What is modularity anyway?
Modularity is the result of a curious experiment playing out in Ethereum as a reaction to the negative scaling properties of blockchains. To deal with this restriction, developers have taken a more aggressive approach to selling blockchain jobs to major chains… on other blockchains.
Focused on rollup technology, this modular change has completely redefined how products and services are built on top of Ethereum. Splitting up the entire stack allows different architectures to be designed according to their respective use cases. Understandably this has led to the rise of… blockchains.
I’m not joking. Everyone is getting ridiculously rich selling blockchains, too.
While each new consensus protocol offers novel and exciting scalability opportunities, it also presents a unique communication problem. If users are scattered across different networks, how is the economy made to work? How can we synchronize everyone in all these distributions? Maybe one more… blockchain?
The turtles are always down.
This fragmentation of the ecosystem has had several obvious consequences. In some cases, users are locked in dust and stuck between intermediaries. While rollups have compelling areas to reduce trust, the inefficiencies created by the transition and rollout of those systems create unreasonable costs for users. It also exposes them to high risk costs such as bridges and central utilities.
For developers, the lack of collaboration across platforms creates friction and fosters a competitive rather than collaborative environment. Every other day a new protocol is developed for new teams to compete with yet another copy of the same applications. In many cases, groups choose to “bet themselves”, turning to their own ecosystem (read: blockchain). It is important to emphasize the attractiveness of this model, which allows customization and optimization of various parts of each application. This flexible structure gives anyone the power to contribute their unique frameworks and inspire new designs. The possibilities are endless!
Unfortunately, those incentives have caused a split in the network effect. If nothing is built that fits together, users will converge to only a few competing networks. As a result, economic activity is concentrated in programs with few concessions.
This kind of modularity has led people away from the goal where it shouldn’t have been. Using different interfaces to interact with a consensus protocol is a perfectly valid idea. However, Ethereum’s strategy is proving problematic; it views interoperability more as an optional feature than a basic design principle. As long as Ethereum continues to pursue standardization by replicating blockchains, the debate will continue, providing more opportunities for competitors to exploit these divisions and encourage dissent. Divide and conquer.
Bitcoin opportunity
In Bitcoin, a different type of architecture is emerging that favors a very different design. Using Lightning as the core of collaboration, developers are slowly converging towards a technology stack that is closer to Bitcoin’s peer-to-peer model.
Rather than trying to replicate shared states around the world, agreements like Cashu or Fedimint facilitate local and permissionless interoperability. Financial services can now be distributed across different economic zones and remain connected through the Lightning Network.
Liquidity providers, atomic bridges, and ecash mints. The new financial network all share the same transaction layer.
Nostr’s arrival provides social anonymity that ties it all together. A social network based on the same principles as Bitcoin, it offers a simple set of rules designed to increase cooperation. By avoiding being prescriptive about the functions it powers, Nostr is launching a Cambrian explosion of open innovation.
Today, different projects are starting to explore ways to simplify Bitcoin trading by making Nostr a native part of the Bitcoin user experience. The core public infrastructure underlying the protocol is similar in nature to wallets and other payment applications, allowing them to communicate and securely exchange messages. This communication layer can connect users with others and various services made available through the network. Standards like Nostr Wallet Connect create new opportunities for Bitcoin applications to integrate with Nostr’s growing ecosystem.
A case study
Projects such as Mutiny perfectly embody the differences in this modular Bitcoin concept. Users can simultaneously connect to services such as Nostr Relays, Fedimint federations, and lightning service providers (LSPs). Each of these provides access to a growing number of features and applications. Using Nostr as a discovery service, we are empowered to use our social network to identify and access apps and services approved by our peers. This web-of-trust presents an interesting alternative to so-called trustless systems. Participants can begin to rely on the benefits of the market to engage in more efficient trading that does not involve the exchanges required in highly decentralized systems.
Finally, there will be marketplaces for money providers, ecash mints, lenders, and consultants who have joined together to advertise their services through Nostr. Fixed order book projects Civkit can easily integrate with Mutiny and allow users to participate in peer-to-peer trading. All integrations are designed around permissionless participation so users can maintain full sovereignty over their interactions.
Platforms versus protocols
The modular Bitcoin story is not without its risks. Key pieces of the puzzle such as LSPs include significant capital requirements that will create economies of scale among competing providers. The growth of ecash mints may be hindered by regulatory concerns and user fraud. Nostr’s transmission has already shown a tendency to centralize and it is not yet clear how the network topology will play out.
The success of this approach depends on market selection and it is important that the barriers to entry in these businesses remain low. Many different efforts are being used to achieve that. For example, many lightning companies are currently collaborating on a system that would allow any market player to use their LSP.
It is probably too early to predict how any of those structures and processes will evolve. As the two worlds continue to collide, rollups may find their place within the Bitcoin ecosystem. Application specific projects like exchange rollups or zkCoins do not require global status and can be made to work with lightning.
The tension between the two approaches is almost as old as the early days of the Internet. Commercial interest may favor platforms that allow them to capture parts of the network effect to monetize it. It can take a long time for highly open and permissionless protocols to take off. The Internet provides a cautionary tale about the integration of services and uses in walled gardens. Hopefully, Bitcoin’s current development path is shaping a future that prioritizes collaboration and permissionless access over financial silos.
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