From CoinShares Research Blog by Max Shannon

In the rapidly evolving landscape of blockchain technology, two distinct approaches have emerged in the design and implementation of these distributed ledgers: integrated and modular blockchains. Since the origins of public, decentralised and permissionless blockchains, architectures were often built in an integrated way: Bitcoin came first then XRP, Ethereum and many others followed suit for over a decade. The scaling trilemma arose in debates that a blockchain can only have two out of three properties: security, decentralisation and speed. As such, Ethereum’s roadmap has evolved to encompass Layer 2s, a modular way to scale Ethereum. Understanding the differences between these approaches, exemplified by Solana (integrated) and Ethereum’s Layer 2 ecosystem (modular), provides insight into their respective architectures, roadmaps, and the impact on adoption and development.

Integrated vs Modular Architecture

At the core of this distinction is the approach towards consolidating or distributing functions within the blockchain. In this piece, we focus on Solana as the primary example of integrated blockchains, which encapsulate all functionalities within a single consensus layer. There have been arguments that Solana’s low cost and high speed comes at the expense of decentralisation, less than Ethereum and its L2s. However, we refute this claim because L2s have very few sequencers at best which centralises execution, and transactions are beholden to multi-sigs which, realistically, can be subpoenaed easily, thereby reducing security and decentralisation. In the case of Solana, transactions on the base layer are not at the mercy of sequencers or multi-sigs and are validated by the network of validators.

Modularity underpins Ethereum’s scaling strategy, which adopts a more compartmentalised approach. This allows for specialisation in certain functions, like execution in rollups while outsourcing consensus and data availability, to Ethereum, or others such as Celestia, in the case of rollups. This specialisation can lead to greater efficiencies but introduces complexity and fragmentation.

Impact on Adoption and Product Development

The modular architecture exemplified by Ethereum and its L2s, while beneficial for scaling through rollups or mitigating the data availability bottleneck through Celestia or Eigenlayer, has encountered issues with user experience. The proliferation of asset ledgers and smart contracts leads to a fragmented global state, affecting liquidity, increasing gas consumption and fees, and necessitating more computations. Hence, liquidity has aggregated mostly on Ethereum’s base layer. Social coordination is also significantly harder and less likely between teams not aligned in the same direction. This is evident in different tech stacks, standards, tokens and visions often resulting in various winner-takes-all developmental decisions. Block times and computational throughput, risk parameters and dev tooling, front ends and abstraction all differ, slowing down development to overcome these issues. Interoperability is still a problem, and so is fragmentation of liquidity and social coordination.

Conversely, integrated blockchains like Solana offer a more seamless user and developer experience by maintaining composability, a key feature for developing modular smart contracts. Chains that integrate data availability and execution inherently offer simpler end-user and developer experiences, and will ultimately provide a better substrate for applications.

Trade-offs of Each Approach

Solana’s pursuit of minimal latency (~500ms) and a large validator set (~2000) presents inherent challenges. The balance between decentralisation and latency is delicate, and Solana has faced issues with network stability and high operational costs for nodes. The community recognises this and are building light clients to combat this, but even then does this not allow full verification at a cheap and accessible level. Albeit, its important to recognise that full verification isn’t the goal for everyone, it may just be to make blockchain data available to all without relying on any third party full nodes like RPC servers, in the case of Tinydancer. Solana has also introduced more clients such as Firedancer which have proved beneficial in periods of high activity already, but it is yet to be seen if these improvements can handle the kind of scale the industry is aiming for. Problems related to low base fees and high storage costs need to be solved to further stabilise the protocol and make it easier for small-time developers to fully derive value from the ‘permissionless’ system crypto should be.

A challenge with modular systems lies in the increased complexity they present for developers. These systems demand that developers navigate the dual challenge of technical and social complexity. The OP stack by Optimism, for example, is at the forefront of modular frameworks for rollups. It places developers at a crossroads: either commit to the Law of Chains or fork and independently manage the OP stack. Adhering to the Law of Chains imposes its own set of rules and limitations. Similarly, going solo with the OP stack might offer more freedom but at the cost of potentially reduced support and increased isolation within the ecosystem. These choices highlight the intricate balance between autonomy and conformity that developers in modular systems have to constantly navigate.

Solutions and Outlooks

Looking ahead, Ethereum’s path seems entrenched in its modular approach, with the focus and acceptance on standardising practices and embracing the trade-offs inherent in its architecture. The Law of Chains is a step towards this standardisation, promoting interoperability and setting minimum standards across the network. Solana, on the other hand, needs to continue to address its stability and scalability issues. But further out on the horizon, it is prudent to think about solving for congestion, state bloat and hardware centralisation, possibly through validity proofs and data availability sampling. These technologies promise to address the inefficiencies by allowing more nodes to process more data efficiently and minimising bandwidth as a bottleneck.

In summary, the choice between integrated and modular blockchain architectures is not merely just a technical decision but a strategic one, influencing everything from user experience to network stability and developer engagement. While Solana seeks to refine its integrated approach to address its challenges, Ethereum embraces its modular nature, for better or worse, hopefully forging a path towards a more interconnected and standardised ecosystem. None of these systems will obsolete the other as the permissionless nature of crypto encourages competition, haste, debate and iteration, eventually leading to continuous improvements and better outcome for users.

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