The market alternative of modular blockchains

With the merge full, Ethereum’s long-term roadmap for scalability is now solidified. And with this, it has rekindled an age-old debate: will the long run include an ‘Internet of blockchains’ or a ‘World of dapps’ on a single chain? Here, Denis explores the expansion of modular blockchain design, and the way it might grow to be the important thing to attaining scalability and sovereignty for purposes whereas decreasing the price of constructing a validator set.

– Chris

Size doesn’t all the time equal scale. As highlighted in a earlier Dose of DeFi article, a decentralized system should have three layers of expertise to perform: execution, knowledge availability, and safety (consensus/settlement). Monolith blockchains like Ethereum and Solana carry out all three, which makes them decentralized, but not essentially scalable. 

Indeed, whereas Ethereum’s blockchain is rising quick (and Solana’s even sooner), this progress places ever-higher strain on validators. As transaction volumes proceed to extend, we might nicely see a data-overload challenge because the business reaches mass adoption.

Throughput throughout high-load durations presents one other downside. For instance, NFT mints are quick however very demanding on blockchain throughput occasions. A single fashionable NFT drop has the ability to devour the complete blockspace, inflicting community congestion. This is what occurred throughout the Bored Ape Yacht Club NFT launch on Ethereum, and creator Yuga Labs  subsequently determined emigrate to its personal high-throughput chain.

Of course, that is web3, so options on options are already up and working. Rollups have grow to be the default response – but at the moment are maybe suboptimal when in comparison with the place innovation seems set to guide us. In this piece, we discover how rollups and appchains are evolving to finest overcome scalability and different points. And how with new approaches to chain design, a world by which modular blockchains are the norm turns into a practical future. 

Rollups are the predominant present answer to the scalability challenge, with Vitalik’s rollup-centric imaginative and prescient of the long run now seemingly coming to life. Rollup expertise delivers pace and throughput by being a quick, scalable separate blockchain that saves solely zipped archives of its transactions to an L1. While zero-knowledge rollups are but to be battle-tested, optimistic rollup expertise has been trialed, with tasks like Arbitrum and Optimism reliably serving customers for a couple of yr now. Rollups additionally could be efficient when extraordinarily excessive throughput is required for a brief interval. 

Rollups do have a weak spot although: they are not upgradable. Or because the staff at Celestia places it:

The eventual purpose of present Ethereum rollups is that the rollups shouldn’t be upgradeable by a multisig or a committee, as a result of if they will, they don’t seem to be trust-minimized as funds could be stolen through an improve. In this mannequin, rollups can solely be upgraded by laborious forking the L1 as a result of the canonical chain is outlined by the L1’s settlement layer, that means the rollups don’t have any sovereignty. 

Celestia and Polygon Avail (and possibly others that we’re not but conscious of) are new blockchains which were specifically designed to resolve the information availability downside, in what is known as ‘modular blockchain’ structure. These blockchains do not confirm transactions, however merely examine that every block was added by consensus and that new blocks can be found to the community. Scroll to the tip for a extra detailed description of how this works*.  

How would this design strategy work with rollups? As the Celestia staff explains in the identical weblog submit,

Rollups don’t submit their blocks to a sensible contract, however straight onto knowledge availability chain as uncooked knowledge. The Celestia consensus and knowledge availability layer doesn’t interpret or carry out computations on the rollup blocks, nor run an on-chain mild shopper for the rollup.”

Polygon’s Avail works in a similar way.

Using such a design means rollups are no longer hard coupled with L1s, and so can be upgraded and are therefore ‘sovereign’. Rollup upgradability means important decisions about governance, technology, or strategy don’t need to depend on L1s – and this full control will be attractive to DAOs, or any large projects. Many projects want to build their own rollups, and if they do, the customization and upgradability aspects of the modular approach are sure to make it a popular route. 

Indeed, Celestia’s first partners (or ‘Modular Fellows’, as it calls them) are mostly projects that enable easier rollup deployment by utilizing Celestia’s data architecture, which is designed to store rollup data, not transactions. Important examples include: 

• dYmension: ‘Home of the RollApps’. This allows rollups to issue tokens and choose which data availability layer to use (e.g. Celestia or Polygon Avail).

• AltLayer: Ethereum-compatible tailored rollups-as-a-service. These are high-throughput ‘disposable’ rollups, where NFTs are minted and then bridged to an L1.

• Eclipse: Rollups using the Solana VM and the Inter-Blockchain Communication protocol. 

Of course, nothing is perfect. Sovereign rollups have disadvantages too – most notably, a lack of liquidity compared to large L1s (especially right after rollup launch). Bridges can be built to bring liquidity to the rollup, but these can’t be as secure as non-upgradable smart contract bridges. Vitalik made this point clear in this post: 

To be a rollup that provides security to applications using Ethereum-native assets, you have to use the Ethereum data layer (and likewise for any other ecosystem)… There are fundamental limits to the security of bridges that hop across multiple ‘zones of sovereignty’. This is a limit to the ‘modular blockchains’ vision: you can’t just pick and choose a separate data layer and security layer. Your data layer must be your security layer.

Since Bitcoin launched, there has always a push for faster blockchains, but once real applications emerged on blockchains, then blockchain architecture design could be customized to the needs of a specific application, aka appchains. That’s why dYdX chose an appchain to accommodate their unique requirements: on dYdX, per every 1,000 order places/cancellations, only 10 trades are executed, meaning they must set-up transaction fees in a way that users only pay for executed trades. To achieve this, each validator runs an in-memory orderbook that is never committed to consensus (i.e., off-chain).

With appchains, launching a wholly-customized chain is possible, as we discussed in this earlier article. While Cosmos SDK and Substrate are currently the most popular frameworks for appchains, the former has achieved far greater adoption success, so we focus on it here.

These are some of the notable projects leveraging Cosmos SDK customizability to implement unique features: 

• dYdX has free transactions for unexecuted orders; validators are designed to store the orderbook.

• Osmosis enables superfluid staking and cryptography for MEV protection.

• Agoric supports smart contracts written in JavaScript.

• Archway distributes incentives to developers directly from smart contracts.

The downside of appchains is the need to distribute token and bootstrap validators for a new chain, while still ensuring decentralization. This could well be an expensive undertaking; validator capitalization on this table hints at the scale required. 

Celestia and Polygon Avail aim to solve this problem by allowing any chain to tap into the modular blockchain’s existing validator network. Celestia will likely issue a token to bootstrap its validator network. And for Polygon Avail, it seems likely they will use the $MATIC token, probably with the existing validator set.

Modular blockchains are indeed taking the first steps to onboard appchains. To be able to start onboarding Cosmos SDK chains, the Celestia team developed Optimint. This is a replacement for Cosmos SDK’s consensus framework Tendermint, that publishes blocks to Celestia instead of going through the Tendermint consensus process. Evmos has already announced it will be Celestia’s first partner from the Cosmos network, in what has been dubbed Cevmos (C stands for Celestia).

Being able to save on validator bootstrapping sounds attractive, especially for smaller projects, such as games or NFT platforms. This saving coupled with full customization makes the concept of an appchain plugged into a modular blockchain a strong one.

Through 2022, rollups and appchains have started addressing blockchain scalability problems – with the latter also overcoming customization limitations. Yet there’s always improvements to be made, and modular design looks set to solve the weaknesses of rollups and appchains. But will there be demand for such design, given the disadvantages?

Having full control over your rollup is a good proposition for large teams with strong blockchain development backgrounds, such as DAOs. Such teams would likely appreciate the customized throughput settings, consensus rules, and even VM choice. Plus, there’s the aforementioned savings on validator bootstrapping that’s especially attractive to smaller projects. 

Polygon claims that with modular blockchains, the vision of an Internet of blockchains is finally becoming a viable possibility. Celestia seems to concur; its team expects tens of rollups/chains to tap into its network over the next three to five years.

To summarize: modular blockchains bring scalability, full control, chain customization, and savings on validator bootstrapping. Yet still there are tradeoffs: namely in liquidity and cross-chain security. We expect to see modular blockchains occupy the niche of highly-customizable solutions for technically-advanced teams on one end of the spectrum, and for small, cost-conscious teams on the other.

* Light nodes need to be able to determine if certain data is available or not without downloading the full blocks. Instead of downloading the entire block, light nodes just download small random samples of data from the block. If all the samples are available, then this serves as proof that the entire block is available. By sampling random data from a block, it can be probabilistically verified that the block is indeed complete. Refer to this podcast transcript for more details.

• Various MEV dashboards Link

• Uniswap misses out on LUSD quantity, Curve and Balancer fill the void Link

• New fund flows dashboard from DeFi Llama Link

• Cow Protocol now supports ERC-1271, enabling “gas-less-ly” trades Link

• Succinct launches first proof of consensus bridge Link

That’s it! Feedback appreciated. Just hit reply. Written in Nashville where the leaves are still turning.

Dose of DeFi is written by Chris Powers, with help from Denis Suslov and Financial Content Lab. Caney Fork, which owns Dose of DeFi, is a contributor to DXdao and benefits financially from it and its products’ success. All content is for informational purposes and is not intended as investment advice.