Could this be blockchain’s “David and Goliath?” Sort of. While it isn’t a fight to the death, it is a proving contest between core development communities for the title of cryptocurrency’s best, hardest, soundest money. The battle pits monolithic examples like Bitcoin, Ethereum, Solana, and Binance Smart Chain against modular examples like Ethereum’s future modular PoS. Crypto is currently dominated by monolithic blockchains. Monolithic blockchains have been proven over the last decade-plus. However, the discussion is growing around the future of modular blockchain technology and how it’s a better way to solve scalability while preserving decentralization and security.

Monolithic blockchains have dominated crypto blockchain adoption since Bitcoin’s genesis in 2009. Bitcoin is the “Goliath” monolithic blockchain, leading market capitalization for the last 13 years. Ethereum is the runner-up. Monolithic blockchains handle the three basic features of a blockchain stack: consensus (PoW or PoS security), data availability (block space), and execution (the computation and state of transactions). For Bitcoin and Ethereum, this monolithic approach has “led to crippling inefficiencies, reflected in the blockchain trilemma.” The blockchain trilemma implies the trade-off between decentralization, security, and scalability. “Bitcoin and Ethereum chose to be highly secure and decentralized, trading off scalability; while other chains made different trade-offs,” like Solana and Binance Smart Chain (Polynya, 2021b). This is why many value Bitcoin or Ethereum as the current and future leaders in cryptocurrency.

Now, let’s examine modular blockchains, aka “David.” “A modular blockchain is a blockchain that outsources at least one of three components to an external independent chain while also conceding its ability to temporarily handle that component/s—the three components being execution, consensus, and data availability.” Modularity entails flexibility via specialization, a key component of natural and capitalistic nuances. Modular blockchains compartmentalize the three stacks of the chain into pieces to optimize scalability and performance. “Modular chains can outsource components to separate independent chains or handle them locally—[they] can’t handle more than two out of three components, otherwise [they imply] monolithic limitations. Flexibility also allows modular chains to be created, exchanged, or replaced independently within a modular stack—a core element of the modular design principle” (Beckett, 2021). With its transition to Ethereum 2.0 (PoS), Ethereum is poised to turn from monolithic to modular mainly due to rollups. We’ve discussed rollups before. They process transactions faster than Ethereum’s mainchain, optimizing execution while outsourcing consensus and data availability back to Ethereum; they “are unburdened from the responsibility of consensus and data availability by creating a transaction execution environment separate from Ethereum, and processing the transactions before making an update to the state of the L1” (Hoffman, 2021).

Ethereum’s future also modularizes consensus and data availability. Consensus is by far the hardest layer to modularize. Future Ethereum has “a wide token distribution that can only be achieved from 6 years of intense activity and high-inflation proof-of-work; a consensus mechanism that can handle a million validators without resorting to in-protocol delegations; a culture of users and developers running full nodes, and focusing on solutions like statelessness to make this sustainable long term” (Polynya, 2021b). PoS maximizes the accessibility of the chain, opening up maximum user participation and thus two homogenous capital pools that become one modular pool of network security. This “enables Ethereum to modularize its data storage capacity via sharding. Sharding creates a redistribution of security across a higher number of chains“ (Hoffman, 2021). By distributing the data among multiple machines, a cluster of database systems can store a larger dataset and handle additional requests.” Rollups now have smaller pieces to verify, improving network fees and execution (Lorem Ipsum, 2021).

Ethereum’s transition to 2.0 conveys this idea of modular technology. The three components of the blockchain stack are being developed in parallel. They complement each other and create synergy. To summarize Hoffman, more decentralization means more scale; more scale means faster execution; and more shards mean more scalability and faster execution. Ethereum’s depth of talented developer resources and dedicated community shows how development specialization across Ethereum’s blockchain stacks facilitates a more efficient chain.

The main arguments predicting the future irrelevance of monolithic chains are economic inefficiencies and a lack of technological specialization. Certain monolithic chains, like Solana, have economic inefficiencies surrounding their fee structure and inflationary tendencies—they issue more tokens than they take in fees. Blockchains must collect more in fees than they issue. Monolithic chains that are not optimized for execution may fail because, unless they see massive improvements in demand, their model is unsustainable. Polynya demonstrates how Solana collects a drastically lower number of fees than the number of issued tokens, inflating the market:

As for Solana, it collected only ~$10K/day for the longest time, but with the speculative mania it has seen a significant increase to ~$100K/day, or $36.5M annualized. Solana is giving out an even more astounding $4B in inflationary rewards, leading to a net loss of 99.2%.

Monolithic chains with proper inflation and fee mechanisms, like Bitcoin and Ethereum, are well poised. As global adoption increases, the monolithic chains with the most economic security will attract the most participants and the largest big money capital. This means increased demand potential. Again, this is where Bitcoin and Ethereum shine because they did not sacrifice security for scalability. They are also the most decentralized. Whales trust the security and decentralization insurability of these two chains; the market has already shown this. Also, both are showing technological advancements in execution: Bitcoin’s Lightning Network and Ethereum’s rollups.

Polynya believes monolithic blockchains are a dead end and firmly supports the idea of specialization: ”Remain monolithic, accept technological obsolescence, but focus on marketing, memes and build network effects and niches before modular chains dominate” (Polynya, 2021). Polynya summarizes monolithic chains’ potential improvement options:

• Expand into a validium

  • The path of least resistance

  • Generate zero-knowledge proofs on the top security layer

• Become a volition or rollup

  • The most attractive option

• Become a security and data availability layer

  • Rearchitect your monolithic structure to be modular-friendly or build a data availability layer with a minimal security

• Become a security-only layer

  • This is Bitcoin (perhaps Bitcoin builds zero-knowledge proofs or a data access layer)

• Build a data availability layer

  • Build the best data availability layer for validiums and volitions

We know and love that decentralization is the ultimate goal of the space, followed by security. This is why Bitcoin and Ethereum have done so well and have won so many dollars and degen hearts. The trilemma is an issue, of course, but modularization is proving to develop great efficiencies for the chains embracing them. The prevailing opinion is that Ethereum’s rollups improve execution, PoS improves consensus, and sharding improves data availability. Ethereum’s community is the most enthusiastic, tech-savvy, and well-resourced to specialize as it evolves from monolithic to modular. Decent appreciates the entirety of the cross EVM landscape and the development innovation across all EVM participants. In this battle, modular development is the likely victor and could deliver the highest form of sound money. Failing to evolve, or being egotistically unwilling to innovate and change, may lead to Goliath’s dump and David’s pump.

P.S. Polynya and alexbeckett collaborated on a Celestia forum post about modular blockchains. Alexbeckett showed a cool “degree of modularity” chart that brings depth to modular blockchain distinction: https://forum.celestia.org/t/defining-modular-blockchains/76.

Sources:

Bankless Podcast. https://open.spotify.com/episode/73p0lZx8LWJTXJXMTXBjxv?si=5dfdeb3936074098

Beckett, Alex. (December 2021). Defining modular blockchains. https://forum.celestia.org/t/defining-modular-blockchains/76

Hoffman, David. (October 2021). Ultra Scalable Ethereum. https://newsletter.banklesshq.com/p/ultra-scalable-ethereum?s=r

Lorem Ipsum. (December 2021). Modular vs Monolithic Blockchains. https://mirror.xyz/0x9CbA1AfF6C2a2a523B671A55C346f580e3Ca0BC4/5yeCY89wkFQBN79peszeK0tyJ9cXx6Sf9nMnV5ziRL0

Polynya. (September 2021). Processors & blockchains: modular is revolutionary. https://polynya.medium.com/processors-blockchains-modular-is-revolutionary-ded01824b603

Polynya. (September 2021). The lay of the modular blockchain land. https://polynya.medium.com/the-lay-of-the-modular-blockchain-land-d937f7df4884

Polynya. (September 2021). Why rollups + data shards are the only sustainable solution for high scalability. https://polynya.medium.com/why-rollups-data-shards-are-the-only-sustainable-solution-for-high-scalability-c9aabd6fbb48