Modularity from Polkadot to Celestia

Why Do We Need Modularity?

According to the scalability trilemma, a blockchain cannot be scalable, secure, and decentralized at the same time; only a combination of two out of the three is possible at the same time. Modularity is intended to solve this trilemma and allow any blockchain to be simultaneously secure, decentralized, and scalable. The modular approach suggests that the core functions of blockchains (execution, settlement, data availability, and consensus) should be separated into different layers, allowing each to be adjusted independently without sacrificing the security of the others. 

What Makes a Chain Modular?

Most blockchains you know are implementing the modular approach at some level, including Ethereum and even Bitcoin. Not long ago, we published a brief article about modular blockchains, in which we looked at their architecture. But it covered a limited idea of modularity. So, let's expand the idea further.

As we mentioned earlier, according to the modular thesis, any blockchain consists of four layers:

1. Consensus Layer: where nodes agree on the blockchain state.

2. Execution Layer: where calculations and processing of transactions take place.

3. Data Availability Layer: where the data is stored and ordered.

4. Settlement Layer: where transactions are finalized, and their irreversibility is guaranteed.

Monolithic blockchains, such as Solana, accomplish all four functions within a single network.

Previously, the modular approach had a different form. The pioneers were Polkadot and Cosmos, the so-called Layer 0s. They were building the lowest layers of the blockchain on which higher layers (L1, L2, L3) could be launched, forming a tree-like structure. That is, modularity was categorized by other layers, which are more like levels. Cosmos and its Hubs is still around, succeeding way more than Polkadot with its Parachains. Now the majority of new-type modular projects are launched on Cosmos, while Polkadot made a pivot towards core rental.

Celestia has brought a new perspective to the modular approach and shifted the paradigm in some sense. Instead of following the path of increasing architectural complexity by adding new layers on top of it, Celestia has led the way in simplifying the architecture by reducing the core functions of its blockchain. By design, Celestia has only consensus and data availability layers but no execution or settlement layers. In other words, Celestia only offers to store and order the block data, while all smart contracts should be settled and executed somewhere else. 

So, while Polkadot and Cosmos chose the path of creating the entire modular infrastructure on top of themselves from scratch, Celestia just built a single universal module that every project can use.

Landscape of Modular Blockchains

While most blockchains have followed a modular approach in one form or another, they vary a lot and are hard to classify. Probably the most obvious way would be to divide the main projects based on four-layer orientation. Some projects focus on one layer-niche, and some expand on multiple.

Consensus Layer

Consensus ensures that all nodes in the network agree on the network's current state and the legitimacy of transactions. Generally, any blockchain with its own consensus can be used as a consensus layer for other projects, with Bitcoin (Nakamoto consensus) being the desired apex. Popular ones are: Ethereum’s Gasper, Cosmos’s Tendermint, and Celestia.

Data Availability Layer

Data availability (DA) layer's job is to make sure that the information from execution layers is put in order and available on the blockchain. It doesn't have to check if the transactions are correct, but it must ensure that the block creators have correctly recorded and shared all the block data for anyone to access.

Ethereum. Ethereum, the world's largest general-purpose blockchain, is transitioning to become an efficient data DA layer through updates like proto-danksharding (a recent Dencun upgrade) and danksharding. These upgrades introduce dedicated block space and new rules for verifying data from execution layers, allowing Ethereum to handle data differently from standard transactions. Proto-danksharding is an early phase allowing up to 1 MB of data verification from these layers, while full danksharding will enable up to 32 MB. This evolution aims to shift the bulk of activities to Layer-2 rollups, positioning Ethereum primarily for data availability and consensus purposes.

• Celestia. Celestia is the first-of-its kind data availability-focused layer. Currently, it remains the main apex. 
• EigenDA by EigenLayer. EigenDA is a data availability layer by EigenLabs, built on top of EigenLayer (a restaking protocol on Ethereum), live on the Goerli testnet, and launching on the mainnet in early Q2 2024. 
• Near. Originally launched as another "Ethereum killer", Near has shifted its development vector during the bear market. Now Near competes for a niche not with Solana or Avalanche but rather with Celestia, offering DA provider services. However, unlike Celestia, Near continues to be a smart contract platform as well. 
• Avail. Avail is a new DA layer that allows modular execution layers to scale and interoperate in a trust-minimized way. Currently in a testnet phase, but many projects have announced partnerships with Avail. The main competitor of Celestia.

Execution Layer

Rollup is the main technology that focuses on transactions and smart contract execution. Since Ethereum is the largest smart contract blockchain, rollups are mainly focused on scaling Ethereum's execution environment. Rollups can be divided into general-purpose and application-specific categories.

General-purpose rollups: Arbitrum, Optimism, Base, Blast, Mode, Metis, Mantle, Manta, zkSync, Linea, Starknet, Scroll, Eclipse, etc. 

Application-specific rollups: dYdX, Aevo, Immutable, Xai, GRVT, etc.

Rollups can be launched at any level relative to the mother blockchain. Meaning Arbitrum for, and Xai for Arbitrum, etc. Application-specific rollups built on top of general-purpose execution rollups, also called Layer 3 (L3), naturally compete with decentralized applications running directly on smart contracts. L3s have greater flexibility and scalability compared to common dApps. 

We have a standalone article about Bitcoin rollup projects and a few articles about application-specific rollups. 

Settlement Layer

Settlement-focused layers aim to provide an environment for running application-specific execution rollups, offering Rollup-as-a-Service. They process transactions from those rollups and post data to the data availability layers, acting as a bridge between them. Despite the focus on new projects, Polkadot and Cosmos are essentially nothing more than settlement layers.

• AltLayer. AltLayer is a protocol for launching restaked rollups with various stacks, such as OP Stack, Arbitrum Orbit, ZKStack, Polygon CDK, etc.
• Ankr. Ankr is a protocol that offers complete rollup and sidechain creation.
• Caldera. Caldera is an Ethereum-based chain for launching Caldera Chains, custom-built blockchains on OP Stack, Arbitrum Orbit, and Polygon CDK. Uses Ethereum as the consensus layer and Celestia as the data availability layer.
• Conduit. Conduit is a protocol that offers launching optimistic rollups using the OP Stack.
• Dymension. Dymension is a Cosmos-based chain for building RollApps, constructor-like rollups with shared security, communication, interchangeability, oracles, liquidity, etc. 
• Initia. Initia is a Cosmos-based chain for building Mininitia, interlinked rollups with shared security, communication, interchangeability, instant bridges, oracles, liquidity, and built-in native USDC. 
• Fuel. Fuel is an operating system for launching Ethereum rollups by Celestia co-founder. Originally, Fuel was the first optimistic rollup on the Ethereum mainnet, deployed at the end of 2020.
• Gelato. Gelato is a protocol that offers fully-serviced rollups natively integrated with oracles, bridges, data indexers, and Account Abstraction.
• Saga. Saga is a Cosmos-based chain for building app-specific chains with an easy-to-use toolkit.
• Sei. Sei is a Cosmos-based chain for building trading-oriented app-chains.
• Layer N. Layer N is a protocol for launching custom interconnected rollups.

How to Catch Modular Hype Train?

Most of the projects mentioned have either recently launched mainnets or are still in testnets. Depending on what stage a project is at, one can either participate in the testnet or start staking the related token. We have a comprehensive article about staking. 

Since new modular projects are just pieces of a construction kit that cannot exist standalone in a vacuum, their main goal at the first stages is to connect with as many other parts as possible. Thus, one can expect a lot of incentives for shared users. Thus, those who stake $TIA will probably get allocations in most projects that use Celestia as a DA layer. And those who stake $DYM will probably get allocations in most projects that use Dymension as the settlement layer. And so on… DYOR, anon.

Output

Polkadot and Cosmos initially led the way in modular blockchain design, establishing the infrastructure for others to build upon. Cosmos, with its hubs, outperformed Polkadot, leading to more projects on its platform, while Polkadot was left behind and eventually shifted focus to core rental. Launched on Cosmos, Celestia took a different route, simplifying the design by focusing on consensus and data availability only, excluding execution and settlement layers. This approach has shifted the paradigm and positioned Celestia as the standard within the industry.

The new blockchain modularity paradigm has led to a major shift in how blockchains, including Ethereum, address the blockchain trilemma and achieve scalability. More development is needed to fully unlock and assess modularity's benefits, but the increasing agreement among crypto developers on its value highlights its potential to significantly change blockchain technology in the coming years. The solutions that will dominate in the future are still at the beginning of their journey. Many have yet to launch mainnet, and there are plenty of opportunities to be early.