What exactly is modularity?
Modularity is the result of a curious experiment taking place in Ethereum in response to the poor scaling properties of blockchains. To address this bottleneck, developers have taken the radical approach of auctioning core mainchain functions to… other blockchains.
This modular transformation, centered around rollup technology, has completely redefined the way products and services are built on top of Ethereum. By breaking down each element of the stack, different architectures can be designed based on their use cases. Understandably, this has led to a proliferation of… blockchains.
I’m not joking. Everyone is getting hilariously rich again by selling blockchains.
While each new consensus protocol offers new and interesting scaling possibilities, they also introduce a strange coordination problem. If users become spread across different networks, how is the economy made more efficient? How can we sync everyone in this distribution? Maybe another… blockchain?
It’s turtles all the way down.
This fragmentation of the ecosystem has had a number of clear consequences. First, users are trapped between middlemen. While rollups have compelling features to minimize trust, the inefficiencies created by transfers to and from these systems impose unreasonable costs on users. It also exposes them to riskier options such as bridges and centralized services.
For developers, the lack of interoperability between platforms creates friction and fosters a competitive rather than collaborative environment. Every other day a new protocol is created for new and existing teams to compete for with another instance of the same applications. In many cases, teams choose to ‘bet on themselves’ and enter their own ecosystem (read: blockchain). It is crucial to emphasize the appeal of this model, which allows the customization and optimization of various components for any application. This flexible architecture allows anyone to contribute their unique frameworks and inspire new designs. The possibilities are endless!
Unfortunately, these incentives have led to fragmentation of the network effect. If nothing built matches, users will consolidate to just a handful of competing networks. As a result, economic activity is concentrated in less permissive systems.
This brand of modularity has taken people further from the goal, when it shouldn’t. Using different interfaces to interact with the consensus protocol is a perfectly valid idea. However, Ethereum’s strategy proves problematic; it views interoperability as an optional feature rather than a fundamental design principle. As long as Ethereum continues to pursue scalability by multiplying blockchains, the debate will continue, providing ample opportunities for competitors to exploit these divisions and encourage disagreement. Divide and conquer.
Bitcoin’s opportunity
On Bitcoin, a different architecture emerges that favors a fundamentally different design. By using Lightning as the backbone for interoperability, developers are slowly moving towards a technology stack that is much closer to Bitcoin’s peer-to-peer model.
Rather than trying to replicate global shared states, protocols like Cashu or Fedimint optimize for local and permissionless interactions. Financial services can now be deployed across different economic hubs and stay connected via the Lightning Network.
Liquidity providers, atomic bridges and ECASH coins. A new financial network that all shares the same settlement layer.
The arrival of Nostr provides the social abstraction that connects everything. It is a social network based on similar principles to Bitcoin and offers a simple set of rules designed to maximize interoperability. By not being prescriptive about the features it enables, Nostr is unleashing a Cambrian explosion of open innovation.
Today, several projects are starting to explore ways to simplify Bitcoin trading by making Nostr its own part of the Bitcoin user experience. The public key infrastructure underlying the protocol is a natural fit for wallets and other payment applications, allowing them to communicate with each other and exchange messages securely. This communication layer can connect users to others through various services made available over the network. Standards like Nostr Wallet Connect create new opportunities for Bitcoin applications to interact with Nostr’s growing ecosystem.
A case study
Projects like Mutiny perfectly embody the differences in this modular vision of Bitcoin. Users can simultaneously connect to services such as Nostr Relays, Fedimint federations, and Lightning Service Providers (LSPs). Each of these gives access to a growing number of features and applications. By using Nostr as a discovery service, we are able to use our social network to identify and access applications and services endorsed by our peers. This web-of-trust introduces an interesting alternative to so-called trustless systems. Participants may come to rely on market incentives to engage in more efficient exchanges that are not hampered by the tradeoffs required for more decentralized systems.
Eventually, marketplaces will emerge where liquidity providers, ecash coins, lenders and Coinjoin coordinators can advertise their services through the Nostr. Decentralized order book projects Civkit could integrate seamlessly with Mutiny and allow users to conduct peer-to-peer transactions. Each integration is designed around permissionless participation, so users can maintain full sovereignty over their interactions.
Platforms versus protocols
Bitcoin’s modular story is not without risks. Fundamental pieces of the puzzle, such as LSPs, bring significant capital requirements that will create economies of scale between competing providers. The growth of ECASH coins may be hampered by regulatory concerns and fraud by operators. Nostr relays have already shown a tendency towards centralization and it remains unclear how the network topology will evolve.
The success of this approach relies on market opportunity and it is essential that barriers to entry into these industries remain low. Various efforts are being made to this end. For example, several Lightning companies are currently working together on a specification that will allow all market players to implement their own LSP.
It is probably too early to predict how these architectures and protocols will evolve. As both worlds continue to collide, it is likely that rollups will find their place within the Bitcoin ecosystem. Application-specific designs such as exchange packages or zkCoins do not require global status and may be able to be made interoperable with Lightning.
The tension between the two methods is somewhat reminiscent of the early days of the Internet. Commercial interests may favor platforms that allow them to leverage parts of the network effect to monetize. It may take longer for more open and permissionless protocols to really take off. The Internet offers a cautionary tale regarding the consolidation of services and applications into walled gardens. Hopefully, the current Bitcoin development path resolves into a future that prioritizes interoperability and permissionless access over financial silos.