The multi-chain approach to scalability

In our previous research, we explored the basics of modularity. We learned that by splitting the core responsibilities of a blockchain (data availability, consensus, settlement, and execution) into multiple players, the blockchain as a stack improves performance while not necessarily sacrificing any security guarantees.

Today, let us dive a little deeper into modularity and explore some prominent paradigms adopted by well-known blockchain designs to learn the game theory behind them. We will explore the following four modularity designs –

1. The monolithic approach

2. Modular execution — The rollup approach

3. Inter-blockchain communication — The Cosmos approach

4. Modular Execution + Settlement — The Celestia approach

To understand these blockchain models, we first need to better understand the concept of data availability in the context of blockchains.

What is data availability?

When we say that data is available to nodes during a consensus process, it means that the block proposer has published all the transaction data for that block, including the block header (which contains the block hash, among other important information) and the block body (which contains all the transactions included in that block). Data availability is important as other nodes will use this information to re-execute all the transactions and confirm their validity.

The monolithic approach

The monolithic approach is the most primitive blockchain design, adopted by legacy networks like Bitcoin and the early stages of Ethereum. This design works with validity proofs, which verify the validity of data before packing it into a block, arriving at a consensus over the right order of the blocks, and then executing the transactions.

Advantages

A monolithic blockchain is a closed system, therefore it can provide more security and stability than a modular stack, where the system may have to rely on forces outside its horizon for securing and verifying transactions. This also makes it easier to develop, maintain and upgrade the blockchain.

Disadvantages

Monolithic blockchains are subject to several scalability issues. One such issue is state bloat, where the increased overhead for maintaining full nodes causes operators to gradually opt out and adopt light nodes. Light nodes do not store block data and therefore rely on full nods for data availability during the consensus process, lesser full nodes make the network centralized and susceptible to attacks.

Another roadblock is efficient resource pricing. Ethereum for instance treats all the transactions as equal and prices them on the storage space they require in each block. This means that a wave of NFT mints on Ethereum can effectively front-run other much sensitive transactions like swaps, staking requests, or lending transactions.

The scalability bottlenecks of monolithic chains led to the invention of execution rollups.

Modular execution — The rollup approach

Execution rollups are the most popular scaling solutions being developed today (Optimism, Arbitrum, zkSync, etc). As the name suggests, these rollups rely on the parent chain for data availability, consensus, and settlement, while the execution is handled off-chain.

Advantages

This design effectively lets rollups have the same security guarantees as the parent chain but can process many transactions per second. To do this, the rollup block is posted to the main chain, where its validators re-execute all the transactions (via fraud proofs) to verify their validity.

Disadvantages

Rollups, like optimistic rollups and ZK rollups, are implemented as smart contracts on the parent blockchain. The construct of a fraud proof that secures a rollup is such that a rollup block cannot achieve finality on the parent chain unless all transactions are verified and recorded on the block on layer 1.

This means that rollups trade off sovereignty for scalability, any changes made to the rollup chain must be verified and arrived at a consensus by the parent chain, otherwise the rollup smart contract will be unable to recognize rollup transactions.

To understand why this is a problem, we need to investigate the Appchain thesis

The Appchain thesis

The Appchain thesis states that as every Dapp on the blockchain seeks to scale, upgrade, and develop, they will resort to opting for complete blockchain sovereignty, which will allow them to take full control over their protocol, without the intervention of their layer-1 chains.

Appchains tokens from evolve from being utility tokens to functioning as coins, which may have several benefits, like a block validation-linked inflation mechanism, the ability to use them for gas, MEV resistance, and many more.

Projects like Cosmos IBC and Celestia were born out of this demand for sovereignty, let’s explore these novel approaches to scalability –

Inter blockchain communication — The Cosmos approach

Cosmos is a decentralized network of independent, monolithic, and interoperable blockchains (or appchains). The blockchains serve niche applications and are connected to one another via light client bridges called IBC, a trust-minimized communication protocol. A Cosmos app chain is in charge of the entire blockchain stack (data availability, consensus, settlement, and execution)

Advantages

The Cosmos software stack, known as the Cosmos SDK, is its most significant advantage. Cosmos SDK is a pre-packaged, generic software stack that consists of two components — Tendermint core and ABCI (Application Blockchain Interface). Together, they ensure that app developers can simply plug their execution layer into Cosmos SDK and seamlessly bootstrap a fully functioning blockchain that is interoperable with the entire Cosmos ecosystem.

Disadvantages

There are some significant limitations to the Cosmos model. First, while the Cosmos SDK makes app-chain development seamless, the validators of an app-chain on Cosmos are performing all the blockchain management duties themselves, which subjects them to similar scalability issues as traditional monolithic blockchains.

Furthermore, IBC is path-dependent, which means that two similar tokens that arrive at the destination chain using different paths will not be fungible. There is also an inherent security issue with IBC, where any security breach on a Cosmos app chain can propagate to other chains it is connected to via its IBC network.

So far, we have explored the Ethereum scalability model, which prioritizes security and throughput, and the Cosmos scalability model, which prioritizes sovereignty. The next scaling solution we’ll talk about is the Celestia approach, which offers the shared security of Ethereum and the sovereignty of Cosmos.

Modular Execution + Settlement — The Celestia approach

The developers at Celestia made an interesting observation. A rollup does not need another chain to perform any execution (and verification) to share its security and all it needs to agree on is a common history of ordered transactions.

This stems from the fact that execution rollups on Ethereum do not inherit its security because all rollup transactions are executed by the mainnet, but from the fact that Ethereum mainnet validators agree on an order of transactions. The need to execute transactions on Ethereum is a bi-product of Ethereum’s design that forces a specific construct for the rollup.

Celestia blockchain functions as a data availability layer, it orders transactions and replicates them, and is indifferent to their validity. The rollup nodes on Celestia pick up the ordered transactions and perform their validity off-chain, where they ignore invalid transactions.

Advantages

The resultant rollup design is such that it inherits the security of its parent chain (shared security), and by not having to execute them on layer-1 can maintain complete sovereignty.

Disadvantages

while there's not enough real-world data to reflect upon the disadvantages of this model, common sense dictates that since the rollup chains on Celestia are responsible for more overheads than Ethereuem-rollups, they will not be as scalable.

Closing thoughts — The future is multi-chain

Celestia has spearheaded a paradigm shift in blockchain designs. In time, modularity will introduce more blockchain constructs that focus on specific niches from the blockchain stack. Data availability as a scalability solution is getting noticed, there are proposals like Danksharding for Ethereum that propose a similar design. Polygon is also working on its proprietary data availability layer called Polygon Avail.