Modular Blockchain Emerges A New Perspective on Disputes over Functional Layer and DA Economics

Revolutionizing the Dispute Process The Emergence of Modular Blockchain and its Impact on Functional Layer and Distributed Autonomous Organization (DAO) Economics

Author: Zeke, YBB Capital

Introduction

The triangle dilemma of blockchain has always been a difficult gap to overcome in the industry, and the successive public chain projects have always tried to cross this gap through different architectural designs in an attempt to become the so-called “Ethereum killer”. However, the fact is cruel, as Ethereum’s position has never been surpassed over the years, and the impossible triangle of blockchain remains unbreakable. So, does there exist a method to fill the gap for public chains and fill the impossible triangle? Mustafa Albasan’s idea of modular blockchain is sprouted from this.

Origin of Modularity

The birth of modular blockchain originated from two white papers. In 2018, Mustafa Albasan and Vitalik co-authored a paper called “Data Availability Sampling and Fraud Proofs”. The paper describes a system that allows lightweight clients to receive and verify fraud proofs from full nodes, and design data availability proof systems to reduce the trade-off between on-chain capacity and security, thus solving the scalability issue of blockchain without sacrificing security and decentralization.

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Then in 2019, when Mustafa Albasan wrote the white paper for “Lazy Ledger”, it detailed a new architecture where the blockchain is only used for sorting and ensuring the availability of transaction data, not for executing and verifying transactions. The purpose of this architecture is to solve the scalability problem of existing blockchain systems. At that time, he referred to this as the “smart contract client”.

The execution of smart contracts is then performed on another execution layer on this client, which is the prototype of Celestia. The emergence of Rollup made this concept more certain. Because the logic of Rollup is to execute smart contracts off-chain and aggregate the results as proofs uploaded to the “client” execution layer.

Through reflection on the architecture of blockchain and new scaling technologies, he defined a new paradigm and called it “Modular Blockchain”.

What is Modular Blockchain

The architecture of a traditional monolithic blockchain typically consists of four functional layers:

• Execution layer – The execution layer is mainly responsible for processing transactions and executing smart contracts. It includes the validation, execution, and updating of transactions’ states;
• Data availability layer – The data availability layer in a modular blockchain is responsible for ensuring the accessibility and verification of data in the network. It usually includes functions such as data storage, transmission, and validation to ensure the transparency and trust of the blockchain network;
• Consensus layer – Responsible for the protocol between nodes to achieve consistency of data and transactions in the network. It verifies transactions and creates new blocks through specific consensus algorithms such as Proof of Work (PoW) or Proof of Stake (PoS);
• Settlement layer – Responsible for the final settlement of transactions, ensuring the transfer of assets and permanently recording them on the blockchain, determining the final state of the blockchain.

A single blockchain integrates the work of these components into one system, but this highly integrated design inevitably leads to some inherent problems, such as poor scalability, lack of flexibility, and difficulties in maintenance and updates.

Celestia believes that a single blockchain no longer needs to do everything by itself. The future evolution of Web3 will be the “modular blockchain,” which modularizes the blockchain and distributes its processes to multiple “dedicated layers,” with each layer responsible for handling specific functional layers, creating a better system that is independent, secure, and scalable.

Modular Design Principles

If a design breaks down a system into smaller parts that can be exchanged or replaced, then it is modular. The core idea is to focus on doing things well in parts (the operation of partial or individual functional layers), rather than trying to do everything. If we take the projects we are more familiar with as examples, Cosmos Zones, Polkadot LianGuairachains can actually be seen as a form of modularity.

A New Perspective

From the perspective of modularity, there is much room for redesigning the single blockchain and its modular stack. Modular blockchains with diverse purposes and architectures can work together through combination. With the diversity of possibilities in design, this track has also given birth to many interesting innovative projects. The following discussion will take a modular perspective to explore the current controversies regarding different functional layers and how Celestia interprets “modularity.”

Around the Ethereum-centered execution layer

If we consider Rollup as the modular execution layer, we will find that most modular execution layer projects are built on top of Ethereum. The reasons for this are obvious – Ethereum has a large amount of resources as a moat and the highest level of decentralization to choose from, but its scalability is poor, so there is great potential for redesigning the functional layer. From the dismal performance of the recently launched Move language public chains (Aptos, Sui) in contrast to the unprecedented prosperity of Layer2 on Ethereum, it is not difficult to see that the infrastructure narrative of blockchain has shifted from building public chains to building Layer2 on Ethereum. So, is the existence of modularity good or bad? Does the execution layer centered around Ethereum stifle innovation in public chains?

The Blockchain Scaling Landscape

First, starting from the perspective of the execution layer, reclassify the existing chains. Here, I quote Nosleepjon’s article “Tatooine’s Twin Suns” to illustrate the current classification of the execution layer in blockchain.

Currently, blockchain can be divided into four categories:

1. Single-threaded single-chip blockchain: A monolithic blockchain that processes one transaction at a time. Due to limitations, most of these have moved towards a Rollup or horizontal scaling roadmap.

Representative projects: Ethereum, Polygon, BNB Chain, Avalanche

2. Parallel processing single-chip blockchain: A monolithic blockchain that processes multiple transactions at once.

Representative projects: Solana, Monad, Aptos, Sui

3. Single-threaded modular blockchain: A modular blockchain that processes one transaction at a time.

Representative projects: Arbitrum, Optimism, zkSync, Starknet

4. Parallel processing modular blockchain: A modular blockchain that processes multiple transactions at once.

Representative projects: Eclipse, Fuel

Single-chip parallel processing architecture VS modular architecture

There are various opinions on which approach to adopt, especially when comparing modular and overall parallel processing concepts. The camps are divided into three:

Modular camp: Modular advocates (mostly Ethereum advocates) believe that a single-chip blockchain cannot solve the blockchain trilemma. To achieve scalability while maintaining security and decentralization, it is necessary to build on top of Ethereum like building with Lego blocks. Modular architecture also offers more control and customization.

Single-chip parallel processing camp: This camp (quoting Kodi and espresso’s views on “Single-chip VS Modular: Who is the future of blockchain?”) believes that the new public chain architecture of single-chip parallel processing (Move series, Solana, etc.) has high integration, and overall performance will surpass modular fragmented design. Modular architecture is also not secure, especially when a large amount of cross-chain communication is required, it broadens hackers’ attack surface.

Neutral camp: Of course, there are also those with a neutral attitude, believing that both can coexist in the end. For example, Nosleepjon believes that the endgame of this game is that both have their advantages, and there will still be competition among public chains, while Rollups will compete with each other.

EndGame

Ultimately, the focus of this question can be simplified to whether the disadvantages of modular friction (such as cross-chain insecurity and system inefficiency) are greater than the centralization issue of the new public chain. From a market perspective, neither the flaws in the centralizer of Rollup nor the potential risks of cross-chain bridges have led people to switch to new public chains. This is because these problems currently seem to have room for improvement, while the new public chain cannot replicate Ethereum’s large ecological moat and decentralized advantages.

On the other hand, although the new public chains have advantages in terms of performance and integration, they are simply forks of the Ethereum ecosystem in terms of ecology, resulting in a high degree of homogeneity and lack of liquidity. There is no exclusive application that can demonstrate its own architectural advantages, naturally there is no reason for people to abandon the Ethereum ecosystem. Rollup’s flexibility is high, and there is still a lot of potential for improvement in future architectural Rollups. When Rollups also have most of the advantages of non-EVM chains, the situation of “Solana Summer” becomes unlikely in the future. So, in this matter, I believe that the disadvantages of modular friction are smaller than the issue of centralization in public chains. And it seems that there is no neutral situation, the suction effect of Ethereum will attract a large number of developers who focus on scalability to layer two, and the new public chains will become ghost towns.

About the future of infrastructure, I am definitely more inclined towards modularity. The fragmented scaling of Ethereum will also mark the beginning of the EndGame for public chain gaming. There will be competition between Layer2 for generalized chains and competition between Layer3 for super application chains.

The current situation in the primary market, with projects being funded, confirms this point. Apart from a large number of Ethereum Layer2 projects, there is hardly any trace of new public chains, except for Bitcoin scalability projects in comparison. But then again, the industry always builds on the development of Ethereum, and the current trend has a taste of excessive concentration. Is this really good? Lack of competition will stagnate the development of an industry. The industry needs diversity, it needs more choices. But how can new public chains create opportunities and breakthroughs? So far, nothing has been seen. When Ethereum continues to improve its own shortcomings, it is a crucial issue for the non-EVM system to find larger gaps for precise strikes.

The Arena of DA Solutions

Having discussed the controversies of the execution layer, let’s now look at the controversies of the data availability layer (DA layer). The debate over which data availability scheme Rollup should adopt has been a hot topic in the industry recently, owing to a tweet by Dankrad Feist, a researcher at the Ethereum Foundation, discussing this topic. He clearly indicated in his opinion that Rollup without using Ethereum DA is not Layer2. So will the previous Layer1 war evolve into a war between orthodox (using Ethereum DA) Layer2 and non-orthodox Layer2? Currently, the industry has mainly three solutions for DA:

1. Public chain as the settlement layer

Using Ethereum as an example, when conducting a transaction on Rollup, the fees submitted to Ethereum mainly include the following categories:

Execution Fee: Compensation for computing resources required to execute the transaction. It includes gas fees required to execute the transaction, usually proportional to the complexity and execution time of the transaction. In Rollup, the execution fee may include the cost of executing transactions off-chain, as well as the cost of generating and verifying transaction proofs;

State Fee: The state fee is related to updating the state on the Ethereum main chain. In Rollup, this includes the cost of submitting a new state root to the main chain. Whenever a Rollup aggregator generates a new state root and submits it to the main chain, state fees are incurred. This cost may be proportional to the frequency and complexity of state updates;

Data Availability Fee: The cost of publishing data to Layer1.

Among these fees, the data availability fee accounts for the highest proportion and is expensive. For example, on May 6th of this year, Arbitrum paid a sky-high gas fee of 376.8 ETH to Ethereum due to the surge in gas fees.

This is because Rollup uploads data to Ethereum using the Calldata format and permanently stores this data, so the cost is very expensive. But the benefit is that it has the best security and orthodoxy among the three schemes. Currently, the cost of this scheme’s reduction requires waiting for the Cancun upgrade of the EIP-4844 update. By introducing the transaction format of Blob carrying Transactions. The transaction format has an additional Blob location compared to the regular transaction format, which can be used to store Layer2 data. Moreover, Blob data will be deleted by nodes after one month, greatly saving storage space.

This transaction format, Blob, can provide data availability at a cheaper price than Calldata. There are two main reasons: on the one hand, Callda exists in the Execution LianGuaiyload, while Blob data is stored in Prysm nodes or Lighthouse nodes (rather than in Geth), which consumes more resources when Calldata needs to be read by the contract; on the other hand, Blob data is short-term storage, and Blob data will be deleted by nodes after one month. But the gas fees will still be higher than the latter two solutions.

2. Validiums DA mode

For Rollups of the application chain type (such as the former dYdX, Immutable, etc.), they usually use the second-layer scalability engine developed by the head Rollup project (currently the most is StarkEx, but the head projects of the ZK series have similar solutions). In the DA mode, because the application chain has a larger computational load, they are more inclined to use the Validiums solution, which is low-cost and high-throughput. The principle of Validiums is designed using off-chain data availability and computation, similar to ZK-Rollup, by publishing zero-knowledge proofs to verify off-chain transactions on Ethereum. However, unlike ZK-Rollup, which keeps the data on-chain, Validiums keeps the data off-chain. Compared with using Ethereum, the cost decreases by 90%, making it the most cost-effective solution in select cases.

However, because the data is kept off-chain, the entity operator of Validium can freeze user funds. To prevent extreme situations, a data availability committee (DAC) scheme must be introduced. The DAC must sign each update of the state with its statutory number to confirm that it has received the data. This is a controversial practice because you have to trust the security of the entity first, not the chain. This is directly mentioned in the tweet by Dankrad Feist (the proposer of EIP-4844 mentioned above).

3. Modular DA

From a modular perspective, there are various ways to redesign the DA layer, which may result in significant differences in the specific implementation of different projects. Therefore, a detailed explanation of modular DA projects would require a large amount of content, and here I will take Celestia as an example to explain DA projects.

Celestia

From the beginning of the article, as the first proposer of the modular blockchain concept, Celestia is the most well-known and earliest project in this field. Its vision is to address the scalability and modularity issues of blockchain. Celestia provides developers with more flexibility, making it easier for them to deploy and maintain blockchain applications. At the same time, it also reduces the cost and complexity of deploying blockchains, providing dApp creators and blockchain developers with a modular and scalable blockchain architecture to support the needs of various applications and services.

Working Principles and Architecture

Decoupled Execution: Celestia’s logic is to divide the protocol into different tiers, with each tier focusing on specific functionalities, which can then be reassembled to build blockchains and applications. Celestia specifically focuses on the consensus and data availability tiers within these tiers. Similar to some Layer1 blockchains, Celestia uses the Byzantine Fault Tolerant (BFT) consensus algorithm Tendermint for transaction ordering, but it differs from other Layer1 blockchains. Celestia does not reason about transaction validity or execute transactions; it only handles the ordering and broadcasting of transactions. All transaction validity rules are enforced by Rollup nodes on the client-side (i.e. decoupling the consensus layer from the execution layer). Therefore, an important point to note is “does not reason about transaction validity.” This means that malicious blocks that conceal transaction data can also be published on Celestia. So how is the verification process implemented? Celestia introduces two core components for this: two-dimensional Reed-Solomon encoding and Data Availability Sampling (DAS).

Comparison of the overall architecture of a single blockchain with Celestia’s modular architecture

DAS: This approach is used for lightweight node validation of block data availability, without the need for nodes to download the entire block. Only a sample of the block’s data is required (the specific implementation method will be described in detail below) using two-dimensional Reed-Solomon encoding. Unlike DAC mentioned earlier, DAS does not require trust in entity security; it only requires sufficient decentralization in the chain for the data to be trusted.

Two-Dimensional Reed-Solomon Encoding (Erasure Coding): The basic idea behind two-dimensional Reed-Solomon encoding is to apply Reed-Solomon encoding separately to rows and columns. This way, even if errors occur in certain rows and columns of the two-dimensional data, they can be corrected. By encoding the block data, the data is divided into kk blocks, arranged as a kk matrix, and extended to a 2k2k extension matrix through multiple Reed-Solomon encodings. The 4k independent Merkle roots of the rows and columns of the extension matrix are calculated; these roots are used as block data commitments in the block header. Celestia lightweight nodes sample the 2k2k data blocks. Each lightweight node randomly selects a unique set of coordinates in the extension matrix and queries the full nodes for the data blocks and corresponding Merkle proofs related to these coordinates. Each received data block with a correct Merkle proof is then broadcasted to the network.

To understand this concept in abstract terms, we can also say that the block data is divided into a square matrix (e.g., 8×8), and through encoding, additional “checksum” rows and columns are added to the original data, forming a larger matrix (16×16). By randomly sampling a portion of the data in this larger matrix and verifying its accuracy, the integrity and availability of the overall data can be ensured. Even if some data is lost or damaged, the checksum data can be used to recover the entire block of data.

Block scaling: Celestia scales with the increase in the number of light nodes. As long as there are enough nodes on the network to sample the entire block, Celestia will remain secure. This means that as more nodes join the network for sampling, the block size can increase accordingly without sacrificing security or decentralization. In traditional blockchains, doing so would sacrifice decentralization because larger block sizes would require greater hardware demands for node downloading and data verification.

Sovereign Rollup: This is also a concept pioneered by Celestia, combining elements of various blockchain designs, including Layer 1 blockchains, Rollup, and early Bitcoin networks like Mastercoin. The key difference between Sovereign Rollup and smart contract Rollup (OP, ARB, ZKS, etc.) lies in how transactions are verified. In smart contract Rollup, transactions are verified by smart contracts on the Ethereum network. In contrast, in Sovereign Rollup, transactions are verified by the Rollup’s own nodes.

Sovereign Rollup publishes its transactions to another blockchain (such as Celestia) for ordering and data availability. Sovereign Rollup’s nodes then determine the correct chain. This design allows Sovereign Rollup to inherit multiple security aspects from the Data Availability (DA) layer, including liveness, security, reorganization resistance, and censorship resistance.

For smart contract Rollup, upgrades depend on the smart contracts on the settlement layer. Upgrading Rollup requires changing the smart contracts. It may require multisig to control who can initiate updates to the smart contracts. While team-controlled upgrade multisigs are common, they could be governed to make the multisig controlled. As smart contracts exist on the settlement layer, they are also constrained by social consensus on the settlement layer.

Sovereign Rollup upgrades through forks, just like layer 1 blockchains. By releasing new software versions, nodes have the choice to update their software to the latest version. If nodes disagree with the upgrade, they can continue using the old software. Providing the choice allows the community, i.e., the people running the nodes, to decide whether they agree to the new changes. Even if the majority of nodes upgrade, they cannot be forced to accept the upgrade. This feature makes Sovereign Rollup a “sovereign” Rollup compared to smart contract Rollup.

Quantum Gravity Bridge (QGB): The key component of the Celestia ecosystem, it serves as a bridge between Celestia and Ethereum (or other EVM L1 chains), enabling the transfer of data and assets between the two networks. By introducing the concept of Celestium (EVM L2 Rollup), Celestia ensures data availability while settling on Ethereum. This allows for the simultaneous utilization of the advantages of both networks: Celestia’s scalability and data availability, as well as Ethereum’s security and decentralization.

Validators on Celestia can run QGB, providing strong data availability guarantees for block data of Celestium at a lower cost than Ethereum’s Calldata.

QGB is a crucial part of Celestia’s vision to achieve a scalable, secure, and decentralized blockchain ecosystem. It achieves the interoperability required for the future of blockchain technology. Currently, the project is working on Zk QGB to further reduce the gas fees for validation.

DA Economics

Let’s talk about the economic value of DAs.

This assumption is based on Polygon Hermez’s estimate that their transactions will eventually only require 14 bytes. With a current Danksharding specification of 1.3 MB/s, Layer2’s TPS can reach around 100,000, resulting in an estimated profit of a staggering $30 billion.

With such a huge cake at stake, the future competition in the DA market will be fierce. Aside from the three mainstream solutions, there are also Stark’s fractional scaling Layer3, zkPorter, and multiple modular DA projects joining the war. Looking at existing Layer2 projects, the general consensus favors the use of Ethereum DAs for general-purpose chains. Application chains and long-tail chains will be the main customers for “unconventional DAs.” In my opinion, modular DAs and Layer3 in the near future will become the mainstream choices.

Conclusion

Advancing decentralization remains the mainstream notion in this industry. Modular blockchains are essentially an extension of Ethereum’s value, an attempt to break the blockchain trilemma. Although they offer diversity in design, they also make the construction process more intricate and complex. Within modular construction, the various risks associated with different modules can be likened to a mystery box. It is important to pay attention to how to build a more stable modular system. On the other hand, the impact of the modular trend will lead to the fragmentation of liquidity in dozens of Layer2 solutions. Cross-chain communication and security will also be key focuses in the future. Modularization in BTC is also a recent hot trend, with some viable solutions emerging that are worth keeping an eye on.

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