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The first smart contract blockchain, Ethereum, was designed to handle its own execution, settlement, consensus, and data availability. Over the years, new decentralized applications have developed, leading to increased demand for blockspace. When blockspace demand exceeds supply, the constrained availability restricts potential applications, causing a significant impediment to utility and widespread adoption.

This limitation is known as the scalability trilemma. Essentially, it suggests that no public blockchain can simultaneously achieve maximum decentralization or security while also achieving optimal scalability. To overcome these limitations, modularity has emerged as a way of outsourcing core components optimized for solving critical functions.

The modular blockchain thesis focuses on role specialization. It proposes decentralizing traditional blockchain functions—like execution or data availability—across specialized networks. By segmenting these functions from a singular Layer 1 into distinct layers, blockchains can be tailored for optimal performance in specific areas, significantly boosting customization, efficiency, and, where necessary, decentralization, security, and scalability.

Given the diverse range of use cases, these functions can vary. A modular network could be specialized to push oracle price feeds, provide zero-knowledge proving services, make data available, or enable a more scalable execution layer on top of another underlying blockchain.

Modularity in the Crypto Industry

Ethereum exemplifies the gradual transformation into a modular world. Initially launched with a monolithic design similar to Bitcoin, Ethereum has seen the success of layer-2 solutions like Arbitrum. These rollups separate the intensive computation needed for scalability off-chain while settling back on-chain. Many projects have adopted this design due to its resource effectiveness and lower costs for processing transactions using rollups.

Networks that help developers see and unlock the value of modularity have been on the rise. For example, Celestia addresses the significant cost of storing data availability (DA) back to Ethereum. While rollups allow for higher throughput, the cost of transacting remains relatively high because it ultimately depends on the storage cost of the settlement layer. An alternative DA layer offers a solution to this problem.

The realization that a single monolithic design cannot meet today’s blockchain demands without trade-offs is why the space is moving towards modularity. Ethereum, while highly secure with smart contracts, faces challenges in processing transactions and gas fees.

Enabling New Use Cases

In addition to solving architectural challenges, it’s becoming clear that additional services are necessary for enabling new use cases and pushing for web3 adoption. Examples of such add-on services include oracle services, decentralized RPC, ZK prover networks, and AI. However, blockchains cannot support these services natively due to the additional overhead, 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 legos.

Addressing Confidentiality

One unsolved problem in this space is confidentiality. Most widely adopted blockchains today are transparent and cannot add on-chain confidentiality without requiring resource-intensive hardware for their validators when utilizing cryptographic methodologies such as zero-knowledge proofs (ZKP) or fully homomorphic encryption (FHE).

Beyond the existing four blockchain layers (execution, settlement, data availability, and consensus), a confidentiality layer on top of existing decentralized applications (dApps) is a critical missing piece. This layer will enable new use cases that are not feasible on transparent blockchains. Inco is an example of a modular protocol that acts as a 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 traction. With the widespread adoption of decentralization, they will likely become the standard for building in web3. This standard will disrupt the vertically integrated approach of monolithic chains and allow for the use of specific modules to create distinct modular stacks. This enables projects to use the modules they need for their specific requirements instead of trying to do everything.

This approach unlocks infinite scalability because a network could depend 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 landscape of blockchain technology 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, or execution—to another distinct blockchain framework.

For more updates and news about the evolving blockchain and cryptocurrency landscape, stay tuned to Global Crypto News. Your source for the latest trends and insights in the world of crypto.

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Remi Gai is the founder and CEO of Inco. He is a web3 founder fellow at South Park Commons, with a background in engineering (Google, Microsoft), entrepreneurship (founding member of Parallel Finance, a suite of DeFi protocols on Polkadot that reached over $500M in TVL backed by Polychain, Sequoia, Founders Fund, Coinbase Ventures), product management (web3 UX lead at co-founded blockchain studio), and venture capital (8 Decimal Capital). Now, he builds Inco, aiming to break down the final barrier to mass adoption of web3.

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