Modularity is transforming the crypto landscape

The first smart contract blockchain, Ethereum, was monolithic by design, meaning it manages its own execution, settlement, consensus, and data availability. Over the years, new decentralized applications have been developed, leading to increased demand for blockspace. When demand for blockspace exceeds supply, limited availability limits the range of potential applications, creating a significant barrier to utility and widespread adoption.

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This restriction becomes the scalability trilemma or, in a nutshell, 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.

The 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 into different layers from a single L1, blockchains can be tailored for optimal performance in specific areas, significantly increasing customization, efficiency and, where necessary, decentralization, security and scalability.

Given the diverse range of usage scenarios, these features may be different. A modular network could be specialized to drive oracle price feeds, provide zero-knowledge proof services, make data available, or enable a more scalable execution layer on top of another underlying blockchain.

The need for modularity in the crypto industry

Ethereum is an example of the gradual transformation towards a modular world. The chain was first launched with a monolithic design, following in the footsteps of Bitcoin. Arbitrum, a layer 2, represents the success story of rollups in separating the intensive computation required for off-chain scalability and putting it back on-chain. Many more projects have adopted this design due to its resource effectiveness and cheaper design of processing transactions using rollups.

It doesn’t stop there. Networks that help developers see and unlock 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) back to Ethereum. Although rollups enable higher throughput, the transaction costs are still relatively high because they ultimately depend on the storage costs of the settlement layer. A solution to this problem is to provide an alternative DA layer.

The realization that a single monolithic design cannot meet current blockchain demands without a trade-off is why the space is moving towards modularity. Ethereum is the most secure blockchain with smart contracts, but still suffers from several shortcomings in terms of transaction processing and gas fees.

The courtesy of the Inco team

In addition to solving the architectural challenges of blockchain, it is becoming clear that additional services are needed to enable new use cases and drive web3 adoption. Examples of such add-on services include oracle services, decentralized RPC, ZK-prover networks, AI, to name a few. However, blockchains cannot natively support these services due to the additional overhead, hardware requirements, or technical incompatibilities. Given the composable nature of the modular architecture, blockchains no longer need to support everything themselves; everything can be plug and play, just like Lego.

The courtesy of the Inco team

For example, one unresolved issue that this space will continue to address has to do with confidentiality. Most of today’s widely adopted blockchains are transparent and cannot add on-chain confidentiality without requiring hardware-intensive hardware for their validators when using cryptography methodologies such as zero-knowledge proofs (ZKP) or fully homomorphic encryption (FHE) .

In addition to the existing four blockchain layers (execution, settlement, data availability, and consensus), a confidentiality layer on top of existing dApps is a critical missing piece that will enable net new use cases that are not feasible on top of transparent blockchains. Inco is an example of a modular protocol that acts as the fifth layer – confidential computing – by introducing fully homomorphic encryption (FHE) to Ethereum and other blockchains without changing the base protocol.

Today, modular protocols are gaining popularity, and with the widespread adoption of decentralization, they will likely become the standard for building web3. This standard will undoubtedly disrupt the vertically integrated approach of monolithic chains and use specific Lego blocks that can be combined to create separate modular stacks. This means that projects will use the modules they need for their specific needs, rather than trying to do everything.

This will unlock infinite scalability as a network can rely on Ethereum for security, Move as the execution environment, Celestia for data availability and Inco for confidential computing. The ultimate goal is for disparate ecosystem modules 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 – settlement, consensus, confidentiality, data availability (DA), or execution – to another separate blockchain framework.

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