December 2024 - The entire Web3 space has finally woken up. Today XRP has overtaken Solana and the green candles are once again returning. The market sentiment is optimistic and hopeful.
Our mission is always to look where nobody is looking and deliver you the most comprehensible and insightful information that will help your strategy years ahead into the future. Today we’re looking at the modular nature of blockchains and how this trend will shape the future of the Web3 space, as well as your projects. Let’s dive right in.
Going modular
In the winter, the weather in Whittier (Alaska) becomes a bit “chilly” to say the least. Naturally most people prefer to stay inside. Begich Towers is a 14 story apartment building that houses within its walls an entire human ecosystem. There are shops, schools and even a hospital. Yes, this arrangement works in a brutishly improvised way, but everyone would agree that it’s far from ideal!
This is a simple analogy of a non-modular blockchain such as Ethereum. All the tasks like execution, storage and consensus happens inside one network. It works well enough until the usage “goes up to 11” and the network becomes clogged up and almost unusable. Yes, it happens every 4-year cycle without exception.
If you were a mayor of a small town, you would probably propose to build a much more “open” infrastructure in order to allow more “breathing space” to your inhabitants. Schools, hospitals, shops and even the post office would be spread out across different buildings and subsequently people won’t have to walk over each other’s heads to get to their destination.
This is exactly how modular blockchains work. Let’s take a closer look.
It all started with Ethereum
In the beginning Lord Vitalik created Ethereum. He looked at it and he saw that it was good. In fact it was so good that it allowed us to build entire decentralized applications, smart contracts and tokens. When you give people a Swiss Army knife, don’t be surprised when they find 1001 uses for it. And find new uses, they did!
The trouble came knocking with the arrival of Crypto Kitties - the very first popular NFT project that took the world by storm. In fact, people were interacting with the Ethereum network so much that they caused literal congestion. Transactions were pending for an ungodly amount of time and the gas fees went through the roof. Why did this happen?
You see, in the beginning Ethereum positioned itself as a Jack of all trades - taking upon itself the gruntwork of validating transactions, storing the blockchain data and even executing smart contracts. All that on a proof of work (POW) blockchain - famous for its inferior scalability. Crypto Kitties have shown that the mighty Ethereum was suffering from some serious childhood diseases.
The concept of being “modular”
There are 3 important functions that almost every EVM network is famous for:
- Consensus; validating transactions and making sure that every network participant is playing by the rules. We can compare this the job of the Bitcoin miners on the Bitcoin network
- Executing; this can be crunching numbers to allow smart contracts and tokens to work flawlessly. When we talk about the EVM (Ethereum Virtual Machine) this is exactly what we mean.
- Storage; as you remember, once a block of data is appended to the blockchain, it’s impossible to alter or modify. Naturally everyone who wants to use the EVM is fighting tooth and nail to be a part of the next block (as their transactions are processed). Over time this makes the blockchain itself quite hefty and bulky indeed.
The blockchain trilemma
In short, the blockchain trilemma is the holy trinity of what an ideal blockchain should be;
- Secure
- Scalable
- Decentralized
The trilemma is also a paradox, simply because any given blockchain can be 2, but not 3 things at once. For example; Solana is Secure and Scalable, but far from Decentralized. On the other hand, Ethereum is Decentralized and Secure, but far from Scalable. You see the problem here. It’s a game of sacrifice and compromise. This is where our story of “modular” blockchains truly begins…
Layer 2 networks
In 2017 Polygon boldly kicked open the door of scalability for the first time. The idea was simple as it was brilliant: Offload a part of Ethereum computational power and make the network faster and cheaper to use. Let’s look at all the value propositions that it brought to the table.
Polygon was compatible with the EVM (Ethereum Virtual Machine) allowing developers to seamlessly deploy their native Ethereum-based decentralized apps directly onto Polygon with minimal modifications. What about that mythical “scalability”?
To understand the concept of L2 scalability, we need to understand a bit more about how the blockchain processes data. It all sounds complicated, but in reality it’s very simple to understand. Let’s go back to Alaska. It’s cold, resources are scarce and the demand for these resources is massive. In fact people are queuing for hours trying to make their way into the supermarket just to buy some basic staples.
This is exactly what happens on the blockchain. There’s a limited amount of blockspace for data and everyone is queuing to be included in the next block. From simple transactions (like sending and receiving tokens) to complicated smart contracts interactions (that help DeFi cowboys execute complex trading strategies on-chain), they ALL need to wait to be included in the blockspace. Is there really no better way?
This is exactly where Polygon comes in. It literally takes a massive amount of these transactions, executes them off-chain and only posts one final outcome (the transaction hash) to the Ethereum blockchain. The result: massive increase of transaction speed for all the network participants. After all, when you don’t need to use Ethereum for trivial transactions (that can be executed off-chain), everyone benefits from a lean, mean and fast network.
Can an L1 scale?
Short answer; Yes! The best 3 examples of Layer 1 network scaling are Avalanche, Cosmos and Polkadot.
We won’t go into nitty gritty details, yet it’s important to know how L1 scaling works. This will help you navigate through the Web3 and Blockchain space like an OG - never letting yourself be intimidated by nerdy crypto-lingo and incomprehensible technical jargon.
To understand L1 scaling, let’s imagine you need to water some grass. The issue is you have only one hose and there’s a football field of grass to water. Good luck with that!
“L1 scaling” simply adds more hoses to your task - literally as many as it takes to finish your job in just a few minutes. That’s it!
Today there are thousands of parallel-running blockchains that work seamlessly together. Users can even configure to use their own gas tokens and use their custom L1 for microtransactions in gaming. From the 3 musketeers, (in 2024) Avalanche has come closest to the Valhalla of L1 scaling.
Now any large institution, organisation, or John from the corner of the street can spin up their own L1 network and unleash it upon the world. Again interoperability is the key here. John’s “Cat-chain” L1 can communicate with JP Morgan’s institutional chain if needed. Just imagine the possibilities!
Now you understand the concept of L1 scaling, the natural question that pops up is, what the hell happens to all that transaction data? This is where Data Availability Layers come in.
Data Availability Layers
In general, there are just 2 problems with the blockchain data;
- We need to know that it’s 100% true and valid
- There’s a lot of it! (and it’s constantly growing with every block)
Naturally, you can imagine what will happen in just a few short years; we will be drowning in blockchain data! For example, if you want to run a full node for the most simple blockchain today (Bitcoin), you would need to accommodate a whopping 620GB of blockchain data on your hard drive.
In a world with millions of L1 and L2 networks this will be a nightmare. Luckily today there are projects that are already thinking ahead to solve this problem. Enter Celestia - the Google Drive of blockchain. So, how does it work?
Celestia separates the job of agreeing on what’s true (consensus) from the job of doing work (execution). This is a core idea of modular blockchains, and Celestia specializes in the data availability and consensus parts. It allows blockchains to be lightweight and focused. These blockchains (like Optimistic Rollups) can outsource data storage and consensus to Celestia, freeing them up to focus on execution.
This literally eliminates the need for massive and cumbersome storage of all blockchain data. What’s not to like, you may say? The blockchain trilemma wouldn’t be such a hard problem to solve if it wasn’t for sacrifices and compromises.
Risks of L1 and L2 modular networks
There’s no such thing as a free lunch. Millions of people around the world still prefer using the old school and clunky Ethereum network over all the shiny new and blazingly fast L1 and L2 wizz kids. Why?
The answer is quite simple: There’s not much that can go wrong with using Ethereum. Yes, the transactions may be a bit slow and more expensive, but at least you’ll be 100% sure they will get executed and get stored on the blockchain properly.
The truth (today) is that it’s simply too complex to build and use modular L1’s and L2’s. In short, many things CAN go wrong! When you’re working with 5 or 6 digit sums, this is definitely not something you want to experience.
Aside from that, there are several other aspects we need to consider. What security vulnerabilities are projects exposing themselves to when using L1’s and L2’s? How easy are these networks to adapt to (from a developer’s point of view)?
In short, there are many unanswered questions that linger in the air. With time, even the most cautious and skittish among us will understand the value that modular blockchains have to offer.
Conclusion
Modular blockchains are amazing tools you have at your disposal. They can allow you to take full advantage of what Web3 tech has to offer. The D3LTA team loves these developments and we follow them very closely.
With every 4-year cycle, the technology improves exponentially and in just a few years, it will take the world by storm. No matter what Dapps, tokens and ecosystems you’re contemplating on launching, there will always be a custom “plug and play” solution to get your plan deployed on-chain.
Today, while the majority of the crypto crowd chases green candles, pump-and-dumps and balloons filled with hot air, you’re armed with a clear understanding of the technology that will revolutionize the world as we know it. If you’re ready to build, we welcome you to our table.
