Exploring Potential Opportunities in Modular Narratives

Uncovering Untapped Potential A Journey into the World of Modular Narratives

Article by: LBank Labs Research Team F.F

TL;DR

In recent years, modular blockchain has become a hot trend in the infrastructure field, with many protocols joining and investing in this wave. As a leading smart contract platform, Ethereum has been advocating for modular narratives and has been exploring a roadmap centered around Rollup to address scalability and efficiency challenges. However, it is now necessary to reconsider the overall direction of modular narratives and the reasons behind choosing it, as modular blockchain also brings some concerns and new challenges. Looking at the positive side, more challenges mean more opportunities.

This article provides an in-depth analysis of modular narratives and outlines the potential opportunities brought about by its evolution.

• The first part reflects the transition from traditional single-chain architecture to Ethereum-dominated modular design, discussing the choices between a single and modular approach.

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• The second part focuses on the key components of modular blockchain and provides a deep analysis of each layer. Importantly, we also address potential issues that are often overlooked or not mentioned when advocating for modular narratives, leaving room for innovation and the development of new protocols.

The Inevitable Choice of Modular Narratives in Ethereum

Single Chain vs Modular Blockchain

When it comes to narratives, they are often a carefully packaged collection of technical terms, and “modular” is no exception. In the early days of smart contract platforms, we called miners validators who operated nodes to maintain the blockchain network. However, each node is actually composed of multiple modules performing different tasks, such as collecting user transactions, executing transactions, updating states, proposing blocks, voting on proposals, and so on. This simple and efficient setup is what we now call a single-chain blockchain.

What happens if a single node cannot handle all these tasks? In traditional IT architecture, tasks are usually allocated to different groups of computers. In the blockchain context, there are typically two ways to address this issue. The first is horizontal scaling, introducing more computers to share the workload, with each computer only needing to handle a small portion of the tasks, which is called “sharding” in blockchain. The second approach is vertical scaling, where different groups of computers are responsible for different types of tasks, with each group only needing to handle specific tasks, which is called “layering” in blockchain.

In the blockchain environment, modules that were previously contained in a single node are now split into different layers. The image provided by Celestia below illustrates that the single-chain approach is more generic while the modular approach is more specialized.

The Road to Scaling Ethereum

As mentioned earlier, the need for scaling arises when nodes are unable to handle all the tasks on the blockchain. During the DeFi summer, Ethereum reached its capacity limit, and high fees became a barrier to attracting new users, thus earning Ethereum the nickname “the aristocratic chain.” This is partly due to Ethereum’s large user base on-chain and outdated architecture and design that fail to meet the needs of crypto users. However, it should be noted that crypto users constitute only a small fraction of internet users, which hinders the mass adoption of Ethereum.

Currently, Ethereum produces one block every 12 seconds, with a block space of 30M Gas. Assuming all the transactions in a block are transfers with a minimum Gas limit of 21,000, the theoretical maximum TPS (transactions per second) is around 120. However, since the actual transactions in the block are mostly contract calls, the actual TPS is much lower, averaging around 15. In comparison, new alternative Layer 1 solutions can achieve thousands of TPS, which is why we rarely hear about modular design in their ecosystems because they don’t need to scale.

Therefore, Ethereum clearly needs to scale, uncovering the idea of modular narratives.

Rollup-Centric Roadmap

As mentioned above, our conclusion is that for Ethereum, scaling is not a “to do or not to do” question, but an inevitable choice. By adopting a modular approach, Ethereum can integrate multiple layers, each with specific purposes, thus improving scalability, efficiency, and overall performance.

Though there are two different scaling methods, Ethereum primarily chooses vertical scaling. However, Ethereum has been wavering between sharding and layering. This can be seen from Vitalik’s blog:

• 2020/10/20 (Rollup): Rollup-centric Ethereum roadmap

• 2021/4/7 (Sharding): Why sharding is great: uncovering the technical attributes

• 2021/5/23 (Sharding): Limits of blockchain scalability

• 2021/12/06 (Rollup and Sharding): The endgame

Since Ethereum confirmed the layering-oriented Rollup-centric roadmap on December 20, 2020, Vitalik has repeatedly mentioned sharding in his subsequent articles. Because the ultimate goal of the Rollup-centric roadmap is to combine sharding and layering to form a hybrid scaling solution. Layering is more direct, with Rollup serving as the execution layer to relieve the pressure on the Ethereum mainnet. Sharding is the ultimate goal of blockchain scaling, including data sharding and transaction sharding. The technical burden and historical baggage make it difficult for Ethereum to fully implement sharding. Therefore, Ethereum has chosen a tricky way, claiming that it will become the settlement layer and data availability layer for Rollup, ultimately achieving data sharding. This narrative has a trendy name called “modular.”

In fact, Ethereum acknowledges the challenge and intentionally avoids sharding, opting for a Rollup-centric scaling. Achieving the ultimate goal will be a long journey, so Ethereum decides to keep user engagement and meet short-term needs. There are many architectural trends that can accommodate this roadmap, such as adjusting the Ethereum Virtual Machine to better support fraud-proof verification.

Short-term Goal: Embracing Rollup

In the short term, Ethereum’s primary focus is to provide Rollup as a reliable and neutral infrastructure service. Rollup is a layer 2 solution and the main scaling solution for Ethereum, improving performance, efficiency, and cost savings through off-chain transaction processing. Rollup aggregates multiple transactions into one settlement transaction on the Ethereum mainnet, significantly increasing the throughput of the Ethereum network and enabling a large number of low-cost transactions.

By migrating users and applications to Rollup, Ethereum’s transactions per second (TPS) are expected to increase significantly. The current TPS is estimated to be around 3000, representing a significant improvement in scalability compared to the current state.

At the same time, Ethereum aims to maintain the scalability potential within its ecosystem while ensuring a seamless user experience. Rollup significantly enhances performance and cost-effectiveness, making it a key component of Ethereum’s modular roadmap. As Vitalik said in his blog, “Whether we like it or not, everyone has already adapted to a Rollup-centric world, and at this point, it would be much easier to continue down this path than to try to bring everyone back to the base chain. Going back to the base chain offers no obvious benefits and reduces scalability by 20-100 times.” The goal behind the modular narrative is to keep users within the Ethereum ecosystem, which is why legitimacy becomes crucial. We will explain this further in the following sections.

Long-term Goal: Data Sharding

In the long run, Ethereum’s goal is to enhance scalability, efficiency, and overall network performance through a multi-stage roadmap. This includes utilizing shard chains in Ethereum 2.0 for data storage, optimizing aggregation, and exploring innovative solutions to address challenges in the blockchain ecosystem. These efforts will unlock Ethereum’s full scalability potential. Once Rollup transitions to shard chains in ETH2.0 for data storage, the maximum theoretical transactions per second (TPS) could reach approximately 100,000.

However, it is worth noting that all these assumptions must be implemented to become a reality. As Vitalik admits in his blog, “From my perspective, almost no one will care when phase 1 finally comes.” That is why the data sharding plan Danksharding is still in its early stages and not fully defined. As a result, Ethereum has introduced an initial version called Proto-Danksharding, which is independent of shard chains.

Looking at Ethereum’s vision, transitioning from a world computer to a global settlement layer reflects the reality of limited computational power and high storage costs on Ethereum. Therefore, Ethereum chooses to focus primarily on scaling the base layer, particularly increasing the capacity to accommodate more data, rather than optimizing on-chain computations or IO operations.

Modular Layer: Components and Opportunities

Although the concept of data availability is primarily discussed within the Ethereum ecosystem, it was initially introduced by Mustafa Al-Bassam, co-founder and CEO of Celestia, in his article “Fraud and Data Availability Proofs”. Alberto Sonnino, a research scientist at Mysten Labs, and Vitalik are co-authors of this paper. Since then, researchers have extensively discussed modular and layered approaches in various forums.

According to Celestia, the modular layer consists of components like execution layer, settlement layer, and data availability layer, each contributing to scalability and efficiency. In this narrative, Celestia aims to act as the data availability layer.

From a high-level perspective, a traditional monolithic blockchain can be divided into four layers: smart contract layer, execution layer, settlement layer, and data availability layer. Each layer plays a crucial role in the modular narrative. The consensus layer, involving agreement on transaction ordering, is often combined with the settlement layer or data availability layer.

Decoupling the monolithic blockchain into layered components allows each layer to develop and experiment with innovation independently. In the following sections, we will explore each layer separately, analyze potential directions, list observed opportunities, and explain our findings.

Smart Contract Layer

The smart contract layer consists of programmable and automatically executable contracts running on top of the blockchain. These contracts enable automation, verification, and enforcement of protocols without intermediaries. They are encoded based on predefined rules and conditions, ensuring transparency, security, and trust in digital transactions.

However, in the modular narrative, the soul of smart contracts – composability – is sacrificed. Composability is the driving force behind the DeFi boom. Currently, smart contracts are deployed and operated on different execution layers, creating burdens for developers and users. Developers need to redeploy contracts, while users have to connect to different execution layers.

Although we are still in a competitive era, composability is an issue that cannot be ignored or avoided. Both developers and users face two opportunities.

For developers, an aggregation layer for smart contracts across different execution layers can provide necessary tools, frameworks, and development environments to seamlessly build applications on diverse execution layers. Standardized smart contract templates and libraries can simplify the development process and promote innovation. This can achieve cross-layer compatibility and enhance developers’ experience.

For users, the smart contract layer serves as their interface to interact with the blockchain. They primarily concern the execution engine, consensus mechanism, and data storage. They simply want a good product and experience, regardless of its form and implementation. Two approaches are currently being explored. The first one is the holistic layer, which combines liquidity or functionality from different execution layers into products offered to users. The second one is intent-driven, focusing on understanding user needs, handling the complex logic behind it, and returning the result to users. Although they have different starting points, the ultimate goal of both approaches is the same.

Opportunity #1: The aggregation layer of smart contracts involves development tools and new layers that can help developers build applications across all these execution layers.

Opportunity #2: The comprehensive layer protocol and intent-centric approach involve AA extensions, which help users seamlessly experience products.

Execution Layer

The execution layer is responsible for executing transactions and updating the state of the blockchain. Its main task is to ensure that only valid transactions are executed, ones that lead to valid state machine transitions. Currently, the most commonly used execution layer is the Ethereum Virtual Machine (EVM), widely used in EVM-compatible chains like zkEVM. The reason behind this is the desire to attract traffic from Ethereum by simply copying and pasting the ecosystem. However, over time, this attractiveness has diminished.

At the same time, we can see that virtual machines have made significant progress. In general, these progress can be divided into two categories: creating more efficient and innovative virtual machines, and modifying the EVM.

In the first category, the idea is very straightforward. EVM is an outdated virtual machine that is difficult to modify and not necessary to do so. And once the EVM is modified, compatibility is compromised. Therefore, many protocols choose the extreme trade-off of replacing the EVM with a new virtual machine to unlock the full potential of smart contract platforms.

One approach is to design a dedicated virtual machine for specific programming languages, such as the Cairo VM in Starknet, or the Move VM in Sui and Aptos. Dedicated virtual machines have the advantages of optimized architecture and improved performance. However, the trade-off is the need to build their own developer community to encourage more developers to build on top of it.

Another approach is to adopt general-purpose virtual machines like WebAssembly (WASM) or RISC-V, which can support multiple languages and are more familiar to traditional developers. WASM is well-known for its high performance and security and is used in popular protocols like Polkadot, Solana, and Near. Therefore, applying WASM in the execution layer is a straightforward choice. Examples include zkWASM developed by Fluent, Eclipse migrating Solana VM to Ethereum, and Nitro’s SVM in the Cosmos ecosystem. Risc0 is an actual example of a RISC-V VM that has gained attention and momentum.

In the second category, the goal is to modify the existing EVM without sacrificing compatibility. There are three possible approaches, all aimed at parallelizing the EVM. The earliest attempt was integrating DAG into the EVM, as seen in projects like Fantom, but this approach has recently fallen out of favor. The second parallelization attempt emerged with the launch of Aptos, which introduced an open-source blockchain -STM, a parallel execution engine for smart contracts. In short, this approach assumes that all transactions are non-conflicting and processes them in parallel before identifying and re-executing conflicting transactions. Many alternative Layer 1 solutions have directly upgraded their execution engines to integrate this method, such as Avalanche. It would be interesting to see similar attempts on Ethereum. Additionally, some protocols are trying to build parallelized EVM from scratch, like Monad, which is gaining popularity in the mainstream market.

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Overall, we are excited about these bold ideas and innovations in the execution layer. After all, technological progress is crucial for pushing the boundaries of blockchain.

Opportunity #3: More efficient and innovative virtual machines

3.1 Language-specific virtual machines

– Cario VM, e.g. Starknet

– Move VM, e.g. Movement Labs

3.2 General-purpose virtual machines: WASM, Risc-V

– Ewasm

– zkWasm, e.g. Fluent

– RiscO

– Solana VM, e.g. Eclipse, Nitro

Opportunity #4: Modify current virtual machines for parallelization.

4.1 DAG, e.g. Fantom

4.2 Optimistic parallelization: Block-STM

4.3 Parallelize EVM, e.g. Monad

Settlement Layer

The settlement layer provides an environment for the execution layer to validate evidence and resolve fraud disputes, while also establishing bridges between different execution layers. In short, the settlement layer is the proof system on which security relies. Currently, there are two main types of Rollup: Optimistic Rollup and zk-Rollup. Optimistic Rollup relies on fraud proofs to ensure the validity of transactions, while zk-Rollup uses zero-knowledge proofs for efficient and secure transaction verification.

Although there have been controversies surrounding the OP and ZK protocols in the past, we don’t need to delve into historical disputes. Let us focus on the current situation.

Arbitrum is a leading protocol that uses fraud proofs and has the highest Total Value Locked (TVL) in the market. It has completed the fraud-proof system but has yet to be deployed on the mainnet, so the outcome remains uncertain. If we need to deal with disputes on L1, the Rollup’s state is essentially frozen, meaning the blockchain could be unavailable for up to 7 days. Even in the traditional internet industry, a system failure for 7 days is unacceptable. Arbitrum cannot risk losing users, so it does not allow submissions of unpermitted proofs – only whitelisted participants can submit proofs.

Optimism, as the second-largest Rollup, explicitly acknowledges in its documentation that it currently does not support fraud-proof functionality. This is because they know that security is not a top priority for the general users. It is now clear that fraud proofs are merely a temporary solution for Optimistic Rollup, and zero-knowledge proofs are the ultimate goal.

It can be concluded that zero-knowledge proofs will undoubtedly dominate the settlement layer in the future. With the advancement of technology and the launch of many zkRollups on the mainnet, Op Rollup will inevitably transition to zero-knowledge proof solutions. Optimism itself is actively seeking help from zk protocols to build zero-knowledge proof systems.

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Based on this clear roadmap, we can identify two opportunities. Firstly, standardizing the Rollup proof system and exploring the progress of ZKP technology offer significant prospects for innovation at the settlement layer. This standard will come from community consensus and widespread adoption. Currently, OP Stack is leading the market, attracting well-known entities such as Base and Binance. In previous articles, we have highlighted the advantages and first-mover advantage of OP Stack. Now it is transitioning to zk, and the standard it chooses is likely to become the market standard. Mina and Risc0 are building proof systems for OP Stack, and one of them is expected to gain a significant market share. Other competitors mainly include existing zkRollups. Their acceptability will be determined by the level of openness. In this field, two noteworthy competitors are Polygon zkEVM and Scroll. Polygon zkEVM is the first fully open-source zkEVM and also provides a more customizable SDK called Polygon CDK for launching custom zkRollups. Scroll’s zkEVM stems from a repository shared with the PSE, Ethereum Foundation’s internal zk team. Both of these zkRollups have their own audiences and have gained recognition from the community. It will be an interesting question to see who becomes the ultimate winner in the future.

The second opportunity comes from the broader ZK field. Once the standard gradually gains social consensus, its associated parties will attract traffic and generate fund inflows. Although we won’t delve into the details of this topic here, we will discuss it in future articles. However, we will mention some examples to provide inspiration. Hardware acceleration is crucial for zk because the generation of zk proofs remains the bottleneck for most protocols. Specific acceleration algorithms and hardware can speed up the process and lower the threshold. Additionally, in the context of Ethereum’s modular narrative, co-processors may be needed to handle Ethereum’s complex calculations.

Opportunity #5: Standard for Rollup Proof Systems

– 5.1 Optimism Foundation’s choices: Mina, Risc0

– 5.2 Open-source zkEVM: Polygon zkEVM, Scroll, and PSE

Opportunity #6: Associated parties in the ZKP field

– 6.1 Hardware acceleration, e.g., Ingonyama, Cysic

– 6.2 Co-processors, e.g., zkVM

Data Availability Layer

The Data Availability Layer is responsible for ensuring the availability and accessibility of transaction data on the Ethereum blockchain. It plays a crucial role in the security and transparency of the blockchain by allowing anyone to check and verify transaction ledgers and reconstruct the Rollup chain. Thus, it is a critical battleground for Ethereum in establishing its position in the modular narrative.

The So-called Legitimacy

To understand why Ethereum repeatedly emphasizes the importance of legitimacy, it is easier to grasp its strategic position in modularity. This concept was first mentioned in Vitalik’s blog post “The Most Important Scarce Resource Is Legitimacy” in 2021. He further discusses this concept in his article: Phase 1 Complete – eth2 as Data Availability Engine – Sharding – Ethereum Research.

In short, using Ethereum as the data availability layer is legitimate, while not using Ethereum lacks legitimacy. In fact, the trends and marketing influence of the Ethereum community have played a role. Let’s take a look at all the Rollups listed on L2beat. L2beat is a protocol primarily based on Ethereum. Although the phase column (security level: phase 0 < phase 1 < phase 2) indicates that they are not very secure, they still receive attention. The most extreme case is Fuel, which chooses Celestia as its data availability layer. Despite building the most secure Rollup, it has not attracted much attention or capital inflow. Therefore, the so-called legitimacy is the truth behind Ethereum's attempt to suppress competitors in the data availability layer to maintain its position.

Overtaking in the Curve

Setting aside the influence of the Ethereum Foundation, is it possible for other competitors to surpass Ethereum? Could Ethereum also make mistakes during upgrades?

Of course, as mentioned earlier, Celestia is an important competitor to Ethereum in terms of data availability (DA) layer.

From a technical perspective, Celestia combines Data Availability Sampling (DAS) and Namespace Merkle Trees (NMT). By adopting Cosmos’ technology stack, Celestia has made adjustments to Tendermint. First, it adopts a two-dimensional Reed-Solomon encoding scheme that enables erasure coding of block data, which forms the basis of DAS. This allows resource-constrained light nodes to only sample a small portion of block data, reducing barriers. Secondly, Celestia replaces the conventional Merkle tree used by Tendermint for storing block data with a Namespace Merkle Tree (NMT). This modification allows the execution layer and settlement layer to only download the necessary data. NMT is a Merkle tree sorted by namespace identifiers, and the hash function has been modified so that each node in the tree includes the namespace range of all its descendants.

As for Ethereum, its Data Availability (DA) roadmap is being progressed through progressive steps in development. Currently, Rollups from the execution layer submit data through the calldata mechanism, which stores data from external function calls. On L1, there is no distinction between data submission and regular transactions.

In the long run, the ultimate goal of sharing DA, Danksharding, does not have a specific timeline, and upgrades often experience delays. Additionally, Danksharding does not have an available specification. To address the urgent need for expensive transaction fees on L2 and meet the short-term requirements of Rollups, Ethereum has proposed Proto-Danksharding, also known as EIP 4844.

Despite its name, Proto-Danksharding has nothing to do with sharding technology. In short, this solution stores compressed data in additional space at a lower cost.

Data compression is based on KZG (Kate-Zaverucha-Goldberg), an alternative proof that fits polynomial equations to data. By leveraging KZG, Rollup no longer needs to present original data or data differences. Instead, a fixed-size KZG commitment is enough for verifying correctness, and it is much smaller in size. Since KZG is essentially zero-knowledge technology based on secret random strings, the EIP-4844 KZG ceremony was open to the public with tens of thousands of participants making contributions.

Ethereum has created an additional space called BLOB specifically for Rollup to store transaction data. The pricing of BLOB is also cheaper than regular calldata, but the dynamic adjustment mechanism still follows EIP 1155. In the long run, Ethereum allows a maximum of 16 BLOBs per block, each containing 4,096 fields. Each field is 32 bytes, so a BLOB can store up to 2MB of data.

To put it in simple terms, Ethereum equipped with BLOB can be seen as a cross-bucket motorcycle, but with two key characteristics. First, the data stored in BLOB cannot be accessed by the EVM. Second, this data will be deleted after a certain period of time. You can imagine Ethereum itself as a constantly running motorcycle, while BLOB is like a detachable sidecar. In this mechanism, Ethereum acts as a temporary storage layer, which is why it is said that transactions after Proto-Danksharding will be much cheaper.

State pruning allows reducing the size of the blockchain and improving performance. These optimizations aim to make Ethereum more lightweight and scalable while maintaining its security and decentralization. However, for execution layers, their global state still needs to be stored somewhere. Some rely on their own DA committees, like zkSync, which proposed zkPorter early on. Polygon also has its own DA layer called Avail. Others may seek dedicated DA layers.

Therefore, if the modular narrative continues, we will remain optimistic about DA layers. Although Ethereum attracts most Rollups with its “legitimacy,” it cannot and does not intend to host the state of all execution layers. Furthermore, Ethereum’s Cancun upgrade has been delayed multiple times, creating a favorable time window for other DA layers to enter the market.

No wonder Celestia plans to launch their mainnet at the end of this month. We will closely monitor Celestia to see if it can break the deadlock of legitimacy. Once Celestia overcomes the obstacles, it will open up a bigger market.

As a guide to investment opportunities, we will first focus on the goals of building partial layers for the Ethereum ecosystem. These layers will initially be led by Ethereum. Otherwise, they may struggle to gain recognition from Ethereum due to legitimacy and to attract developers and users like alternative L1s. Among all these layers, the DA is the most challenging part.

Next, we will evaluate whether the modular approach is strictly limited to Ethereum, and whether Celestia can lead the wave of universal modular storytelling. As Celestia leverages the Cosmos stack, it will also bring capital inflows to the Cosmos ecosystem, especially for projects building the execution and settlement layers, such as Fuel on the execution layer.

Another area that will benefit is RaaS, where widespread modular storytelling will encourage more protocols to adopt Rollup, similar to how SaaS (Software as a Service) has changed traditional internet services. The business model for RaaS is clear: they charge service fees from the protocols. By offering more powerful business development at a cheaper price and better service, they can gain more market share. In addition, their success is closely related to the ecosystem they operate in, so we are likely to see them expand into multiple ecosystems.

Opportunity #7: Modular Layer

– 7.1 Partial layer built for the Ethereum ecosystem.

– Execution Layer: Rollup

– Settlement Layer: Risc0, Mina

– Data Availability Layer: Celestia, EthStorage, Zero Gravity

– 7.2 Partial layer built for modular storytelling.

– Execution Layer: Fuel

– Settlement Layer

Opportunity #8: RaaS tools closely related to the ecosystem.

To be continued

So far, we have extensively discussed the concept of Ethereum-driven modular storytelling and explored the fundamental realities behind this interesting name. Considering Ethereum’s position as the largest smart contract platform, compliance with market regulations is crucial. However, it is important not to limit ourselves to its narrative alone, as the internet represents a market much larger than cryptocurrencies. If the goal of the crypto industry is to achieve widespread adoption, it is inevitable that other participants will emerge in this market. In our upcoming articles, we will delve into the vast world of smart contract platforms.

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