Modular system and the blockchain trilemma

The blockchain trilemma

Before we get caught up in the allure of quick crypto profits, let’s recall Satoshi Nakamoto’s original vision for Bitcoin: a decentralized, transparent, and fundamentally fair system.

Maintaining decentralization becomes more challenging as the network grows. In a small group of five or ten, sharing information and making collective decisions is straightforward. But what happens when the community expands to 100 or even ten thousand members? How can we maintain efficiency in decision-making without sacrificing fairness?

This challenge is known as the blockchain trilemma or the impossible triangle. It refers to the difficulty of achieving decentralization, security, and scalability - all at the same time. Typically, enhancing one or two of these aspects compromises the third.

Ref: https://goldrush.dev/docs/unified-api/guides/modular-vs-monolithic-blockchains/

For example, scaling up a blockchain often means sacrificing some security. If you prioritize security, throughput might take a hit. This is why Ethereum’s scalability improvements have been gradual; Vitalik Buterin and the Ethereum Foundation value security and decentralization above all.

In contrast, high-performance Layer 1 blockchains like Solana, which has 1,514 validators, focus on scalability. However, they have fewer validators compared to Ethereum’s 1 million+, resulting in higher entry barriers and operational costs for validators. 

Number of Ethereum validators

Ref: https://www.validatorqueue.com/

Number of Solana validators

Ref: https://solanabeach.io/validators

Can we still strive for a broader decentralized future without compromising efficiency or security?

Historical Efforts

Vitalik Buterin, Ethereum’s founder, has been tackling this challenge since early. Together with Mustafa Albasan, who later co-founded Celestia, they authored a paper on Data Availability Sampling and Fraud Proofs in 2018. Their thesis explored innovative methods to enhance Ethereum’s scalability while preserving its security and decentralization.

ref:https://www.paradigm.xyz/2022/08/das

In their proposal, they introduced Data Availability Sampling (DAS), a technique that allows nodes to verify the availability of transaction data without needing to download the entire dataset. This probabilistic method ensures that all data is available and untampered with, significantly improving scalability without compromising security. They also discussed Fraud Proofs, which enable the network to detect and respond to invalid blocks efficiently, ensuring that only legitimate transactions are processed. Interestingly, this paper not only provided solutions for Ethereum but also offered technical guidance for other third-party data availability (DA) layers, paving the way for modular blockchains. 

In 2019, Mustafa Albasan further developed these ideas in his paper, LazyLedger. He proposed simplifying blockchain duties to just ordering and ensuring data availability, leaving execution and verification to other modules. This approach effectively addressed blockchain scalability issues, and this white paper can be considered the precursor to modular blockchains.

What are Modular blockchains?

Since monolithic blockchains are stuck in the blockchain trilemma, how about breaking things down into a system? 

This is where modular blockchains come in. Instead of cramming everything onto a single blockchain, modular blockchains separate the key functions—execution, settlement, consensus, and data availability—into distinct modules. These modules can then be organized and integrated to provide a more efficient and scalable outcome.

The modular design allows developers to build and iterate rapidly by mixing and matching modules as needed. Each module can be developed independently and added to the blockchain framework in a plug-and-play fashion, much like Legos.

Ref: https://celestia.org/learn/basics-of-modular-blockchains/modular-and-monolithic-blockchains/

Key structures of modular blockchains

1. Execution Layer

The execution layer is where transactions are processed and smart contracts are executed. It handles transaction logic and updates the state of the blockchain, typically operating off-chain in modular blockchain systems to enhance scalability.  

One example is Ethereum’s Rollups. Solutions like Optimistic Rollups and ZK-Rollups handle transaction execution off-chain and then post proofs back to the main chain for verification.

2. Data Availability Layer 

The DA layer ensures that all the data necessary for validating transactions and executing smart contracts is accessible to all network participants. Data availability sampling, mentioned above, is one of the techniques used by the DA layer to ensure data availability.

Celestia, the pioneer in modular blockchains exemplifies this layer, followed by other projects like EigenDA and Avail.

3. Consensus Layer

The consensus layer is responsible for achieving agreement on the state of the blockchain among all nodes. It utilizes consensus algorithms like Proof of Stake (PoS) or Byzantine Fault Tolerance (BFT) to maintain the integrity of the blockchain and ensures that all transactions are valid and ordered correctly.

This layer often integrates tightly with the data availability layer due to their interdependent nature. Tendermint, used by Cosmos, is an example. It provides a BFT consensus engine that ensures transactions are agreed upon and ordered correctly, maintaining both the security and efficiency of the blockchain network.

4. Settlement Layer

The settlement layer processes proofs from the execution layer to finalize transactions. It serves as the bridge between different execution layers, ensuring that transactions are ultimately resolved and recorded on the main blockchain.

Ethereum’s Layer 1 is a prime example of an effective settlement layer. While the execution of transactions might happen off-chain on Layer 2 solutions, the final settlement and validation occur on Ethereum’s mainnet, ensuring security and finality. Another example is Dymension, which functions as a robust settlement layer by coordinating transaction finality and ensuring the integrity of cross-chain interactions.

Benefits of Modular Blockchains

1. Scalability: Modular blockchains enhance scalability by offloading transaction processing and data storage to specialized layers. This separation allows each layer to handle a higher volume of transactions without compromising performance.

2. Interoperability: By designing layers that can interact with multiple blockchains, developers can create applications that leverage the strengths of various platforms. This interoperability is crucial for the development of cross-chain applications and a more connected blockchain ecosystem.

3. Balanced Security Models: The modular approach allows for more tailored security models. Each layer can be independently optimized for security, ensuring that critical functions like consensus and data availability maintain high-security standards.

Challenges Facing Modular Blockchains

1. Technical Complexity: The need to develop and integrate multiple independent layers adds complexity to the design and development process. This can slow down development and increase the potential for bugs and security issues.

 2. User Experience Complexity: Users and developers may need to interact with multiple layers and understand how they work together, which can be daunting. 

3. Coordination Overhead: Ensuring that all layers communicate effectively and maintain consistency requires robust protocols and governance mechanisms. This overhead can complicate operations and increase the costs associated with maintaining the blockchain network.

Closing Thoughts

As modular blockchains rapidly evolve, the debate over the most crucial layer intensifies. Some experts champion the Data Availability (DA) layer for ensuring data integrity and accessibility. Others prioritize the Settlement layer, emphasizing its importance in finalizing and recording transactions.

In reality, all components of a modular blockchain are integral to its overall functionality. It's vital to maintain a holistic perspective and stay informed as technology advances swiftly. Understanding these systems before investing is essential, a principle that applies to all blockchain projects.

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