framework.
Remi Gai
Remi Gai is the founder and CEO of Inco. He is a founding member of web3 at South Park Commons, with a background in engineering (Google, Microsoft), entrepreneurship (founding member of Parallel Finance, a defi protocol suite on Polkadot that has reached over 500 million TVL supported by Polychain, Sequoia , Founders Fund, Coinbase Ventures), product management (head of web3 UX at co-founded blockchain studio), and venture capital (8 Decimal Capital). He is now creating Inco, with the aim of breaking down the last barrier to mass adoption of web3.