What are Modular Blockchains?

A legacy blockchain such as Bitcoin is effectively a ledger of transactions grouped in blocks, where each block is linked cryptographically to its predecessor to form an immutable chain. Miners verify each transaction, parsing block data to ensure that account balances reconcile.

This system encompasses four core functions that the blockchain must fulfill. They are execution, settlement, data availability, and consensus.

Execution describes transaction processing, which can be initiated by a user signing a wallet transaction or by a smart contract that executes automatically based on defined parameters.

Settlement describes the point when a transaction has been inscribed to the blockchain and is considered final such that it cannot be rolled back.

Data availability refers to the need for a blockchain to store historical data, which is required to validate transactions. Over time, a blockchain accumulates more transactions and, thus, more data, which must be available to the network.

Consensus refers to the mechanism for a decentralized network to reach an agreement on the new state of the blockchain following the addition of each new block of transactions.

Monolithic versus Modular Blockchains

Legacy blockchains were designed to handle all of these functions within a single layer. As such, they are often called “monolithic blockchains.” However, as blockchain technology has become more adopted, legacy blockchains have struggled to scale. A larger network can make consensus more secure since it’s more difficult to coordinate an attack. However, more network participants can mean it takes longer to achieve consensus, constraining throughput. Similarly, as the amount of blockchain data to parse grows over time, it takes longer for each validator to verify a transaction.

A modular blockchain setup, where one or more tasks are delegated to a separate chain, has emerged as a solution.

Ethereum’s Journey from Monolithic to Modular

Ethereum’s scalability journey demonstrates how a project can move from being a monolithic to a modular blockchain. It was conceived as a monolithic structure, operating under the proof of work consensus.

However, over time, Layer 2 projects have emerged that operate as an execution layer. These layers offer a faster throughput than Ethereum since they only handle execution and allow Ethereum to act as a settlement and consensus layer.

Since Layer 2s also offer an alternative to Ethereum for faster execution, they can help to alleviate traffic on the Ethereum chain.

Over recent years, Ethereum itself has also moved to a modular structure. This transition began with the “Merge” to the Beacon chain in 2022 when the platform moved from proof of work to proof of stake as a preliminary step to modularity. The 2024 “Dencun” upgrade introduces proto-danksharding, where data will be segmented across multiple “shard” chains. The completion of this upgrade marks Ethereum’s transition to a modular blockchain since the Beacon chain will no longer handle all of the four core functions of the Ethereum ecosystem.

Some blockchain ecosystems are complete and modular by design. The most prominent example is Celestia, which provides a data availability and consensus layer to Layer 2 blockchains.

Pros of a modular blockchain

There are several advantages to a modular blockchain infrastructure over a monolithic one.

Scalability

Improving scalability was the main motivation for developing modular blockchains. A monolithic blockchain only has a single layer to handle all tasks and is limited to linear processing. In contrast, a modular structure can be far more efficient since it separates out tasks such as execution and data availability. In this way, it can enable parallel processing with far higher transaction-per-second throughput.

A further benefit of improving scalability is reducing transaction fees, which can be achieved by reducing the computing power needed to parse the blockchain. Increasing throughput also creates less of a supply constraint on block space, reducing the opportunity for prices to spike during times of high demand.

Adaptability

Upgrading a monolithic blockchain is a monumental task, as the longevity of the Ethereum roadmap illustrates. Changing any single element of the system can impact other processes downstream, meaning that changes are slow to test and develop.

In contrast, modular blockchains can be more adaptable and easier to upgrade since the modular components can be upgraded independently of one another. They also allow developers to choose combinations of the most suitable layers for their needs, optimizing for factors such as speed or security.

Interoperability

Modular blockchains also tend to prioritize interoperability by design, allowing for the transfer of data and assets across connected networks via communication protocols such as bridges. This also offers more flexibility for developers to build dApps that operate across multiple ecosystems.

Cons of a modular blockchain

Despite their advantages, there are still several drawbacks to using modular systems over monolithic ones.

Security

Monolithic blockchains maintain security based on a single layer using consensus. However, modular blockchain structures can suffer from points of weakness in consensus, particularly when one system is bridged into another. The increase in traffic on modular systems in recent years has resulted in bridges becoming targets for hackers, with notable incidents such as the attacks on the Solana, to Ethereum Wormhole bridge, and the Axie Infinity Ronin bridge which resulted in combined losses of close to $100 million.

Complexity

Modular blockchains can result in a significant amount of complexity at the front and back end due to the additional requirements of establishing trust. For example, when Ethereum implements proto-danksharding, it will include a mechanism for randomly testing shards for data availability to avoid the risk that a shard cannot deliver the required data. In contrast, there is no requirement to validate the availability of data in a monolithic structure.

On the front end, modular systems frequently lack an integrated user interface, meaning it may be necessary to sign multiple transactions or navigate additional steps compared to a monolithic structure. This complexity can also create points of vulnerability for attacks such as spoofing, where hackers attempt to clone the interface to intervene in transactions.

Modular blockchain essentials

• Modular blockchains segregate one or more of a blockchain system's tasks, such as consensus, transaction execution, or data availability, to a separate chain.
• Modular blockchains operate in contrast to monolithic structures, where every task is handled on a single layer.
• The advantages of a modular blockchain structure include scalability and adaptability but may come at the expense of the security offered by a monolithic blockchain.