Understanding Layer-2 Modular Blockchains
Layer-2 modular blockchains are a new approach for developers looking to scale cryptocurrency networks. The modular systems built on arbitrary base blockchains such as Ethereum, allow the parts of the process to be decoupled (i.e., execution, data availability, and the consensus layer). Separation of the functions enables component customization of each module independently, without changing the entire system. In practice, the modular arrangements allow projects to use components from different providers, increasing efficiency of a network, increased transactions per second, and decreased cost. Therefore, for cryptocurrency and developers, modular systems enable the expansion of applications in a timely manner without the practicality of a lags on layer-1 chains.
The modular concept has evolved as layer-2 projects have set out to shrink the congestion of Ethereum's network, which in turn increases gas costs that often inhibit interaction for daily use. As a layer-2 project example, by separating the computation from data storage, overhead gas costs on the base layer network decreases the work that has to be done. Projects that use that process still retain high security while also increase performance instead of suggesting that a significant number of transaction cost harms the base-layer. In this context, however, a layer-2 project can horizontally scale the number of modules that are used independently (adding additional modules that are still productive and assuming modules that are limited in functionality) for specific use cases (i.e., decentralized finance (DeFi), gaming, NFTs) which have a different need of consumers. To inform your representations of how this is articulated, a helpful article is Celestia's modular blockchain explanation that provides the general insights of separating concerns to better distribute production resources.
When thinking about how to implement layer-2 modular at a personal level, perform these steps in number order but after defining a project as your own:
- Together on the iterations that need improvement, to review the bottlenecks of transaction from the perspective of trading or use, factor in time of slow (speed or cost) for example with time being spent to determine an overall time spent given analysis of the space of experience because it will feel different even if transaction work in a comparative basis on either layer-1 or layer-2.
- Would the cost on the respective development side be also reason(s) to justify improving the transaction time given the circumstances to choose compatible data availability providers, such as Celestia, to delegate storage, but allow for easy access to the data.
- Implement execution environments that work well with Ethereum virtual machines to facilitate easy smart contract execution.
- Experiment with the new setup on testnets to see the improvements in throughput and latency before deploying to the mainnet.
This progress encourages a clear path to leveraging modular benefits.
Important Components of a Modular Architecture
Modular architecture in layer-2 is composed of important pieces that work together creating the scalable system. Data availability layer stores data off-chain but creates verifiable data to ensure security and prevent problems, such as withholding attacks. Execution layer wraps the smart contract's processing logic so it can be executed in parallel, speed up processing. Consensus modules will achieve agreement across the overall network, and have been increasingly adopting proof-of-stake consensus mechanisms to limit energy used to reach those remainder agreement on state of the blockchain. The settlement layer takes the transactions and restricts them to the base-chain ensuring there is some sewerty level to the transactions on that agreed base-chain to settle transactions to. This break provides the opportunity for projects to become specialists because if there is an upgrade to the module, it will not cause the problems of an all-in-one upgrade, providing a more resilient modular network.
Given the flexible architecture crypto projects are able to leverage with modular designs produces less development costs and complete redesign opportunities. If a DeFi application was launched with an execution module scientifically built to execute complicated and resource require calculation and leverage the general data layer to respond and store information. This creates a tailored problem tailer that functioned or performed better than a all-in-one transaction processing system. A good reference to evaluate and understand layer-2 scaling components would be with visiting Ethereum.org's web page that flushed out layer-2 and how it interacts with the main chain after you have digested the key components of each module component.
After you have the learned the key components, use these bulleted tips for deciding what types of modular configurations to investigate for you project:
- Use modular arrangements with strong audit histories in order to decrease the changes of vulnerability to security breaches.
- Examine interoperability standards so that data can flow across all layers.
- Consider the expenses accrued using the modules used defined per layer, also identify modules based on lower fees in significantly higher volume use cases.
- Also look for modules that are applicable to larger community contracts, specifically from reputational aspects that assure they will be maintained and updated.
Working through these steps will help shape a successful modular system.
The Benefits of Modular Layer-2 Crypto
There are significant benefits to modular solutions in layer-2 crypto that are beneficial to both developers and investors. Modular solutions allow for independent optimization of all blockchain functions requiring projects that will have significant throughput to have it while also maintaining security, which is important for applications expecting a large number of consumers. Modular design also enables far easier updating than traditional architecture updates - if we want to update functionality for a single application we can, without needing to redeploy the entire network - and that saves tons of time and operational resources. The faster we can update an application in crypto, the faster we can get to market with that feature, which is important in an ever-changing and competitive space like NFTs and decentralized exchanges.
In addition, costs will be lowered as products leverage the cost advantages of modules in their complete - standalone functional state instead of needing to build everything from scratch. Additionally, as costs are always run practices for improvements in reduction and optimizing for a lower cost to operating the entire system - this reduces the bar even for smaller teams to get products out and contribute to the creative ecosystem. Modular layered-2 utility also proposes a better resource utilization system - heavy computations would be one module, data storage would have its own module - to eliminate another bottleneck as an example. Investors also find that modular approaches tend to create a more predictable scaling path for the various modular features that exists within the entire system layer of features - and lessen the chance of module failure when we mean failure in the tech industry.
For an more broader view and comparison to traditional layer systems with modular, check out Alchemy's Layer 2 blockchain guide.
Once comfortable, also layer on the following strategies:
- Determine key requirements, such as quick execution for applications that incorporate gaming, in order to select suitable modules.
- Team up with known providers like Optimism for execution to benefit from established implementation.
- Allocate an integrated testing budget to validate functional modules and collaborative execution.
- Prepare for future additions by selecting flexible modules that allow for easy transformation. This method optimizes the benefits of a modular approach.
Cost Efficiency Due to Modular Design
Cost efficiency is a significant selling point of modular design in layer-2; projects only pay for the modules they are making use of, no unnecessary fixed overhead. The pay-as-you-go model is beneficial to startups with constrained funds because they can get to market with a minimum viable product more quickly. In layer-2 crypto, lower gas fees for users are possible due to a modular design, as the optimized modules do the jobs less expensively. Again, the benefits of modular design are apparent when redundancy is eliminated, because less duplication of design occurs with shared modules between projects.
For cryptocurrency projects, cost efficiency usually leads to higher profit margins, since saved costs can be shifted into marketing efforts or other valuable features. In addition, modular setups allow for evolving pricing, as fees adjust to frame usage over time. Pricing volatility is particularly beneficial in a crypto context, as markets occasionally shift with little prediction. To get an idea about slightly developed and underlining cost models, check the Messari's crypto theses report, as it gives a glimpse into the economic outcomes of modular blockchains.
Below are bulleted recommendations for achieving cost efficiency:
- Conduct audits and assess module provider pricing to eliminate hidden fees.
- Use open-sourced modules whenever possible to save on licensing costs.
- Assess usage acquisition to determine ideal module pricing via number of users over time.
- Negotiate bulk contracts with providers for large projects.
Any of these recommendations will help engage development efforts with considerations for times of budget limiting priorities.
Leading Modular Layer-2 Innovations in Crypto
There are several crypto projects that are driving modular layer-2 innovations which bring unique elements to the ecosystem. These projects are showcasing how modularity can deliver solutions to specific challenges relating to data or the execution environment, and they are focusing on specific roles to create building blocks that others can use to build customized solutions. The shared experience is moving the layer-2 ecosystem forward at an accelerated pace, with 2025 being the expected year for widespread implementation. Investors tracking the current media leaders in the space can also catch trends to take advantage of the wider adoption.
Currently, Arbitrum is a project l am impressed with that provides developers with customizable chains via Arbitrum Orbit to construct layer-2s design to their needs. Adoption has significantly increased for the project over the last three years and 2025 is the target date for TVL of over $10B. The Optimism project, is another example of modular layer-2 blending simplicity and upgradeability in their OP Stack. These layer-2's do the heavy lifting of maintaining interoperability between chains and significantly upgrades the maintenance required for multi-chain projects to ensure their smart contracts stay in-sync. Celestia has a specialized offering in the segment, offering a modular layer of data availability. Celestia enables the offloading of storage aspects of execution and is attracting layer-2 project needing high throughput. Manta Network has an interesting emphasis on privacy in its modular offering, offering zero-knowledge proofs to reconcile consensus for secure transactions. Berachain has focused its modularity in getting community governance into its modular layer-2 and enable users to help influence the growth of the network.
If you are interested in making your own assessment of several of these modular layer-2 leaders, I have created the following list for you fallow the outline:
- Visit the projects official websites, usually you can find the white papers and road maps on the site which can provide enough information to make your own handout on the specifications of the project.
- Review the Total Value Locked (TVL) of the project on DeFi Llama to help measure adoption.
- Join a Discord for the respective project which usually has active developer and community discussion and updates on the project.
- Use a comparison site like Layer2.org to outline features or compare attributes of a modular layer-2.
With this plan for research, you will utility also involves burn mechanisms, a process that will eliminate supply over time. When a project has high utility, retention and usage is better as the token has a purpose beyond capital appreciation. For utility analysis, refer to the tools from Token Terminal. After checking multiple projects and utility, look into these bullet points:
- Check APY for staking to provide income potential.
- Consider governance rights to provide you influence.
- Review the fee reduction to provide savings to users.
- Review burns rates to consider effects of scarcity on value. All of these points will help with selection.
Future Directions for Layer-2 Modular Solutions Emerging trends for modular layer-2 solutions indicate a run towards increased implementation of AI for smarter resource allocation, working towards 2025 where we will see the hybridization of AI combined with rollup solutions. This will optimize maximum efficiency, with a 400% increase in throughput forecasted.
Crypto projects will reap the benefits of modules being able to automatically select based on ROI utility; the number of selections is going to reduce computation time, re-configuration time and squelch all manual configuration practice. Another trend is adding stronger privacy modules that utilize zero knowledge to keep data and processing of confidential information.
This trend will be extended to finance sectors, (both secure and privacy overall is needed for finance). The modular boom will also see acceleration in the conversion and tokenization of real-world assets, pointing the lineages of physical to layer-2. For a view at foresight trend report for pair to layer-2 read Deloitte’s blockchain report (recent 2023).
Here are numbered preparations for trends:
- Review AI tools for modular optimization.
- Construct privacy features into the designs of the project layers.
- Explore tokenization of RWA’s potential.
- Attend industry conferences to get a sense of the developments. You will prepare yourself for future endeavors.
AI Integration in the Modular Layer-2 With the integration of AI module management will automate, creating predicative node configurations for layer-2 performance. This trend will emerge in 2025, as errors and costs will be diminished in cost of RTI models. A crypto project implementing AI would also expect gains of 50% efficiency in the predictions. AI integration itself enables configurations changes based on multiple node loads, any delays will be mitigated. Additionally, AI can predict data-based analysis during increased congestion and over utilization. Leaning in on forecasting could provide the uptime protection for critical applications in layman's terms. Refer to the IBM AI Blockchain insights page for more AI into blockchain.
To summarize the suggestions; here is a bullet list for possible integration of AI:
- Utilize an AI system for real-time module enhancement
- AI predictive models to balance loads (a fee savings and optimization)
- Integrate AI partnerships to provide systems that more project specific tools
- Use simulated testnets to test models for efficacy and readiness
Each of these will assists project(s) between initiatives to lean on precognitive expected usage. All if these will support and/or enhance adoption. Conclusion Overall, layer-2 modular improvements have the potential of altering the cryptocurrency landscape area by providing scalable and customizable networks, while simultaneously addressing any of the key limitations to core blockchains. The crypto projects that adopt modular beyond traditional methods connect and harness improvement for resourcing and costs, properly positioning themselves amongst competitors. Modularity is increasing, and providing other functions though sectors beyond DeFi and gaming - modernizing and upgrading will advance all industries striving for adoption.
Some of the best and leading projects exemplifying this advancement will dictate demand / drive use-case. This means building selective opportunities, on investment based on utility and growth. Future suggestions of trends is supported with AI as additional modules will enhance demand trends, while providing increased throughput, additionally making significant product changes leading into 2025 that will be apparent in layer-2 services. Again, invest due to utility forecasts and the new advancements will create attractive margins on products or services. Overall, the paradigm shifts towards embracing a modularized layer-2 model will simultaneously prepare and/or ensure development align with blockchain functional demands for real world use.