Author: Alex Bergeron, Bitcoin Magazine; Translated by: Tao Zhu, Golden Finance
What exactly is modularity?
Modularity is the result of an interesting experiment on Ethereum, a response to the blockchain’s poor scalability. To address this bottleneck, developers took a radical approach by auctioning off the main chain’s core functions to… other blockchains.
Centered around Rollup technology, this modular transformation completely redefined the way products and services are built on Ethereum. Separating each element of the stack allows for different architectures to be designed based on their use cases. Understandably, this has led to a proliferation of… blockchains.
I kid you not. Everybody is making a fortune peddling blockchain.
While each new consensus protocol offers novel and interesting scaling opportunities, they also bring up a weird coordination problem. How can we make the economy efficient if users are scattered across different networks? How can we get everyone in the distribution in sync? Maybe another... blockchain?
This fragmentation of the ecosystem has some obvious consequences. First, users are isolated and trapped between intermediaries. While Rollups have compelling trust-minimizing properties, the inefficiencies created by transfers in and out of these systems impose unreasonable costs on users. It also exposes them to riskier options like bridges and centralized services.
For developers, the lack of cross-platform interoperability creates friction and fosters an environment of competition rather than collaboration. A new protocol is created every other day for new and old teams to compete with another copy of the same application. In many cases, teams choose to “bet on themselves” and spin off into their own ecosystem (i.e. blockchain). It is crucial to emphasize the appeal of this model, which allows for various components to be customized and optimized for each application. This flexible architecture allows anyone to contribute their own unique framework and inspire new designs. The possibilities are endless!
Unfortunately, these incentives lead to a fragmentation of network effects. If nothing is built to work together, users will funnel into just a few competing networks. The result is a concentration of economic activity into fewer permissioned systems.
This modular model has led people away from the goal, and it shouldn’t. Using different interfaces to interact with the consensus protocol is a perfectly valid idea. However, Ethereum’s strategy has proven to be problematic; it treats interoperability as an optional feature rather than a foundational design principle. As long as Ethereum continues to pursue scalability by adding more blockchains, the debate will continue, providing ample opportunities for competitors to exploit these differences and encourage discord. Divide and conquer.
Bitcoin Opportunities
On Bitcoin, a different architecture is emerging that leans toward a fundamentally different design. Using Lightning as an interoperability backbone, developers are slowly moving toward a technology stack that’s closer to Bitcoin’s peer-to-peer model.
Rather than trying to replicate the global shared state, protocols like Cashu or Fedimint are optimizing local and permissionless interactions. Financial services can now be deployed in different economic centers and stay connected via the Lightning Network.
Liquidity providers, Atomic Bridge, and the e-Cash Mint. A novel financial network, all sharing the same settlement layer.
Nostr has emerged to provide the social abstraction that ties all of this together. It is a social network based on similar principles to Bitcoin, which provides a simple set of rules designed to maximize interoperability. By avoiding being prescriptive about the functions it implements, Nostr is sparking a Cambrian explosion of open innovation.
Today, different projects are beginning to explore how to facilitate transactions on the Bitcoin network by making Nostr a native component of the Bitcoin user experience. The public key infrastructure underlying the protocol is a natural match for wallets and other payment applications, allowing them to communicate with each other and exchange messages securely. This communication layer can connect users with each other and with various services offered over the network. Standards such as Nostr Wallet Connect create new opportunities for Bitcoin applications to interact with Nostr's growing ecosystem.
case study
Projects like Mutiny perfectly embody the difference in Bitcoin's modular vision. Users can simultaneously connect to services like Nostr relays, Fedimint Alliance, and Lightning Service Providers (LSPs). Each of these services allows access to an increasing number of features and applications. Using Nostr as a discovery service, we are able to leverage our social network to identify and natively access peer-approved applications and services. This network of trust introduces an interesting alternative to so-called trustless systems. Participants can begin to rely on market incentives to participate in more efficient transactions that are not hindered by the trade-offs required by more decentralized systems.
Eventually, a marketplace will emerge for liquidity providers, e-cash minters, lenders, and coinjoin coordinators to advertise their services through Nostr. The decentralized order book project Civkit can be seamlessly integrated into Mutiny and allow users to participate in peer-to-peer trading. Each integration is designed around permissionless participation so that users have full control over their interactions.
Platform and Protocol
Bitcoin’s modularity story is not without risk. Fundamentals such as LSPs involve significant capital requirements, which will create economies of scale among competing providers. Regulatory issues and operator fraud could hamper the growth of electronic cash mints. Nostr relays have already shown a tendency toward centralization, and it is unclear how the network topology will play out.
The success of this approach depends on market optionality, and the barriers to entry into these businesses must remain low. To this end, a number of different initiatives are being taken. For example, several Lightning companies are currently working together to develop a specification that would allow any market participant to implement their own LSP.
It’s probably too early to predict how these architectures and protocols will evolve. As the two worlds continue to collide, Rollups will likely find their place in the Bitcoin ecosystem. Application-specific designs, such as exchange Rollups or zkCoins, don’t require global state and may be interoperable with Lightning.
The tension between the two approaches is somewhat reminiscent of the early days of the internet. Commercial interests may favor platforms that allow them to capture part of the network effect in order to monetize it. More open and permissionless protocols may take longer to really take off. The internet provides a cautionary tale in terms of services and applications being consolidated into gated walled gardens. Hopefully, the current path of Bitcoin development will address the issues going forward — prioritizing interoperability and permissionless access over financial silos.
