Ethereum is one of blockchain’s blockbuster success stories, used by millions, housing thousands of decentralized applications, and managing billions of dollars worth of funds. What’s impressive is that this success has been achieved despite some serious issues with its monolithic architecture, which causes big scalability issues that often leave its network crippled by congested traffic and sky-high fees.

The success of Ethereum begs the question – what would happen if we could actually build a blockchain without those scalability issues? How far would the crypto industry go if it wasn’t being held back? It’s a question the industry hopes it will soon be able to answer with the advent of modular blockchains.

At present, the bulk of core tasks, such as transaction processing, consensus, and data availability, all take place on the Ethereum chain itself. The result is that its nodes are regularly overloaded. They’re pressed into service, verifying transactions, making data available, and maintaining the entire block history, and these demands have an extremely negative impact on its efficiency.

Modular blockchains aim to solve this by splitting the core functions across multiple, separate blockchain layers, reducing the strain on each one to make them more efficient.

What are modular blockchains?

The basic concept of modular blockchain architectures involves diverting the various jobs that blockchains do into distinct layers – so there will be one chain for execution, one for consensus, another for data availability, and so on. This modular makeup lays the foundation for greater scalability, as each component of the blockchain only has to handle one, specific task, independently of the others.

Not only does the reduced burden help, but it also means each layer can be better optimized for the specific task it’s required to do.

This is unlike monolithic blockchains, which force all of the main functions of a blockchain onto the same nodes. Rather than do this, it distributes all of the tasks that must be performed onto optimized layers of nodes so they can focus specifically on the function, and do it faster than before.

A key advantage of this approach is that developers can create very specific combinations of blockchain layers that suit the particular needs of their decentralized applications. It can be likened to building a blockchain out of Lego blocks. For instance, a developer can pair the most suitable, optimized data availability layer, such as 0G with a highly-efficient execution layer like FuelVM, and a secure validation layer such as EigenLayer, which inherits the strong security of Ethereum through liquid restaking.

By mixing and matching modular blockchain layers in this way, developers can create a more flexible architecture that achieves the highest possible throughput for their specific use case, and benefit from greater efficiency and scalability than any monolithic blockchain can provide.

The modular approach is a powerful alternative to building a customized blockchain from scratch, which is what some, more ambitious developers have done, enabling developers to benefit from highly optimized performance layers while sharing the security of more established networks.

Modular blockchain components

While there are all sorts of possibilities for mixing and matching various layers, a modular blockchain will almost always involve piecing together four basic components. The concept is an architectural revolution that many believe will surpass the traditional, one-size-fits-all model for decentralized networks.

The four basic components include an execution layer, which is the primary or foundational layer, where users’ transactions are submitted and where they interact with dApps through smart contracts. These interactions are what trigger “state transitions”, such as the updating of on-chain balances and accounts.

By separating the execution layer from tasks such as consensus, transactions, and interactions can be performed off-chain, using techniques such as ZK-Rollups or Optimistic Rollups, enabling more efficient (faster and cheaper) processing.

The second main component is the settlement layer, which performs the job of settling all of the transactions that were offloaded onto those rollups. It does this by processing their transaction proofs. This task involves validating transaction states, managing proofs of fraud, and resolving any disputes that may arise, especially in the case of Optimistic Rollups.

Third is the consensus layer, which can be a rollup-based sidechain or some other architecture, and is responsible for ensuring that a required majority of nodes agree on the blockchain’s state. It does the job of bundling multiple transactions together to be settled as one and must ensure each one is valid. It must also agree on the order in which those transactions are processed.

One advantage of having a consensus layer is it provides developers with more flexibility over how decentralized they want their dApps to be, as they’re able to configure the number of validators involved.

Finally, every kind of dApp needs a data availability layer, which ensures that all of the data required to validate transactions and process smart contract interaction is made available to every other participant in a network. In this way, it enables all of the essential on-chain data to be quickly verified by anyone using or participating in the network. Data availability layers have become especially popular with dApps that aim to boost their efficiency by eliminating the need to rely on Ethereum itself to provide data availability.

What does modular architecture bring to the table?

It’s easy to understand why splitting these tasks into separate layers can boost the overall efficiency of dApps. Modular blockchains are rapidly emerging as a compelling solution to the scalability problems on Ethereum and other decentralized networks. In the case of Ethereum, it means the heavily congested mainnet can focus solely on executing transactions and producing blocks, and maintaining consensus, with settlement, consensus, and data availability all performed elsewhere. It’s sort of like employing separate people to handle the various tasks in a kitchen, such as preparing ingredients, cooking them, and cleaning the dishes, rather than having a single employee do everything.

Besides enabling tasks to be processed faster, it also means lower costs as rollups can access verified data without making expensive calls to the Ethereum mainnet. Moreover, data availability-focused updates and improvements can be initiated separately, without causing any disruption to the mainnet.

As an example, a developer looking to build a high-performance decentralized exchange platform might employ ZK-rollups as an execution layer for efficient, off-chain transaction processing, and use Ethereum for consensus and settlement in order to benefit from its security. Finally, they can use a specialized data availability layer such as EigenDA or 0G for more cost-effective and faster access to off-chain data storage.

Fixing data availability for high-speed access

There has been some criticism of modular blockchains due to the security complications and increased trust assumptions that arise from having a more fragmented network architecture. But none of that has prevented significant advances from being made.

Indeed, the general consensus is that the benefits of a modular approach outweigh the risks. Over the last 12 months, the idea of modular blockchains has really caught on and there are numerous projects bringing the dream of greater scalability into the realm of reality.

In the data availability space, one of the most promising initiatives is 0G’s network, which is focused on delivering high-speed and highly-secure data access for decentralized networks. It’s aiming to delivering a rapid throughput of up to 50 Gbps, which vastly improves on the 1.5 Mbps rate of Ethereum when used as a data availability layer.

0G is building its data availability layer to support a new generation of blockchain-based games and artificial intelligence applications that require an extremely fast and reliable data pipeline. If such apps don’t have fast and efficient throughput, they won’t be able to match the performance of their Web2 counterparts and will see their transaction costs add up far beyond what many users would be willing to pay.

Founder Michael Heinrich told TechCrunch that, ultimately, 0G intends to achieve “infinite capacity”. So just as AWS enables developers to spin up as many servers as they need to ensure blazing-fast application performance, 0G will be able to spin up as many consensus networks as they require.

Momentum in modular blockchains

Meanwhile, there have been promising developments across the entire modular blockchain stack. Fuel Labs is pioneering the concept of parallelized virtual machines on the execution layer, while Optimism has made significant breakthroughs in areas such as sharding, decentralized sequencing, and incentivized verification.

Ethereum itself is also contributing to blockchain modularity. As part of its post-merge development roadmap, it’s working towards creating separate but unified settlement and data availability layers. One of its most promising ideas is the concept of “danksharding”, which is working to evolve Ethereum’s L1 data shards and blockspace into a separate “data availability engine”, paving the way for Layer-2 rollups to implement low-cost and high-throughput transactions.

Another interesting project is Celestia, whose execution layer implementation can also be used as a data availability layer. It’s laying the foundation for alternatives to EVM-based virtual machines, such as WASM, Starknet, and FuelVM-based VMs. By sharing data availability with a variety of execution layers, Celestia makes it possible for developers to create trust-minimized bridges across clusters that unlock inter-ecosystem and cross-chain composability and interoperability.

Starkware’s Volitions project introduces a compelling solution to the dilemma of on-chain and off-chain data availability. With it, dApp developers and users will be able to choose if they want to send their transaction data off-chain, where it can be processed faster, or keep it on-chain, where it’s more secure.

Even Bitcoin is likely to benefit from modularization. A project called Babylon is working on a protocol that will make it possible to stake BTC to improve the security of appchains within the Cosmos ecosystem, and later extend this to other proof-of-stake blockchains.

The outlook for modular blockchains

Although many of the above-mentioned projects are still very nascent ideas, the impressive speed at which they have progressed suggests that blockchain’s future is more likely to be modular than monolithic.

Modular blockchains are not without their problems, though. Slapping together lots of different components like they’re Lego might create some headaches for developers. With modular blockchains, security ultimately rests on the underlying settlement layer, but developers will need to take care not to create a situation where a failure of one layer causes issues on the other layers.

A second challenge can involve costs. Optimizing each layer brings about a better experience for users, but it comes at a cost of greater complexity, with the need to create mechanisms for managing fraud and validity proofs proving to be a significant challenge.

If modular blockchains are to succeed, the onus is on developers to ensure that everything slots together seamlessly so that their dApps simply “work”.