What is Modular blockchains?
Modular blockchains refer to a new approach to blockchain architecture that allows for greater flexibility and customization. Rather than relying on a monolithic blockchain structure, modular blockchains use a modular approach, in which different components of the blockchain are separated into individual modules that can be customized and combined as needed.
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This approach offers several benefits over traditional blockchain architectures. For example, it allows developers to more easily create customized blockchains that are optimized for specific use cases, such as supply chain management or identity verification. It also allows for easier upgrades and modifications to the blockchain, without disrupting the entire system.
One of the key features of modular blockchains is the use of smart contracts, which are self-executing contracts with the terms of the agreement written into code. Smart contracts can be customized and combined to create more complex applications on top of the blockchain.
Overall, modular blockchains offer a more flexible and customizable approach to blockchain architecture, which can help to drive innovation and adoption in the blockchain space.
New generation of modular blockchains
This new generation of modular blockchains has the potential to replace centralized bridges and exchanges. The public blockchain sector has become a $1 trillion industry, but a major obstacle it faces is the lack of a secure, decentralized interoperable solution. For instance, moving between Ethereum and Bitcoin, the two largest blockchain networks, has traditionally required centralized exchanges as a safe and reliable method.
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BitGo, a centralized solution provider, offers the biggest liquidity pool for Ethereum users seeking to exposure to Wrapped Bitcoin (WBTC), which represents over 93.6% of Bitcoin bridged to Ethereum. However, reliance on BitGo exposes WBTC to regulatory and centralization risks, particularly in light of the recent dissolution of RenBTC after FTX’s collapse.
To enable interoperability between smart contract platforms and application-specific blockchains, developers must focus on creating more efficient cross-chain bridges. Polygon, Arbitrum, and Optimism are responsible for 90% of cross-chain bridge volume from Ethereum, while Rainbow and Fantom bridges are the only independent blockchains with a significant total value locked on bridges with Ethereum. Projects such as Polkadot and Cosmos are attempting to establish an interoperable “network of networks” by implementing modularity to build a secure and scalable cross-chain platform. However, Polkadot is still in development, and Cosmos has yet to attract sufficient liquidity to its ecosystem.
Addressing Bridge Centralization
During the 2021 hype cycle, the idea of a “multichain future” emerged, where different blockchains fulfill specific functions but are interconnected through interoperable solutions. However, the initial wave of bridges was primitive and centralized, making them vulnerable to exploitation.
The next wave of interoperable solutions operates as independent blockchains to ensure decentralization and increase security. Threshold is set to launch in Q1 2023, offering a trustless and private gateway for Bitcoin on Ethereum, replacing centralized providers like BitGo. Other protocols focus on interoperability between smart contract platforms. LayerZero is an omnichain interoperability protocol that enables the development of applications like decentralized exchanges and lending protocols. These protocols can interact with monolithic chains such as Ethereum, Cosmos Hub, and Solana. Stargate, the first DEX built using LayerZero, currently has $324 million in liquidity across Ethereum, Polygon, BNB Smart Chain, and Avalanche.
Celestia, built using the Cosmos SDK, is a layer-1 blockchain that supports smart contract execution and is responsible for ordering transactions and making blockchain data more accessible. It aims to act as an intermediate layer between Ethereum rollups and the mainnet by compressing the rollup data for faster execution on the Ethereum layer 1. Celestia doesn’t verify block data but optimizes gas cost and execution speed. This feature will extend to layer-1 blockchains like Cosmos, Solana, and Avalanche.
The team behind Celestia will conduct an incentivized test in Q1 2023, beginning public testing and rewarding testnet validators with the potential for a native token airdrop. Fuel Labs, the team building Fuel Network, has also developed the Fuel Virtual Machine and Sway programming language to improve transaction speed. The team launched its second beta testnet in November 2022, and the public testnet is expected to go live sometime in 2023.
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While the interoperable space is still underdeveloped and vulnerable to centralization risks, various teams are developing decentralized solutions that will launch in 2023. These protocols will bridge liquidity securely across decentralized finance protocols and other layer-1 blockchains, helping to create a multichain future where users will have a blockchain-agnostic experience, and protocols will interact seamlessly with one another.
