Section 1.1: The Dilemma of Crypto Innovation

The primary challenge in crypto innovation lies in the fact that what truly matters often lacks the allure of creating yet another inconsequential coin that can quickly inflate in value through dubious schemes. These are often nothing more than glorified get-rich-quick schemes for the founders, not the investors.

Consequently, if developers are primarily motivated by profit, how do we encourage them to focus on building valuable solutions?

Before addressing that, we must first ask: where is innovation genuinely needed? What is our true purpose?

When Bitcoin was launched in 2009, it aimed to facilitate peer-to-peer transactions using a novel cryptocurrency concept. It remains largely application-specific, primarily serving as a medium for transferring value.

However, as time progressed, the versatility of blockchains became apparent. Ethereum was introduced as a decentralized platform capable of running any application on a blockchain, marking the dawn of general-purpose blockchains.

In simple terms, Ethereum can execute code, which paved the way for a vibrant ecosystem of applications and trends we now recognize, including DeFi and NFTs.

But if developing your own blockchain and currency can be more lucrative, why opt to build your application on Ethereum instead? The answer lies in security.

Section 1.2: The Importance of Security

The main appeal of blockchain technology is its inherent security. Distributed systems lack a single point of failure and are challenging to compromise, thanks to the consensus mechanism.

This means that the more distributed a network is, the more secure it becomes. Established blockchains like Bitcoin and Ethereum, being larger and more widely distributed, offer superior security compared to their newer counterparts.

Thus, when you deploy your application on Ethereum, it benefits from the security that Ethereum provides. Conversely, launching a new blockchain carries the risk of vulnerability if adequate resources are allocated to compromise it.

Therefore, leveraging a well-established blockchain like Ethereum for your application is a logical choice.

However, this decision isn't without its challenges.

Section 1.3: The Trade-offs of Established Blockchains

Using Ethereum necessitates adherence to its constraints, which can limit scalability and impose specific rules. For instance, just as you cannot run an iOS application on an Android device, certain innovative consensus mechanisms and data storage methods may be restricted.

These limitations can prompt some projects to seek alternative blockchains that better align with their needs, or even to create their own, accepting the associated security risks.

For example, the blockchain gaming sector demands high performance for online play. Projects in this space often find themselves competing for limited blockspace on Ethereum, leading to increased fees and longer validation times during periods of high demand.

Thus, we face a dilemma: how can these applications leverage Ethereum's security while enjoying the flexibility and performance necessary for more demanding projects?

Section 2.1: The Conflict Between Decentralization and Performance

Increasing block size to accommodate more transactions per second complicates the physical infrastructure needed to maintain the network, thereby fostering centralization as only a few entities can afford such resources.

In essence, blockchains cannot achieve both speed and distribution simultaneously. Innovations that have emerged over the years, promising improved performance, often did so at the cost of centralizing their networks, undermining their original purpose.

So, how can we design a blockchain architecture that balances decentralization with scalability? The answer is modularity.

Section 2.2: Embracing Modularity for Blockchain Innovation

Ironically, one of the most intricate technologies, blockchain, essentially performs a few fundamental tasks: ordering transactions and validating them through consensus.

The process is straightforward:

1. Bob sends a transaction to Alice.
2. The transaction enters a pool of pending transactions.
3. Nodes compile these pending transactions into a block, with one node proposing the block for introduction.
4. Other nodes download the complete block and validate transactions against their transaction history.
5. If consensus is reached, the block is accepted and added to the chain.

As evidenced by Bitcoin and Ethereum, base layers must remain simple to ensure decentralization. However, there's no rule stating that these base layers must execute all functions simultaneously.

What if these functions were divided among different systems? The outcome could be transformative.

The principle of modularity involves separating consensus, data availability (DA), and execution into distinct layers, enabling high performance while maintaining decentralization.

By decoupling these components, each can expand without the limitations imposed by the others. This, in my view, represents the undeniable future of blockchain technology.

Section 2.3: Key Components of the Modular Architecture

This advanced architecture comprises several essential elements:

• A consensus layer, incorporating the consensus algorithm that nodes use to validate transactions and establish the new state of the chain.
• A data availability layer, ensuring that nodes possess complete transaction histories to verify transaction validity.
• An execution layer capable of running code and processing complex transactions, with zero-knowledge rollups emerging as a promising solution.

The remarkable aspect of this modular architecture is that it allows for high security without apparent trade-offs, as transactions still settle in the base layer, inheriting its security. Additionally, the performance is enhanced by executing transactions outside the base layer, while maintaining decentralization through lighter node requirements.

Section 2.4: Examples of Projects Leading the Way

Many researchers and developers are already pursuing this vision. Notable examples include:

• BitDAO: One of the largest DAOs globally, has collaborated with EigenLayer to develop a system running on Ethereum called Mantle, which utilizes BitDAO's execution layer, likely a zk-rollup based on zkSync’s technology, alongside EigenLayer’s data availability component.
• Celestia: A new blockchain that combines data availability and consensus within its base layer while providing an abstraction layer for various virtual machines to operate on top of it. However, Celestia requires a robust set of validator nodes for consensus, making strong adoption at the base layer crucial for security.

Note: The mentioned projects are not investment recommendations by the author. Both are relatively new, and their tokenomics and funding structures are not fully established, making investment evaluations premature unless you're a significant venture capital entity, which I am not. Always conduct your research.

A Final Thought

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