Comparing Monolithic vs.
Modular Blockchains

Ever since Bitcoin was introduced in 2008, developers, cryptographers, and builders have attempted to solve the blockchain trilemma. In cryptography, the blockchain trilemma claims that no public blockchain can simultaneously achieve maximum security, decentralization, and scalability. Public blockchains always optimize security followed by making nuanced trade-offs in decentralization and scalability, which has led to two opposing philosophies in blockchain architecture: monolithic vs. modular.

Monolithic blockchains (e.g., Bitcoin) operate on a single layer where nodes handle all core blockchain functions in a linear fashion. In contrast, modular blockchains (e.g., Ethereum) consist of interconnected components that are each responsible for specific functions like execution, settlement, data availability and consensus.

Monolithic blockchains offer robust security and decentralization, acting as deterrents to malicious actors seeking to disrupt the system. On the other hand, modular blockchains are crafted for flexibility, thus making them well-suited for arbitrary decentralized applications (dApps) such as decentralized finance (DeFi), social media, and gaming. Various scaling approaches, such as optimistic and zero-knowledge (ZK) rollups exist within modular blockchains each involving trade-offs within the blockchain trilemma.

In this piece, we explore the trade-offs of monolithic and modular blockchains in the digital asset industry’s quest to scale blockchains while maintaining security and decentralization.

Blockchain Trilemma

Before comparing different types of blockchain architectures, it is important to understand why different types of blockchains were created. The blockchain trilemma concept was coined by Trent McConaghy and Ethereum Co-Founder Vitalik Buterin and encapsulates a fundamental trade-off in blockchain technology—juggling security, scalability, and decentralization. The trilemma states that anyone can optimize for two of the three elements but increasing optimization for the third will inevitably decrease one or both of the other two.

Diagram illustrating blockchain trilemma trade-off.

Security

Security is the primary pillar and holds the utmost importance in a blockchain (particularly a public blockchain). It is the first characteristic to be chosen and cannot be compromised on in terms of trade-offs. Robust defenses are essential to prevent malicious entities from seizing control. Blockchains’ decentralized nature complicates this, lacking a central authority for oversight and protection. Notably, Bitcoin uses a combination of cryptography and proof-of-work consensus to fortify security and ensure blocks are tamper-resistant. Networks become more secure as the number of participants increase, thus deterring hacks, such as the 51% breach. However, the enhancement of security inevitably comes at a cost or trade-off with the trilemma's other facets—decentralization and scalability.

Scalability

Scalability is a critical consideration in blockchain network development. Scalability addresses the challenge of handling an increasing volume of transactions and users without compromising transaction speed or fees. Balancing scalability with decentralization and security proves challenging as is seen in Bitcoin's limited capacity of processing seven transactions per second (TPS) compared to centralized systems like Visa theoretically being able to reach 24,000 TPS.¹ Numerous scaling solutions such as sharding, different consensus mechanisms, and Layer 2 blockchains are actively being explored to overcome this hurdle.

Decentralization

Decentralization—the defining characteristic of blockchain technology—distributes control among participants to eliminate the need for a central authority. This distribution enhances transparency, fairness, and resistance to censorship. Challenges arise as consensus becomes more time-consuming with a growing number of participants, potentially impacting scalability. While it promotes fairness, a highly decentralized network could face security concerns if it becomes easier for malicious entities to launch and join attacks.

In summary, the blockchain trilemma poses a complex problem for developers and requires a delicate balance between security, scalability, and decentralization. Enhancing one often comes at the expense of others, showcasing the intricate challenges faced by blockchain networks. The ongoing exploration of innovative solutions remains crucial for advancing the broader adoption of blockchain technology.

Monolithic vs. Modular

Understanding the blockchain trilemma trade-offs is a prerequisite to understanding the two diverging architecture approaches that have arisen to make blockchain technology more scalable for mainstream adoption.

Diagram illustrating difference in tech architecture between modular and monolithic blockchains.

Monolithic blockchains operate on a single layer (base layer) or a closely interconnected cluster where nodes handle all core blockchain functions in a linear fashion. For instance, Bitcoin requires nodes to process every block using their own copy of the blockchain. While this approach enhances security and decentralization, it suffers in handling high transaction volumes or accommodating more users.

Solana, another monolithic blockchain separate from Bitcoin, prioritizes scalability over decentralization. It requires high-performant nodes capable of processing thousands of transactions per second. Solana’s goal is long-term scalability without relying on moving computation off-chain to optimistic and ZK-rollups, like Ethereum.

In contrast, modular blockchains consist of interconnected modules or components, each responsible for specific functions. This streamlined approach enhances flexibility and scalability. Modular blockchains, as part of a larger “modular stack,” allow developers to combine different modules to achieve specific objectives. This enables “pluggable modules” that can be replaced or merged based on the use case.

A comparative analysis between Solana and Ethereum shows the strengths and weaknesses of each approach. Solana's monolithic design features distinct components like proof-of-history that contribute to impressive scalability and adaptability. In contrast, Ethereum's modular architecture has encountered challenges in scaling and adapting to evolving technological landscapes while also preserving its decentralization.

The choice between monolithic and modular architectures involves nuanced considerations. Solana's success highlights the advantages of monolithic, while Ethereum's evolution reflects challenges within a modular framework. Despite these challenges, the Ethereum network is highly successful when taking into consideration its rapid organic developer growth and the fact that it has never had an outage. This can be attributed to the Ethereum Foundation’s initial focus on decentralization by creating low-cost hardware requirements and an easy-to-understand developer experience such as its fast-to-learn Solidity coding language.

On the other hand, Solana’s current success was not without past challenges as it has had frequent outages, prohibitively expensive hardware requirements, and a coding language (Rust) with a steeper learning curve. In conclusion, architecture decisions should hinge on specific use cases and objectives, carefully weighing trade-offs in simplicity, scalability, and flexibility.

Benefits of Monolithic Design

Simplicity: Monolithic designs have been around longer, leading many to believe they are more battle-tested in the real world. Also, many developers find monolithic designs to be easier to conceptualize, design, and implement because everything is within one framework.

Security: Some believe that the integrated design of monolithic blockchains makes them more difficult to exploit since attackers would need to compromise the entire system vs. individual modules.

Utility: Since monolithic blockchains handle execution as well as other duties, an underlying token may have more uses and could potentially accrue more value in the long term.

Modular Blockchain Explained

A blockchain can be broken up into four core components (also known as “modules”):

Execution Module

This component encapsulates the execution environment for smart contracts—self-executing contracts with agreement terms encoded directly into the code. It includes the virtual machine, scripting language, and tools for deploying and interacting with smart contracts. Smart contracts automate and enforce agreements on the blockchain and elevate the execution component’s significance. The module’s efficiency, language support, and the platform's ability to securely handle complex computations are focal points for audiences assessing functionality, security, and interoperability.

Execution Module Projects

Optimistic Rollups: One of the most popular execution module projects, optimistic rollups, serve as a Layer 2 scaling solution strategically designed to enhance blockchain scalability. Their primary mechanism involves processing transactions off-chain while leveraging the underlying blockchain for security. This approach operates under the assumption of transaction validity by default (optimistic) with a dispute resolution mechanism in place for addressing any detected fraudulent activity.

How They Work:

1. Transactions are executed off-chain, enhancing speed and cost-effectiveness.
2. A summarized version (rollup) of these off-chain transactions is periodically submitted to the main blockchain.
3. The main blockchain acts as a security layer, allowing users to initiate disputes if fraudulent transactions are identified.

Layer 2 rollup Optimism aims to scale Ethereum by harnessing the potential of optimistic rollups. This facilitates faster and more cost-efficient transactions while upholding the security guarantees of the Ethereum blockchain. Various DeFi projects and applications have migrated to Optimism to capitalize on the improved scalability it offers.

Zero-Knowledge: Zero-Knowledge (ZK)-rollups represent an alternative Layer 2 scaling solution employing zero-knowledge proofs for scalability. Zero-knowledge proofs (ZKPs) are a cryptographic technique that allows one user—a prover—to prove to another user—a verifier—that a statement is true without revealing any other information. In other words, using a ZKP is a way to prove that you know something without revealing what it is that you know. For example, imagine that you want to prove to someone that you are a citizen of a country without giving them personal identifying information. A ZKP identity solution could prove your citizenship without revealing other personal information. 

How They Work:

1. Like optimistic rollups, transactions are executed off-chain.
2. Users provide succinct proofs (ZK-proofs) to the main blockchain, validating transaction correctness without disclosing full details.
3. The main blockchain verifies these proofs, ensuring transaction validity without requiring exhaustive details.

ZKsync was the first ZK-rollup on Ethereum facilitating scalable transactions. Integration of ZKsync by projects like 1inch and LayerZero showcases the adoption of increased throughput and privacy features.

These scaling solutions have garnered significant traction in the Ethereum ecosystem and beyond. Projects like Optimism and ZKsync exemplify their effectiveness in enhancing transaction throughput. As the blockchain space evolves, these Layer 2 scaling solutions could play a pivotal role in enhancing the scalability and user-friendliness of decentralized applications.

Optimistic rollups currently dominate the market because they had a first-mover advantage in the rollup space and offer the cheapest transaction cost and higher TPS than ZK-rollups. Developers prefer optimistic rollups due to these advantages. However, ZK-rollups are still nascent in blockchain and offer greater security protections. Finally, there are now innovations in using fully homomorphic encryption (FHE)—the holy grail of encryption—in ZK-rollups, which will further drive innovation. To summarize, it is still too early to pick a rollup winner.

Settlement Module

Settlement functionality refers to the process by which transactions are finalized and ownership changes are recorded. The settlement layer is a critical component that ensures the integrity and finality of transactions. Settlement functionality ensures the immutability of recorded transactions. Once a block is added to the blockchain, it is extremely difficult to alter the information contained within it. This immutability provides a high level of security and trust in the transaction history’s integrity.

Consensus Module

The consensus component serves as the foundational element of a blockchain, which determines the method by which nodes collectively agree on the ledger's state. Diverse consensus mechanisms, including proof-of-work, proof-of-stake, and delegated-proof-of-stake contribute to this critical aspect. This component plays a role in shaping the network's security and trustworthiness. The chosen consensus mechanism significantly impacts decentralization, finality, and resilience against malicious attacks. Stakeholders scrutinize the efficiency, scalability, and resistance to adversarial scenarios when evaluating the consensus component.

When a user initiates a transaction, it is broadcast to the network. Nodes in the network validate the transaction according to the consensus rules. Once consensus is reached among the participating nodes, the transaction is considered finalized and its details are added to the blockchain.

Data Availability Module

Data availability refers to the idea that all transaction-related data is accessible to nodes on the blockchain network. Ensuring data availability encourages trustlessness because peers can independently verify transactions and blocks without relying on others in the network. This component governs the intricacies of storing and retrieving data on the blockchain, encompassing the data structure, storage protocols, and mechanisms for handling substantial data volumes. As the blockchain ledger expands, effective data storage becomes table stakes. Audiences critically analyze the data storage component for scalability, data integrity, and efficiency in handling diverse data types. Innovations within this component wield substantial influence on the blockchain’s overall performance.

One such example of a data availability module is modular data availability network Celestia. Celestia offers scalable and secure data availability for launching blockchains through Data Availability Sampling (DAS), ensuring scalability with a growing user network. Data Availability Sampling (DAS) allows nodes, even non-staking ones, to validate data availability without the need to download the entire block dataset. This becomes particularly crucial in blockchain networks where data volume can be substantial, posing resource-intensive challenges if traditional download methods were employed. 

Key Characteristics of the Data Availability Module:

Data Propagation: Responsible for efficiently propagating data—including transactions and blocks—the data availability layer ensures uniform access across all network nodes, fostering consensus and synchronization.

Redundancy: Incorporating redundancy mechanisms enhances fault tolerance to ensure data availability even in the face of node failures or downtime. Redundancy promotes network resilience.

Security: Implementing robust security measures—including cryptographic techniques—safeguards the transmission and storage of distributed data to prevent unauthorized access or tampering.

A prime example of a data availability layer is Ethereum’s “The Merge” introduction of the Beacon Chain, which coordinates consensus and ensures data availability across the network.

Benefits of Modular Design

Flexibility: Modular design imparts the ability to upgrade or replace each component independently, facilitating the blockchain's adaptation to evolving requirements.

Innovation: Seamless integration of novel consensus mechanisms, networking protocols, execution environments, and data storage solutions is achievable with limited disruption to the entire tech stack.

Scalability: Optimization of individual components empowers a modular blockchain to achieve heightened scalability compared to its monolithic counterparts.

Interoperability: Modular architectures foster interoperability with external systems, nurturing collaboration and integration with other blockchain networks.

Conclusion

The blockchain trilemma highlights the delicate balance required between security, scalability, and decentralization in blockchain architecture design. Each aspect of the trilemma presents unique challenges and trade-offs that developers must navigate to create robust and effective blockchain networks.

The dichotomy between monolithic and modular blockchain architectures highlights each design’s strengths and weaknesses. Monolithic blockchains, such as Solana, offer high TPS at low costs but are not as decentralized. In contrast, modular blockchains, such as Ethereum, provide flexibility and decentralization at the cost of scalability and ease of use. Layer 2 scaling solutions, such as optimistic and ZK-rollups and innovations in data availability, are addressing scalability challenges.

In technology innovation where blockchain technology is a sandbox to reinvent the Internet, there is no one “correct way” to create new financial rails. Both monolithic and modular blockchain camps initially emerged to create a scalable, decentralized blockchain that would provide a more transparent financial system. Developers for monolithic chains like Solana initially hyperfocused on optimizing TPS throughput while making trade-offs in decentralization and network resiliency. Modular blockchains like Ethereum have focused on decentralization and security, while pushing off scalability issues to solve in the future. This has resulted in an incredibly complex technology stack with four modules and four layers (L0-L3) to scale Ethereum. We believe these two solutions will begin to converge as they take best practices and lessons learned from each other to create a better general-purpose blockchain for public utility. While the paths taken by these two philosophies may be different, we believe the end destination will be the same.

The exploration of the blockchain trilemma and comparison of monolithic and modular architectures underscores the ongoing quest for balance and innovation in blockchain development. As the ecosystem continues to evolve, the pursuit of solutions that harmonize security, scalability, and decentralization remains important for realizing the full potential of blockchain technology.

Interested in learning how Fidelity Digital Assets℠ custody and execution services or investment solutions could be right for you?

Fill out this form and a member of the Fidelity Digital Assets℠ team will reach out to you.