Modularity is transforming the crypto landscape

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The first smart contract blockchain, Ethereum, was monolithic by design, meaning it managed its own execution, consensus, consensus, and data availability. Over the years, new decentralized applications have been developed, leading to increased demand for block space. When demand for block space exceeds supply, limited availability restricts the range of potential applications, causing a significant barrier to use and widespread adoption.

This limitation is called the scalability trilemma, or simply the idea that no public blockchain can simultaneously provide maximum decentralization or security to achieve optimal scalability. To overcome the limitations of the scalability trilemma, modularity emerged as a way to outsource key components optimized to solve critical functions.

Courtesy of Inco team

Modular blockchain thesis focuses on role specialization. It proposes decentralizing traditional blockchain functions such as execution or data availability across private networks. By splitting these functions into different layers from a single L1, blockchains can be tailored for optimal performance in specific areas; Customization, efficiency and decentralization when necessary, security and scalability can be significantly increased.

Given the diversity of use cases, these functions may differ. A modular network can be customized to transmit oracle price feeds, provide zero-knowledge proof services, make data available, or enable a more scalable execution layer on top of another underlying blockchain.

The need for modularity in the crypto industry

Ethereum exemplifies the gradual transformation to a modular world. The chain was first launched with a monolithic design, following in the footsteps of Bitcoin. Arbitrum, a layer-2, represents the success story of aggregations in separating the computation-intensive work required for off-chain scalability back onto the chain. Many more projects have adopted this design due to its resource efficiency and less costly design of processing transactions using aggregations.

It doesn’t end here. Networks that help developers see and unlock the value of modularity are on the rise. Celestia is a great example of solving an obvious problem: the significant cost of storing data availability (DA) back to Ethereum. While aggregations allow for higher throughput, the transaction cost is still relatively high because it ultimately depends on the storage cost of the settlement layer. One solution to this problem is to introduce an alternative DA layer.

The realization that no single monolithic design can meet today’s blockchain demands without compromise is why the field is moving towards modularity. Ethereum is the most secure blockchain with smart contracts, but it continued to face various shortcomings regarding transaction processing and gas fees.

Courtesy of Inco team

In addition to solving blockchain’s architectural challenges, it is becoming clear that additional services are required to enable new use cases and drive web3 adoption. Examples of such add-on services include Oracle services, decentralized RPC, ZK prover networks, artificial intelligence. However, due to overhead, hardware requirements, or technical incompatibilities, blockchains cannot natively support these services. Given the malleable nature of modular architecture, blockchains no longer need to support everything themselves; Everything can be plug and play like Legos.

Courtesy of Inco team

As an example, one of the unsolved problems that the field will continue to solve is around privacy. Most widely adopted blockchains today are transparent and cannot add on-chain privacy without requiring resource-intensive hardware for their validators while using cryptography methodologies such as zero-knowledge proofs (ZKP) or fully homomorphic encryption (FHE).

Beyond the four existing blockchain layers (execution, settlement, data availability, and consensus), the privacy layer on top of existing dApps is a critical missing piece that will enable net new use cases not possible on top of transparent blockchains. Inco is an example of a modular protocol that acts as a fifth layer (confidential computing) by bringing fully homomorphic encryption (FHE) to Ethereum and other blockchains without changing the underlying protocol.

Today, modular protocols are gaining traction, and with widespread adoption of the decentralized approach, they will likely become the rendering standard in web3. This standard will undoubtedly disrupt the vertically integrated approach of monolithic chains and make use of specific Lego blocks that can be paired to create different modular stacks. This means that projects will use the modules they need for their specific needs, rather than trying to do everything.

This will unlock infinite scalability because a network can depend on Ethereum for security, Move as the execution environment, Celestia for data availability, and Inco for confidential computing. The ultimate goal is for different ecosystem modules to coexist and grow together.

The blockchain technology landscape is poised to expand significantly with the emergence of modular architectures in 2024 and beyond. These new blockchains delegate at least one of the core functions (consensus, consensus, privacy, data availability (DA), or execution) to another different blockchain framework.

Remi Gai

Remi Gai is the founder and CEO of Inco. He is a founding member of web3 at South Park Commons and has a background in engineering (Google, Microsoft), entrepreneurship (Polychain, Sequoia, and Parallel Finance, a suite of defi protocols backed by Founders, Polkadot that has raised over 500 million in TVL). has. Funding, Coinbase Ventures), product management (web3 UX lead at co-founded blockchain studio) and venture capital (8 Decimal Capital). Now he’s founding Inco with the aim of removing the last hurdle to mass adoption of web3.