Modular Blockchains: A Solution to the Scalability Trilemma

Every distributed ledger possesses three fundamental attributes: decentralization, security, and scalability. The blockchain trilemma posits that enhancing any two of these aspects necessitates a compromise on the third. Initially articulated by Vitalik Buterin, this concept forms the core of projects like Ethereum and Celestia, which are centered around addressing this challenge.

Modular blockchains present a promising resolution to the trilemma. Their strategy involves concentrating on essential functions and outsourcing secondary tasks to other networks, thereby easing the burden on individual nodes and augmenting the overall capacity of the blockchain.

However, to fully grasp their structure, it’s vital to first understand the underlying mechanics of blockchain technology.

Key Layers of Blockchain 

The functioning of a blockchain can be segmented into four key components: execution, settlement, consensus, and data availability. Such a division allows the network to uniformly execute its functions while maintaining security, decentralization, and scalability.

Key Layers of Blockchain. Source: Celestia.org

Let's delve into each component.

• Execution: This layer of the blockchain is dedicated to transaction processing. Activities here include gathering, hashing, and integrating transactions into a block.
• Settlement: This component is centered on the verification of transactions, ensuring their permanence and integrity within the blockchain.
• Consensus: This aspect is crucial for achieving a unanimous agreement among nodes regarding the validity of transactions. It employs various consensus algorithms, such as Proof-of-Work and Proof-of-Stake.
• Data Availability: This involves the storage of all blockchain-related information, encompassing the ledger of transactions, the timing of their execution, and more.

In traditional, or monolithic blockchains, these tasks are all handled within a single layer. Often, these blockchains prioritize decentralization and security, which can pose difficulties in terms of scalability. Let’s explore some of the most notable examples.

Monolithic Blockchains

Layers of Monolithic Blockchains. Source: Visa.com

Bitcoin. Bitcoin's blockchain operates on the Proof-of-Work consensus algorithm, notable for its reliance on computational power to validate blocks. Nodes pull transaction data from the mempool and assemble these into a block. Miners then verify the block's validity before it's appended to the existing chain.

In this system, Bitcoin nodes are responsible for each of the four components. This method, combined with the programmed limit on block creation time, has led to the development of Layer 2 solutions like the Lightning Network to enhance scalability.

Ethereum. Founded in 2015 as Bitcoin's alternative, Ethereum emphasizes security and decentralization. It provides a more scalable architecture through the use of smart contracts.

Ethereum sets a gas limit of 15 million units per block, with a ceiling of 30 million units. This cap dictates the range of transactions that can be processed. To extend beyond these limits, Ethereum integrates L2 solutions, offloading transaction processing to these secondary layers.

Solana. Solana's blockchain consolidates all components into a single tier, with a primary focus on scalability. To manage a high volume of transactions, it demands robust hardware from its validators. In the blockchain trilemma, Solana opts for scalability at the expense of decentralization.

Modular Blockchains

In the evolution from monolithic blockchains, the concept of modularity has emerged. This model delegates each of the core components to separate networks, attempting to address the scalability trilemma. Importantly, it doesn't negate the need for L1 blockchains; instead, it enables them to interact more efficiently with other networks.

Layers of Modular Blockchains. Source: Visa.com

Modular blockchains have the flexibility to focus on different levels: execution, settlement, consensus, and data availability. More often, they take charge of the first two components and are tailored for specific industry sectors.

Take L2 solution Immutable X, as an example. It's tailored for scaling operations within the GameFi sector. Projects such as Gods Unchained and Illuvium are developed on this platform. Immutable X primarily focuses on the execution layer, while computation, consensus, and data availability are managed through Ethereum.

It's crucial to recognize that modular blockchains are a segment of a broader modular stack. This stack is a suite of solutions that, when working in tandem, effectively address all four foundational components of a blockchain. 

Landscape of Modular Blockchains. Source: Messari.io

These modular blockchains apply diverse scaling techniques. They vary in their functional execution, the ways they interact with one another, and their reliance on an L1 blockchain.

Let’s explore modular architecture methods:

• Rollups: These are utilized for transaction processing outside the primary network, emphasizing the “execution” level. After processing, they relay the resultant data back to the L1 blockchain. Notable solutions in this category include Optimism and Arbitrum.
• Validium: Operating similarly to rollups, Validium processes transactions off the main network. However, it differs in that it doesn't store transaction data; instead, it transmits proof of their validity. Starknet and zkSync are examples of Validium implementations.
• Sovereign Rollups: These are specifically tailored for the “execution” layer. Their unique characteristic, as opposed to regular rollups, is the sovereignty in verifying transactions, which is conducted on their own nodes without relaying to the L1 blockchain. Celestia is a prime example of this approach. Check out our dedicated article to learn more about Celestia's origin, project financing, analysis of the TIA token, and the criteria for airdrops.

These innovations not only aim to enhance network scalability but also have the potential to obviate the need for L1 blockchains. Celestia exemplifies a modular blockchain concentrated on consensus and data storage. 

Celestia is a modular data availability network that securely scales with the number of users, making it easy for anyone to launch their own blockchain,

the CEO of Celestia describes the project

Final Words

An increasing number of crypto companies are showing interest in developing a modular blockchain architecture. This trend is evident when we observe the surge in new projects between 2022 and 2023.

Comparison of the Modular Ecosystem from 2022 to 2023. Source: Twitter.com

Undoubtedly, this approach is spurring competition in the market. However, whether any of these projects will successfully resolve the scalability issue remains a challenging question.