DreamingCrypto is your portal to the cryptoverse’s unfolding legend, and today, the focus shifts to a groundbreaking concept that's quietly reshaping the landscape: modular blockchains. Monolithic blockchains execute, reach consensus, and maintain data availability all on one chain. In comparison, modular blockchains take the opposite approach. They further decompose these tasks into specialized layers, providing possible gains in scalability, customization and interoperability. In this post, we’ll explore the “what,” “why,” “where” and “how” of these modular blockchains. We’ll be focusing on their potential and revealing some amazing, under-the-radar work in this creative new space.

Modular blockchains are an important paradigm shift from the legacy, monolithic blockchain design. Now imagine one such restaurant controlling not just the menu, but every aspect of the dining experience. They intentionally raise their own ingredients and personally serve the customers. A modular approach would be like having separate farms, kitchens, and serving staff, each specializing in their respective tasks. This division of labor enables tremendous efficiency and scalability. In blockchain parlance, this would involve sharding consensus, transaction execution, and data availability across different, specialized chains.

The fundamental concept of modular blockchains is increased performance through distribution of the work. Rather than having one chain do everything, specialized chains outsource certain functions. This specialization results in increased efficiency and helps create specialized, targeted solutions to meet diverse needs. Modular blockchains enhance interoperability by allowing easy movement of data and assets between linked networks via specialized communication protocols, such as bridges. This interconnectedness encourages a more collaborative and efficient blockchain ecosystem.

Understanding Modular Blockchain Functions

Modular blockchains can specialize in four primary functions: execution, settlement, consensus, and data availability. Knowing what each of these functions actually is helps unpack how savvy this architectural tactic can be.

  • Execution: This layer handles the actual processing of transactions and smart contracts.
  • Settlement: This layer provides a mechanism for resolving disputes and finalizing transactions.
  • Consensus: This layer ensures agreement among network participants on the validity of transactions.
  • Data Availability: This layer guarantees that transaction data is accessible to all network participants.

By decoupling these functions, modular blockchains have the ability to optimize each layer for their desired performance characteristics. That’s not to say you can’t design an execution layer to deliver high throughput. A future data availability layer can focus on security and redundancy. This specialization has empowered our team to develop a more tailored and efficient blockchain solution.

The advantages of this modular approach are many. Firstly, it allows for greater scalability. Because they’re able to distribute the workload across different chains, modular blockchains can process more transactions than monolithic blockchains. Secondly, it enables greater customization. This modularity allows developers to pick and choose the exact modules they need, building customized blockchain solutions for specialized applications. Thirdly, it encourages interoperability, enabling various blockchains to communicate and interact with one another seamlessly.

Promising Projects in the Modular Blockchain Space

Though the modular blockchain idea is still in its early stages, numerous projects are already taking ambitious steps in this direction. Whether it’s battery recycling or preserved agricultural land, these projects showcase the amazing and varied applications and potential of modular blockchain technology. Here are a few examples of projects that are pushing the boundaries of modularity:

  • Dymension: Dymension is building a modular network where anyone can launch a RollApp. This allows applications in gaming, DeFi, and social media to launch with custom logic and native tokens without starting from scratch.
  • HeLa: Developed by HeLa Labs, HeLa is designed with customizability, performance, and seamless integration within the broader Web3 ecosystem in mind.
  • Manta Network: Manta Network leverages advanced cryptographic techniques, specifically zero-knowledge proofs (ZKPs), to ensure confidential transactions while maintaining transparency and security.
  • Aether Games: Aether Games is utilizing a modular blockchain approach to build fantasy and card-based games.
  • Qubetics: Qubetics is a modular blockchain project with potentially high ROI, offering a comprehensive infrastructure for multi-chain application interaction.

These projects show us that modular blockchains can be used in highly exploratory ways, from gaming to DeFi to privacy-focused solutions. As encouraging as these projects are, though, it’s worth noting that they’re still only in the early stages of development.

Risks and Rewards of Investing in Early-Stage Ventures

There are big profits to be made by investing in early-stage modular blockchain ventures, but significant risk lurks around the corner. Knowledge of these risks and potential rewards is essential to creating successful and informed investment strategies.

By removing third parties, blockchain technology protects and accelerates payments. Such efficiency presents unique opportunities and rewards to investors willing to bet on early-stage modular blockchain projects. New angles and creative solutions can be found far too often, uniting parties like Malcolm Silberman quoted above, “We are bringing the parties together.”

Several risks must be considered. Data privacy risks are a legitimate concern. As blockchain technology is still developing and maturing, it may not adequately protect sensitive data. Smart contract risks Smart contracts can encode very complex arrangements, and encode complexity itself may lead to unforeseen consequences. Same standard risks as current business processes, but with twists that organizations need to consider and build controls around.

As with any modular blockchain investment, it’s essential to do your own research first. To start with, read reports from credible major organizations, such as Galaxy Research. They’ve released a series of research publications exploring Layer 2 ecosystems, zkEVMs, and the current state of decentralization for rollups like Arbitrum and Optimism. These reports can provide valuable insights into the technical aspects, market potential, and risks associated with different modular blockchain projects. Investors should carefully evaluate the team behind the project, the technology being used, and the potential market for the solution.

Modular blockchains mark a hopeful advancement in the progression of blockchain technologies, promising new strides in scalability, customization and interoperability. The space is quite nascent. There are a number of innovative projects that are coming online and testing the limits of what’s possible. First, investors must understand the risks associated with early-stage startups. Investors should always do their own research before making any kind of investment decision. The future of Web3 — by almost all accounts — is going to be modular. In order to most effectively adapt to this new cryptoverse, one must first grasp this paradigm shift.