What is modularity anyway?
Modularity is the result of a curious experiment conducted on Ethereum as a reaction to the poor scalability properties of blockchains. To solve this bottleneck, developers have taken the radical approach of auctioning off the core functions of the main chain to… other blockchains.
Centered on rollup technology, this modular transformation has completely redefined how products and services are built on Ethereum. Splitting each element of the stack allows you to design different architectures based on their use cases. Understandably this has led to a proliferation of… blockchains.
I am not joking. Everyone is getting incredibly rich selling blockchain, once again.
While each new consensus protocol offers new and interesting scalability opportunities, it also introduces a strange coordination problem. If users are dispersed across different networks, how can the economy be made more efficient? How can we synchronize everyone in this distribution? Maybe another… blockchain?
There are turtles all the way.
This ecosystem fragmentation has had some obvious consequences. First, users are isolated and trapped between intermediaries. While rollups have compelling trust-minimizing properties, the inefficiency created by moving them in and out of these systems creates unreasonable costs for users. It also exposes them to riskier options such as bridges and centralized services.
For developers, the lack of interoperability between platforms creates friction and fosters a competitive rather than collaborative environment. Every other day a new protocol is created to allow new and existing teams to compete with yet another copy of the same applications. In many cases, teams choose to “bet on themselves,” plugging into their own ecosystem (read: blockchain). It is essential to highlight the appeal of this model, which allows the customization and optimization of different components for each application. This flexible architecture allows anyone to contribute their own unique frameworks and inspire new projects. The possibilities are endless!
Unfortunately, these incentives have led to the fragmentation of the network effect. If nothing that is built scales well, users will consolidate to only a handful of competing networks. As a result, economic activity is concentrated in fewer licensed systems.
This type of modularity took people further from the goal when it shouldn’t have. Using different interfaces to interact with the consensus protocol is a perfectly valid idea. However, Ethereum’s strategy proves problematic; considers interoperability more as an optional feature than a fundamental design principle. As long as Ethereum continues to pursue scalability by multiplying blockchains, the debate will persist, providing ample opportunity for competitors to exploit these divides and encourage discord. Divide and conquer.
The Bitcoin Opportunity
A different architecture is emerging on Bitcoin that favors a fundamentally different design. Using Lightning as the interoperability backbone, developers are slowly coalescing towards a technology stack much closer to Bitcoin’s peer-to-peer model.
Rather than attempting to replicate global shared states, protocols like Cashu or Fedimint are optimizing local, permissionless interactions. Financial services can now be distributed across multiple economic hubs and remain connected via the Lightning Network.
Liquidity providers, atomic bridges and ecash coins. A new financial network that all shares the same level of regulation.
Nostr’s arrival provides the social abstraction that ties everything together. A social network based on similar principles to Bitcoin, it provides a simple set of rules designed to maximize interoperability. By avoiding being prescriptive about the features it enables, Nostr is unleashing a Cambrian explosion of open innovation.
Today, several projects are starting to explore ways to facilitate Bitcoin trading by making Nostr a native component of the Bitcoin user experience. The public key infrastructure underlying the protocol is a natural fit for wallets and other payment applications, allowing them to communicate with each other and exchange messages securely. This level of communication can connect users with others with various services made available through the network. Standards like Nostr Wallet Connect are creating new opportunities for Bitcoin applications to interface with Nostr’s growing ecosystem.
A case study
Projects like Mutiny perfectly embody the differences in this modular vision of Bitcoin. Users can simultaneously connect to services such as Nostr Relays, Fedimint federations, and Lightning Service Providers (LSPs). Each of these grants access to a growing number of features and applications. By using Nostr as a discovery service, we have the power to leverage our social network to natively identify and access applications and services approved by our peers. This trust network introduces an interesting alternative to so-called trustless systems. Participants can begin to rely on market incentives to engage in more efficient exchanges that are not hampered by the trade-offs required by more decentralized systems.
Eventually, markets will emerge where liquidity providers, ecash mint, lenders and coinjoin coordinators can advertise their services through Nostr. Decentralized order book projects Civkit could integrate seamlessly with Mutiny and allow users to engage in peer-to-peer operations. Each integration is designed around permissionless participation so users can maintain full sovereignty over their interactions.
Platforms and protocols
Bitcoin’s modular history is not without risk. Key pieces of the puzzle, such as LSPs, involve significant capital requirements that will create economies of scale among competing providers. The growth of ecash coins could be hampered by regulatory concerns and fraud by operators. Nostr relays have already shown tendencies towards centralization and it is unclear how the network topology will develop.
The success of this approach relies on the optionality of the market and it is essential that barriers to entry into these businesses remain low. To this end, various efforts are being made. For example, several Lightning companies are currently collaborating on a specification that would allow any market player to implement their own LSP.
It is probably too early to predict how these architectures and protocols will evolve. As both worlds continue to collide, rollups are likely to find their place within the Bitcoin ecosystem. Application-specific projects like rollup exchanges or zkCoins do not require global state and could perhaps be made interoperable with Lightning.
The tension between the two methods is somewhat reminiscent of the early days of the Internet. Commercial interest may favor platforms that allow them to capture portions of the network effect to monetize it. It may take longer before more open, permissionless protocols can really take off. The Internet provides a warning regarding the consolidation of services and applications into walled gardens. Hopefully, Bitcoin’s current development path will result in a future that prioritizes interoperability and permissionless access over financial silos.
