The Modular Blockchain Thesis

In the ever-evolving frontier of blockchain research, the pursuit of the most optimal system has been an ongoing challenge. Numerous architectures have been experimented with, such as trying to accommodate all users within a single chain or a group of chains under one network. However, scaling such systems to onboard billions of users has proven limited in scope.

To address this problem, researchers turned to Layer 2 (L2) solutions, providing additional scaling capabilities to Ethereum’s Layer 1 (L1). But the true breakthrough lies in the next evolution, modular blockchains. The thesis is simple – by modularizing the blockchain and splitting up the processes that are traditionally all handled on Ethereum’s L1 among specialized layers, we have the potential to achieve 20-50x improvements in Transactions Per Second (TPS). The result is a highly scalable, composable, and decentralized system that can redefine the world of crypto.

This blog post aims to introduce you to the concept of modular blockchains. We’ll delve into how modular chains work, what sets them apart from their monolithic counterparts, and explore the various Ethereum modular L2 tech stacks, including rollups like Optimism and modular rollups like Mantle. By the end of this read, you’ll be equipped with a deeper understanding of how modular blockchains will become the driving force behind the next bull run, setting the stage for a whole new era of blockchain infrastructure.

Blockchain Layers

To grasp the mechanics of modular blockchains, we must first establish the basics of blockchain architecture by taking a look at the functions of a regular blockchain.

At its core, every blockchain carries out the same set of tasks, which can be categorized into four distinct processes or layers:

• Execution: this layer serves as the initial processing hub for transactions and blockchain state changes. It’s also the primary interface through which users interact with the blockchain, engaging in activities like signing transactions, deploying smart contracts, and transferring assets.

• Settlement: blockchains offer finality, a crucial guarantee that committed transactions are immutable and irreversible within the blockchain’s history. Achieving this requires validating transactions, verifying proofs, and resolving disputes – all encompassed within the settlement function.

• Consensus: at the heart of blockchains lies the consensus layer, which facilitates nodes in reaching a collective agreement on verified and accurate transactions. This layer plays a critical role in ensuring the global state of the blockchain, determining transaction order, and adding new blocks to the chain.

• Data Availability: this layer stores and publishes the transaction data necessary to validate state transitions. Block producers hold and make this data accessible upon request, ensuring that malicious actors cannot withhold transaction data during potential attacks.

We can envision execution, settlement, consensus, and data availability as individual layers comprising the blockchain. Now let’s dive deeper into the limitations existing monolithic blockchains face and explore how modular blockchains offer promising solutions.

Monolithic Blockchains

Traditionally, blockchains have had a monolithic architecture. A monolithic blockchain is a single chain that executes transactions, provides settlement, offers consensus, and guarantees data availability. Monolithic blockchains handle all four functions at the same network level or layer. Imagine you were at a restaurant and saw the owner take on the roles of Chef, Server, Bartender, and Cashier simultaneously. This restaurant would no doubt have limited capacity and high costs. Examples of such monolithic blockchains include Bitcoin and Solana.

The monolithic architecture has high hardware requirements and significant trade-offs since the same layer is asked to do all four processes simultaneously. This leads to the infamous monolithic Blockchain Scalability Trilemma, similar to the CAP Theorem for distributed systems. The monolithic Blockchain Scalability Trilemma describes the challenging trade-off between three key properties of a monolithic blockchain’s architecture:

• Decentralization: the distribution of power among network participants, often measured by the number of independently run nodes or validators in the network.

• Scalability: the ability to handle a large volume of transactions, typically measured in TPS.

• Security: The trustworthiness of the network, determined by its resistance to attacks.

The monolithic Blockchain Scalability Trilemma states that with current technologies, it’s only possible to prioritize two of these three properties at the same time. As a result, to enhance one component, sacrifices must be made in one or more of the others. For instance, Ethereum’s L1 prioritizes security and decentralization, leading to high gas fees and slow transactions during peak times (option B), while existing alternatives like Solana may prioritize throughput by trading off some level of security and decentralization, often relying on fewer nodes (option A). It’s vital to emphasize that sacrificing decentralization to boost throughput does not truly constitute scaling. As blockchains evolve, the pursuit of a more scalable, decentralized, and secure system remains at the forefront.

Modular Blockchains

With ever-increasing evidence on the suboptimal performance of monolithic blockchains, it becomes clear that we must look to new paradigms to scale blockchains efficiently. Among these innovative approaches, modular blockchains shine as the most promising design, driven by the principle of modularity – the art of breaking a system into distinct components with each component focusing on excelling at a select few tasks. Typically, a modular chain focuses on one function and delegates at least one of the other four functions (execution, settlement, consensus, data availability) to external blockchains.

In the context of our restaurant analogy, now imagine if the owner hired individual professionals for each position. All of a sudden, the restaurant can cater to multiple customers concurrently and is more affordable. This is precisely the thesis of modular blockchains, that a single blockchain should not need to bear the burden of handling every function. Instead, by disassembling execution, settlement, consensus, and data availability into separate layers, individual blockchains can concentrate on specializing in specific processes.

It’s crucial to note here that modular blockchains are different from networks of chains where each chain handles all processes, like Cosmos. A modular blockchain represents a layer within a broader modular stack of chains, allowing for flexible combinations to achieve diverse objectives. Modular blockchains bring forth a promising horizon, where specialized chains come together to unlock unprecedented possibilities.

Benefits of a Modular Architecture

1. Scalability: the beauty of a modular blockchain lies in its ability to distribute tasks across different layers. For instance, one layer may handle execution, while another manages settlement and consensus, and a third takes charge of data availability. This modular approach paves the way for enhanced scalability. Take rollups, for example; by focusing on execution, they achieve greater scalability than L1s. Still, they maintain a high level of security by relying on Ethereum for settlement, consensus, and data availability. The key to overcoming scaling difficulties is avoiding the attempt to handle all tasks within a single layer.

2. Launching New Chains: leveraging modular designs not only enhances scalability but also accelerates the launch of new chains. Previously, launching a new chain could be difficult due to the need to build up its security properties – a Proof of Stake (PoS) blockchain needs to establish a wide distribution of tokens to avoid centralization risks, while a Proof of Work (PoW) blockchain needs to attract miners to prevent a few parties from controlling the network’s hash rate. However, with modular blockchains, developers can now focus on the minimum component, such as execution, while seamlessly plugging into specialized modules that handle security. This streamlined approach enables faster development and deployment, eliminating the need to build every part of the stack from scratch.

3. Flexibility: the ultimate advantage of a modular architecture is its flexibility, a characteristic monolithic chains simply cannot offer. Acting as pluggable modules, modular blockchains such as execution layers or data availability layers can be easily swapped or merged depending on the specific use case. This modular approach enables developers to tailor blockchains to suit specific needs, making changes to the blockchain quickly and easily without the complexities of a full-scale upgrade.

Ethereum’s Modular L2 Tech Stack

In its early days, Ethereum, like Bitcoin and other first-generation blockchains, was built with a monolithic architecture. However, recognizing the need for enhanced performance and scalability, the Ethereum network is now undergoing a transformative shift towards a modular L2 tech stack.

To better grasp this evolution, let’s begin by briefly going over the Ethereum-Centric Modular Stacks that have emerged:

• Monolith: representing Ethereum’s L1 or Mainnet, which operates as a monolithic blockchain by itself.

• Rollup: an L2 solution that acts as the execution layer, utilizing Ethereum for everything else. Notable examples include Arbitrum and Optimism that take execution off Ethereum’s L1 and publishes state roots and rollup data back to Ethereum’s L1.

• Modular Rollup: a rollup with modular data availability, as exemplified by Mantle that posts rollup data to a separate data availability layer, called Mantle DA (powered by EigenDA, a core application on EigenLayer).

Ethereum’s modular L2 tech stack allows for scalability while preserving high levels of security and decentralization. This powerful combination empowers Ethereum to lay the foundation for a more efficient and sustainable blockchain ecosystem. Now let’s explore the different Ethereum-Centric Modular Stacks below.

Monolith

Ethereum, in its original form, operates as a monolithic blockchain, handling everything without the use of rollups or data sharding.

This monolithic architecture grants maximum security but comes with trade-offs – high costs and limited scalability. Consequently, the Ethereum Mainnet’s transaction speeds have been relatively slow, averaging 15-20 TPS.

Ethereum’s gradual shift towards becoming a modular blockchain involves adopting rollup-centric computation and data sharding strategies.

Rollup

Rollups are the original breakthrough in modular blockchains, offering a separate layer for execution to scale the monolithic architecture of Ethereum. A rollup securely abstracts the execution layer of blockchains to sequencers – powerful computers that bundle and execute multiple transactions before periodically posting compressed data back to the Ethereum Mainnet for verification. By shifting this computation offchain (with respect to Ethereum’s Mainnet), rollups can achieve remarkable 20-50x increases in TPS.

In the current landscape, rollups serve as the execution layer, processing transactions while outsourcing settlement, consensus, and data availability. Notable examples include optimistic rollups, utilizing the Optimistic Virtual Machine, and zk rollups, running a zkEVM. These rollups execute smart contracts and process transactions but still rely on Ethereum for:

• Settlement: all rollup transactions are finalized on Ethereum. Optimistic rollup users wait until the challenge period elapses or if the transaction is deemed valid after a fraud proof computation. In the case of zk rollups, this occurs after the validity proof is verified.

• Consensus and Data Availability: rollups publish transaction data to the Ethereum Mainnet as calldata, enabling anyone to execute the rollup’s transactions and rebuild its state if needed. Optimistic rollups require substantial blockspace and a 7-14 day challenge period before finality. Zk rollups keep the data available for validation for 30 days before it’s purged, offering instant finality but requiring significant processing power to create proofs.

Rollups allow for faster block times and bigger blocks without compromising decentralization or security. This is possible because Ethereum serves as the base layer or L1 for rollups, which sit on L2. Rollups are just the beginning of a new era for Ethereum. As demonstrated by the chart below, Arbitrum and Optimism’s total transactions already surpass those of Ethereum. This trend showcases the remarkable modularization of Ethereum.

Modular Rollup

Newer modular rollups move the data availability layer off Ethereum too. An excellent example of this is Mantle, which still relies on Ethereum for settlement and consensus, but leverages Mantle DA (an implementation of EigenDA technology), as the data availability layer. Mantle DA orders and provides proof of data without executing transactions; instead, execution is efficiently outsourced to Mantle’s specialized execution layer.

Until recently, Ethereum stood as the only data availability solution for rollups, presenting challenges, especially in terms of cost. Data availability is the largest cost bucket for most rollups, constituting up to 70% of expenses primarily from storing transaction data on Ethereum. Crucially, this cost is variable and increases proportionally with usage, making it a significant hurdle as more users come on board. Up until now, only large rollups with substantial resources could afford to accommodate large user bases.

Thankfully, the Ethereum landscape is changing, and new modular solutions in the form of data availability layers are emerging to reduce transaction data submission costs. Leading examples of data availability layers, including EigenDA, Celestia, and Avail, tackle data availability problems head-on, providing promising solutions to overcome the limitations of rollups alone.

Mantle

As we’ve observed, existing rollups on Ethereum face scalability limitations due to their reliance on Ethereum for data availability. Mantle is a groundbreaking solution to this, earning the distinction of being the first modular rollup to leverage optimistic rollups for execution and delegate data availability to Mantle DA. Mantle DA is a result from the close collaboration between the Mantle and EigenLayer teams, utilizing modified EigenDA technology to create a Mantle data availability setup and representing the state of the art before the EigenDA Mainnet release.

Mantle’s modular approach allows it to benefit from the robust security of Ethereum while bypassing the need to post complete rollup data on Ethereum’s L1, significantly reducing transaction costs and improving transaction speed. This scalability opens the door for diverse use cases, including DeFi, Gaming, and Social applications, to thrive on the network.

Another benefit of Mantle’s modular tech stack lies in its flexibility. For example, upon the launch of EigenDA on Mainnet, Mantle will swap out its current Mantle DA module in favor of EigenDA. Mantle’s consensus mechanism can also easily be replaced with zkEVMs once they are production-ready. This exemplifies the true power of modular blockchains, enabling highly performant chains that remain adaptable to evolving technologies.

Mantle’s Ecosystem

Fueling Mantle’s ambitions is the Mantle Treasury and Governance (previously named BitDAO) with an unparalleled treasury boasting $3.6 billion in hard assets, solidifying Mantle’s position as one of the most capitalized L2 solutions on the market. The support and contributions from ByBit, a leading exchange with expanding market share and recognition, further strengthen Mantle’s position in the market.

The recent passing of a BIP-21 proposal from BitDAO with nearly 100% support led to the integration of BitDAO’s brand and treasury into the Mantle ecosystem and the positioning of Mantle as its flagship product. Backed by the formidable Mantle Treasury, Mantle offers developers and teams grants ranging from $10,000 to $150,000 to build on the network, while benefiting from essential tooling like Covalent, fostering a vibrant and innovative ecosystem.

Mantle’s successful conclusion of a 6-month long Testnet saw over 16 million transactions processed, more than 1 million unique wallets, and over 48,000 developers onboarded, all at an incredibly low gas cost of 1.0e-9 Gwei, thanks to Mantle DA. This sets the stage for Mantle’s recently launched Mainnet that has already garnered over 2,000 daily active addresses and an impressive 35,000 daily transaction count in a week’s time.

The CQT Network

At Covalent, our vision of long-term data availability revolves around maintaining sustained accessibility and availability of historical blockchain data over extended periods.

With Ethereum implementing rollups and eventually other protocol improvements like Danksharding (where data blobs required for validation are automatically deleted after a 1-3 months) and EIP-4444 (where Ethereum clients will be obliged to discard data over one year in age), the responsibility of providing historical data will shift away from Ethereum itself.

Stepping up to the challenge, we are currently developing a decentralized and crypto-graphically secure data availability network called The CQT Network that will ensure long-term data availability. Our goal is to empower anyone to build a full canonical representation of a blockchain, host a standardized schema database, and effortlessly query blockchain data. Stay tuned for more exciting updates.

A Modular Future

In the past decade, the blockchain space has grappled with the challenge of scalability, often finding itself trapped in a cycle of creating new L1 blockchains due to the high costs and limitations of Ethereum. However, it’s essential to recognize that the high fees on Ethereum are not a bug but rather a feature of decentralization

In a world where L2 solutions are becoming the norm for mass adoption, modular blockchains are revolutionizing the very architecture of blockchains by dividing the execution, settlement, consensus, and data availability layers. While monolithic approaches falter under scalability constraints, modular architectures have the potential to grow exponentially.

With competition heating up at the data availability layer, the barriers to entry for new rollups will significantly reduce. In the next year, we can anticipate a boom in application specific rollups on the OP or zk stacks, fueled by the possibility of cheap data availability and the power of modular chains. Developers, it’s now time to build modular.

Quote from Arjun Kalsy, Head of Ecosystem at Mantle

“Mantle Network was designed to deliver hyper scalable performance at low costs along with high security, derived from Ethereum. We have chosen to work with Covalent, an established technology partner, so Mantle Network can focus on expanding and growing the ecosystem in new ways that will attract the best of projects, builders, and users to the community.”

Quote from Ganesh Swami, Co-Founder and CEO at Covalent

“Modular blockchains present a sustainable and innovative architectural choice for builders. We are thrilled to extend our support to the launch of Mantle Mainnet right from day one. Their implementation of EigenDA, resulting in a remarkable 70% reduction in gas fees, is truly impressive and highlights the transformative potential of a modular design.”

Written by David Tso.