Web3 is currently significantly harder to use than Web2 for both developers and consumers. To bridge this gap, we need better core infrastructure. Deploying a decentralized application (dApp) should be as easy as deploying to AWS for developers, and using dApps should be as intuitive, if not more so, than Web2 apps. In this piece we explore the ways underlying blockchain infrastructure can evolve to this point, the various techniques being employed to scale blockchains, what the ultimate outcome looks like, and why modular and monolithic approaches might not be so different when played out to their extremes.

Understanding Modular vs. Monolithic Systems

Crypto communities frequently form distinct tribes, as members align themselves with a specific blockchain (Bitcoin, Ethereum, Solana, etc.) and take sides in debates over modular vs. monolithic architectures.

The modular vs. monolithic ideology has been debated at various layers of the technology stack since long before the concept of modular chains was introduced to crypto. This debate has renewed vigor with the advent of various rollups and new data availability layers like Celestia. Other writings cover the tradeoffs between these systems in more depth. This paper will assume prior knowledge and we’ll focus specifically on how these chains scale and what the future of modularity holds.

To understand the future of modularity, it is important to recognize the differences between monolithic and modular architectures, the wide-ranging spectrum of modular design choices, and the tradeoffs that come with each one.

At a high level, blockchains are constructed with four core layers:

Execution: the process of blockchain nodes processing transactions to transition to the next state.
Settlement: Provides finality or irreversibility, which guarantees no one can alter the recorded transactions.
Consensus: The collaboration of nodes to reach a decision on the validity of transactions and their ordering.
Data Availability (DA): Propagating transaction data and making it available so that other nodes can recreate the state.

Monolithic chains handle all these functions, while modular blockchains decouple these functions over multiple specialized chains. We like to think of modular chains as customizable cars. You can replace or upgrade certain parts of a car like the engine for increased power or tires for better grip. Similarly, components in modular blockchains can be replaced or upgraded for better performance, such as using a less expensive DA layer or parallelized execution layer.

Why Modularity

If monolithic chains are supposedly faster, simpler, and less expensive, why would a developer ever opt to use a modular architecture? For starters, building a modular system gives individuals the ability to pick and choose tech stacks they want to build with. Developers can put together things that might not otherwise be possible, while taking advantage of existing user bases and liquidity bases. Despite the recent narrative against Ethereum from the Solana community, Ethereum is still where the most capital, innovation, and talent live. It is battle tested, as it has survived two full crypto cycles. It has embraced the open-source ethos, and most attack vectors are now understood. It also has mature developer tooling. Building on the modular stack allows developers to leverage the security of mature consensus and settlement layers, while enabling developers to innovate on these layers if they don’t like the way something is done.

As a developer, there are few reasons to build an L1 from scratch. The main upside is that you have full ownership of blockspace and get to extract maximal value. But when finding product market fit, time and energy should be spent on experimenting first and extracting value second. The primary draw to building on a modular stack is that it can foster a breeding ground for innovation because of how easy it is to get started and experiment with different layers of the stack and realize how different permutations of modular components can best fit each applications needs.

Modularity offers the advantage of boosting throughput and security without sacrificing decentralization, thus effectively addressing the blockchain scaling trilemma. In contrast, fast monolithic chains face a trade-off where increasing throughput is directly correlated with an increase in the cost of validator hardware. In a modular system, techniques like Data Availability Sampling (DAS) can be used to inexpensively verify the chain.

Spectrum of modularity and tradeoffs

Although the ability to selectively pick the best blockchain design for your possible use case is compelling, it can be overwhelming for developers to stay on top of new innovations at the various layers of the modular stack. Just last year developers had only a few options - deploy on Ethereum or a competing L1, deploy on a roll up, or build a Cosmos app-chain. Today, developers have tools at their disposal such as Rollup-as-a-Service (RaaS) providers and are faced with decisions of using things like alternate DA and settlement layers, Rollaps, and parallel execution layers. It’s a difficult but monumental task to understand the trade-offs that come with each design decision.

Source: https://twitter.com/ThorHartvigsen/status/1625152360816447489/photo/1

The above graphic portrays some of the popular modular permutations being built today. How should developers decide which architecture to go with based on what they’re trying to achieve? We believe the best way to think about it is to consider blockspace ownership as a spectrum. A Cosmos app-chain will control all of their blockspace whereas a dApp built on Ethereum mainnet will have little control over blockspace. This is a wide-ranging spectrum with many flavors in between these extremes. Generally, the larger an application gets, the larger the incentives are to own all aspects of the stack and control all the economics.

We group the various areas dApps can deploy into 4 buckets:

Sovereign-Modular
Purpose-Optimized Modular
Shared-Modular and
Monolithic

Sovereign-Modular

This category encompasses things like app-specific rollups, Cosmos app-chains, and Rollapps. These architectures emphasize the need for complete autonomy and block space ownership. As a dApp developer, the benefits of full sovereignty include being able to reallocate resources if something bad happens, undo a hack, or just upgrade the VM to better support your application. Strong considerations need to be made before taking this approach as you are assuming that there will be enough interest in your app for users to bridge liquidity to a new chain.

CMT Digital portfolio company DyDx is one such successful case - they’ve benefitted from the ability to customize exactly how the blockchain works and the jobs that validators perform in order to offer things like no trading gas fees and 2,000 TPS. However, there are tradeoffs that come with the app-chain route. DyDx spends significant intellectual energy on figuring out low level things like chain and RPC infrastructure, whereas another perpetual futures DEX like Drift, which is built entirely on Solana, doesn’t have to worry about these things and can focus entirely on improving the UX and the application.

Additional advantages of deploying an app chain are that developers can capture MEV back to their own tokens and charge a premium on transaction fees. The biggest advantage here lies within the cost structure. When you deploy on a shared chain, you are effectively paying ‘rent’ to that chain. In contrast, operating your own chain means you have fixed operating expenses where these costs are covered by the transactions on your chain, and you can charge a premium on top. This makes app-specific chains ‘homeowners’, rather than rent-seekers.

Purpose-Optimized Modular

These rollups and chains are purpose built for specific transaction types and execution models. While offering less autonomy than the Sovereign-modular bucket, they provide an environment where applications with analogous functionalities can operate and leverage shared advancements.

A Purpose-Optimized Modular chain could utilize an execution layer that supports parallelization and high throughput, creating an ideal environment for various trading platforms to deploy on. Eclipse FND is building an L2 that settles to Ethereum but executes transactions on Solana’s SVM. The advantage here is that apps on the SVM can take advantage of all the existing liquidity in the Ethereum ecosystem. Another Purpose-Optimized rollup could dip below the EVM and add new lower-level primitives such as secp256r1 curve verification, enabling wallets to sign transactions with passkeys. Companies like Zama and Aztec are introducing FHE enabled opcodes and bringing new ZK innovations into their execution layers, enabling private blockchain transactions. Not only do these optimizations facilitate a high-performance ecosystem for each individual app, but they also foster a community where similar apps can pool resources to work on the underlying infrastructure.

In a Purpose-Optimized Modular setup, apps retain a considerable amount of control over block space, allowing them to customize their operations to a certain degree without managing the full stack themselves. This leads to a consortium of apps that benefit from the network effects of shared innovations and the cost efficiencies of shared security models.

This approach strikes a balance between the benefits of specialization and the efficiencies of shared infrastructure, appealing to developers who wish to maintain some autonomy while capitalizing on the collective strengths of like-minded applications.

Shared-Modular

In the middle of the spectrum are general purpose rollups such as Arbitrum and Optimism, where many different types of apps share state. Typically, these are smart contract rollups that use Ethereum or an alternative DA layer like Celestia for settlement, consensus, and DA, but operate an alternate execution layer designed to accommodate a diverse array of applications.

The shared state and existing liquidity of these rollups present attractive reasons for applications to deploy on a Shared-modular architecture. General purpose applications such as new DEXs or lending protocols will many times look to deploy on the L2 with the most ETH bridged over, as existing users within an ecosystem are more likely to try something new out as opposed to bridge to an entirely new chain to use an app.

Yet, the Shared-Modular structure isn’t without its trade-offs. Applications built on these rollups are subject to the overarching governance and fee structures of the shared L2, which may not align with the individual app’s goals. Additionally, the shared state means that one application clogging the network can impact the performance of others, contributing to the noisy neighbor problem.

Monolithic

These are traditional L1 blockchains such as Bitcoin, Solana, and Ethereum where consensus, execution, data availability, and settlement are tightly integrated and managed by a single layer. These blockchains are ideal for foundational applications that benefit from universal accessibility and composability. Projects like SAFE, Ethereum Name Service (ENS), and Uniswap, which provide services or infrastructure utilized by a wide range of applications and users, find a natural fit on these platforms.

The majority of applications today are deployed on monolithic or shared-modular architectures, but we envision a future where modular components become more scalable and performant, and more apps emerge on purpose-optimized and self-sovereign modular architectures.

The Future of Modular Blockchains

There are differing views on the future of modularity in blockchains. Some anticipate hundreds to thousands of rollups emerging in the near future, while others argue most of the execution can occur on few high-performance rollups. A world where thousands of rollups exist is certainly viable thanks to RaaS platforms such as Caldera and Conduit enabling the deployment of a roll up in a few clicks, as shown below:

Source: https://app.conduit.xyz/create-network

However, it’s uncertain whether there would be significant utilization of thousands of app-specific or general-purpose rollups, especially if most applications can operate on a handful of high-performance chains without scaling concerns. If rollups continue on the same standard - single threaded execution using Ethereum or Celestia for settlement and DA, then by default, we likely will see a future with thousands of rollups. However, these chains share the EVM’s limitations of single-threaded processing and state growth issues.

A likely future we envision is one where the issues of fragmented liquidity and user experience in a landscape crowded with thousands of rollups become apparent. Many teams focus on EVM compatibility, but this approach may be limited. To effectively overcome the EVM’s limitations, significant innovations are needed in execution and at the VM level. Such advancements could result in the consolidation of the rollup landscape, favoring a few high-performance environments capable of handling thousands of TPS.

Ultimately, experimentation is beneficial. As we transition from low to high throughput blockchains and tackle scaling issues like state bloat, engineers are enabled to build more interesting applications. This reflects the notion that modular and monolithic architectures are simply two different paths to get to this same end goal. The rollups and teams building on top of Ethereum can learn a lot from monoliths like Solana, and vice versa. For instance, Eclipse FND is building a high-performance execution rollup that settles back to Ethereum, allowing Ethereum liquidity to take advantage of a high TPS VM. Neon EVM offers a platform for EVM apps to deploy on Solana, utilizing its liquidity and throughput. Solana itself could borrow research innovations such as Data Availability Sampling (DAS) for more efficient verification of the chain. At the end of the day there is room for both modular and monolithic chains to coexist, leading to a future where core infrastructure is robust enough for developers to build top-tier applications.

Source: https://twitter.com/jon_charb/status/1714119362574000639/photo/1

While many approaches exist for constructing and scaling blockchain architectures, be they monolithic or modular, it’s clear that different chains excel for different use cases. The future is multi-chain, underscoring the need for simplifying cross-chain communication and interaction for both developers and users. Several talented teams are working on solving these problems with NEAR being one at the forefront. Through NEAR’s Blockchain Operating System (BOS) and Account Aggregation, users have an interface where they can control every account on any chain through a single unified account, enabling things like cross-rollup transactions to be executed in seconds.

Source: https://twitter.com/proximityfi/status/1724834844407181694/photo/1

Challenges and Limitations

The future is undeniably multi-chain, and modular chains will proliferate and play an increasing role in the ecosystem. While modular chains have the potential to solve problems for developers and users, there are several limitations. The trickiest pieces to solve are the fragmented UX and liquidity, and state management. Things like NEAR’s Account Aggregation can potentially solve these issues, but it remains to be rolled out and battle-tested.

Another limitation is that even after amping up performance and throughput on Ethereum rollups, scalability on the underlying L1 remains an issue. The EVM is still going to process all the bundled rollup transactions in a single-threaded manner. Chains like Avalanche and Arbitrum have seen fee spikes recently with inscriptions congesting the networks, showcasing that the first principles solution to this problem is to localize fee markets - something no rollup has implemented yet.

Source: https://blog.labeleven.dev/why-solana

Another issue with a more modular future lies in the inherent security risks of these systems. Unlike monolithic chains, which maintain validators on a single network and thereby offer fewer vulnerabilities, modular designs introduce more potential weak points for hackers. The history of security breaches in bridging illustrate these dangers.

The Path Forward

The evolution of blockchain technology is steering us towards a multi-chain future where both monolithic and modular architectures have pivotal roles to play. While modular chains offer flexibility and scalability, addressing key challenges like fragmented liquidity will be paramount. Monolithic chains provide robust security and streamline operations but must evolve to handle increasing throughput demands. Overcoming the differences between these systems holds the promise of a more integrated and efficient blockchain ecosystem. As teams continue to experiment and learn from both architectures, the goal remains clear: to build core infrastructure that is not only high-performing and secure but also accessible and user-friendly for both users and developers.

For informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. The views expressed herein are those of the author as of the time of writing and may not necessarily represent the views of CMT Digital and its affiliates. Certain information contained in the piece has been obtained from third-party sources, including from portfolio companies of CMT Digital. While taken from sources believed to be reliable, CMT Digital has not independently verified such information.

References to any securities, digital assets, tokens, and/or cryptocurrencies are for illustrative purposes only and do not constitute a recommendation to invest in any such instrument nor do such references constitute an offer to provide investment advisory services. This content is not intended for investors or prospective investors and should not be relied upon when making any investment decision, including a decision to invest in any vehicles managed by CMT Digital. Such offerings are only made via formal offering documents.

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Understanding the Future of Modular and Monolithic Blockchains