A Detailed Explanation of Modular Public Chains and Market Competition Landscape

Original Article: “The Universal Path of Modular Execution Layer”

Author: Kyle Liu, Investment Manager at Bing Ventures

Summary:

• There is a certain degree of competition and cooperation among modular public chain execution layer projects, as they all face common challenges and opportunities. Our evaluation dimensions should always revolve around four indicators: security, scalability, interoperability, and cost-effectiveness.
• The security of Fuel is provided by the Ethereum mainnet, which means that Fuel does not need its own validators or consensus mechanism and is not at risk of attacks or forks. However, this also means that Fuel needs to rely on the security and stability of Ethereum; if Ethereum experiences failures or upgrades, it may affect the operation of Fuel.
• The scalability of Fuel is achieved through its efficient transaction format and low-latency confirmation times, allowing Fuel to process thousands of transactions per second and complete transaction confirmations within seconds. However, this also means that Fuel needs to compete for resources and users with other rollup chains; if other rollup chains offer higher throughput or lower latency, it may affect Fuel's attractiveness.
• The interoperability of Fuel is realized through its cross-chain transfer capabilities and multi-token support, enabling Fuel to be compatible and interoperable with Layer 1 and Layer 2 networks such as Ethereum, Arbitrum, Optimism, and Polygon. However, this also means that Fuel needs to compete with other cross-chain solutions for efficiency and security; if other cross-chain solutions provide faster, cheaper, or more secure transfer services, it will also affect Fuel's competitiveness.

Riding the wave of Layer 2, the narrative of modular public chains has gained momentum, particularly with a focus on modular public chain execution layer projects. This issue of the Bing Ventures industry research report will briefly introduce what modular public chains are and the current basic landscape of the modular public chain execution layer field.

With the development of Layer 2 and Rollups, the Ethereum ecosystem has shifted towards a modular architecture. One of the biggest obstacles to the large-scale application of blockchain technology is scalability. Layer 1 scaling solutions focus on block production rather than block validation. Modular blockchain infrastructure aims to facilitate the adoption of Web3 with scalability, security, and decentralization characteristics, focusing on ease of integration, rapid delivery, and user experience.

Modular public chains are gradually becoming the most discussed topic, and modularity refers to dividing the blockchain's consensus layer, data availability layer (DA), settlement layer, transaction execution layer, etc., among different chains, rather than having a single chain handle all modules. The execution layer can exist as its own blockchain or utilize the underlying blockchain to ensure validity and data availability.

Generally speaking, the aforementioned three layers have long existed, but they have been coupled within the Ethereum network without clear boundaries and divisions of labor. The purpose of modular public chains is to decouple these layers, first handling privacy security, node validation, transaction confirmation, data storage, fraud proofs, and other functions separately in the technical environment of Layer 2 applications, thereby achieving on-chain scalability.

The Rise of Modular Narratives

The "impossible triangle" of blockchain technology has always been a problem for developers and users, and solutions like Layer 2 are designed to address this core issue. Specifically, Layer 2's approach is to move data computation and processing to Ethereum's second-layer network, while the first-layer network primarily focuses on security, i.e., consensus. It is worth noting that modular public chains are mainly proposed as solutions for Ethereum upgrades, with their narrative logic revolving around Ethereum. However, there are currently also other projects on different chains referencing this for performance improvements.

Modular public chains aim to divide the system into multiple modular components, giving it blockchain characteristics and even allowing for sub-functions such as DEX, stablecoins, NFTs, and derivatives. Developers can extract these new modules and rearrange them to achieve more advanced functionalities. It wasn't until the second half of last year that modular public chains were mentioned again, as Ethereum's Layer 2 solutions began to rise at that time, and Layer 2 is a crucial foundation and prerequisite for achieving modularization of public chains.

Source: celestia

Competitive Landscape of Modular Execution Layers

The Ethereum ecosystem has achieved the separation of the execution layer from the underlying blockchain through technologies like Layer 2 and Rollup, thereby improving scalability, security, and interoperability. Currently, there are some modular public chain execution layer projects focused on providing data availability layers, such as Celestia, LazyLedger, and DataShards; some focused on providing execution layers, such as Optimism, Arbitrum, and zkSync3; and others focused on providing cross-chain bridging and protocol aggregation, such as Polygon, Connext, and Hop Protocol.

They are actively developing and deploying their solutions and collaborating with various decentralized applications to enhance user experience and network efficiency. There is a certain degree of competition and cooperation among modular public chain execution layer projects, as they all face common challenges and opportunities. Our evaluation dimensions should always revolve around four indicators: security, scalability, interoperability, and cost-effectiveness. The author summarizes the following types of typical projects:

• Projects based on Optimistic Rollup, such as Optimism and Arbitrum. These projects utilize fraud proof mechanisms to ensure the validity of the execution layer while providing high-speed parallel transaction execution and low-latency confirmation times.
• Projects based on ZK Rollup, such as zkSync, StarkNet, Hermez, Scroll, Taiko, and Aztec. These projects utilize zero-knowledge proof technology to ensure the validity of the execution layer while providing high compression rates and privacy protection.
• Projects based on Plasma, such as Polygon Plasma, OMG Network, and Matic Network. These projects utilize sidechains and exit mechanisms to expand the throughput of the execution layer while providing compatibility and interoperability with Ethereum.
• Projects based on cross-chain bridging, such as Connext and Hop Protocol. These projects utilize multi-signatures or relay nodes to transfer assets and data to different execution layers or underlying blockchains while providing flexible protocol aggregation and routing options.
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Source: Volt

Accelerating Public Chains

The modular blockchain architecture can decompose the functions of a blockchain into different layers, such as execution layer, security layer, and data availability layer, which can improve the efficiency, flexibility, and interoperability of blockchains. Parallel transaction products can execute transactions using parallel processing and ensure the validity of margin transactions through different validation mechanisms, which can enhance the processing capacity, throughput, and confirmation speed of blockchains. They can support more tokens and smart contracts and allow users to transfer assets between different blockchains, expanding the application scenarios of blockchains, such as DeFi, NFTs, and Web3.

Arbitrum is a classic execution layer solution based on Optimistic Rollup technology, enabling efficient, low-cost, and highly compatible smart contracts on Ethereum. Arbitrum can utilize Arbitrary Data technology to improve transaction throughput and confirmation speed. Meanwhile, StarkNet, as an execution layer platform based on ZK-Rollup technology, can achieve scalable, secure, and privacy-protecting decentralized applications on Ethereum. StarkNet can utilize Zero-Knowledge Proof technology to ensure the validity of transactions and data availability. These two routes currently dominate the mainstream of execution layer technology.

However, parallel processing requires strict state access lists to ensure that transactions do not interfere with each other. Additionally, modular blockchains need to rely on other layers to provide security, consensus, and data availability, which may increase complexity and costs. Furthermore, parallel processing may reduce transaction confirmation speeds, as it requires waiting for all parallel branches to complete before confirming the entire block. In the face of these issues, Fuel, as a UTXO-based execution layer protocol, can operate across different blockchains.

Fuel can execute transactions using parallel processing and allow users to transfer assets between different blockchains through Optimistic Yanking technology. Fuel employs a virtual machine called FuelVM, which can quickly validate transactions and blocks and supports multiple tokens and smart contracts. Fuel uses a technique called Optimistic Yanking, which allows users to transfer assets between different blockchains without waiting for long confirmation times or paying high fees.

Source: vitalik.ca

Fuel: Parallel Transactions in the Execution Layer

Fuel is one of the first Optimistic Rollups deployed on the Ethereum mainnet, launching its V1 version on Ethereum at the end of 2020. It provides scalability by using a different execution model from the EVM, specifically a highly parallelizable minimal execution system based on UTXO, supporting ETH and all ERC-20 tokens. However, due to the low user adoption of Fuel V1 and its lack of smart contract support, it did not gain popularity after launch. Shortly after the launch of Fuel V1, the development team, Fuel Labs, shifted all development focus to the V2 version, positioning it as a modular execution layer, a verifiable computation system designed for the modular blockchain stack.

The most notable feature of Fuel is its new VM architecture—FuelVM, which has its own toolchain and language. FuelVM draws characteristics from WASM, EVM, and Solana's SeaLevel, with its most striking potential being its execution on a UTXO-based data model. Compared to today's Optimistic Rollups, Fuel's main distinction lies in its use of a UTXO-based data model, and its first version was designed for P2P payments. Fuel V2 is expected to implement smart contracts similar to Ethereum, with the VM designed for application-specific payment Rollups, providing more reasoning convenience, although it is less apparent for general Rollups similar to Ethereum.

The technical stack of FuelV2 has three core pillars:

FuelVM

FuelVM aims to reduce the waste processing situations of traditional blockchain virtual machine architectures while increasing the potential design space for developers. Fuel adopts a UTXO data model, similar to Bitcoin, where the entire state is represented as a UTXO set. The difference is that some UTXOs in Fuel V2 are token UTXOs, while others are contract UTXOs. Unlike token UTXOs, contract UTXOs have code, storage, and a unique contract ID in addition to balance and spending conditions.

A notable feature of UTXOs is that they are atomic, meaning transactions completely consume them and create new UTXOs. For contract UTXOs, Fuel defines some new validity rules. Important rules include: contract UTXOs are locked behind special spending conditions that anyone can consume; when a transaction consumes a contract UTXO, it creates a new contract UTXO with the same spending conditions and contract ID but may have new storage and balance; contract UTXOs used in the same transaction can interact with each other.

The advantage of Fuel is that the UTXO model allows the Fuel blockchain to conduct transactions more quickly and efficiently. Its disadvantage lies in the technical difficulty of implementing the UTXO model, which requires more code compared to the account model. Additionally, since the UTXO model is not well-suited for smart contracts, using contract UTXOs requires adherence to new validity rules, necessitating some technical knowledge and experience. However, Fuel continues to evolve and improve, with the potential to implement more functionalities and application scenarios in the future.

Parallel Transaction Execution

Fuel uses a strict state access list in the form of a UTXO model, thus having the capability to execute transactions in parallel, which provides advantages in computation, state access, and transaction throughput. Fuel is a UTXO-based blockchain, and its greatest advantage lies in its ability to execute transactions in parallel, a feature lacking in many other blockchains. The core of this technology is to determine the state portions that transactions will modify through access lists, enabling parallel execution.

This means that if the UTXOs spent by transactions do not overlap, they can be executed separately, fully utilizing the performance of multi-core CPUs. This technology applies not only to intra-block transactions but can also execute across blocks, allowing for faster synchronization speeds for (re)entering nodes. In contrast, account model-based blockchains can also achieve parallel execution, but they require more considerations, such as strict regulations on access lists. Meanwhile, single-core performance can no longer meet demands, and the use of multi-core CPUs is becoming increasingly common, with multi-core processing having a multiplicative effect on improving execution efficiency. Therefore, Fuel's parallel execution technology is expected to become increasingly important in the future.

Developer Experience

Fuel provides a powerful and smooth developer experience using its domain-specific language Sway and supporting toolchain Forc. The development environment retains the advantages of smart contract languages like Solidity while adopting paradigms introduced in the Rust tool ecosystem and incorporating syntax that utilizes blockchain VMs. To address the issue of state growth, FuelVM employs two programs—scripts and predicates—to enhance Turing-complete smart contracts.

Unlike the EVM, users of FuelVM do not directly call contracts but run scripts to invoke multiple contracts. The beauty of scripts lies in their prunable nature; once executed, they are completely pruned and do not affect the state. Predicates are similar to scripts but do not read contract storage during execution, making them completely stateless. The main purpose of scripts and predicates is to turn FuelVM into semi-stateless execution. In FuelVM, applications can lean towards state or execution based on their functionalities and resource prices. Additionally, Fuel supports various complex applications, such as multiple local asset support, authorization and transfer in a single transaction, mixers, and privacy applications, offering great flexibility.

Source: Fuel

The Universal Path of Modular Execution Layers

The main value of today's Rollups lies in scaling Ethereum and expanding its functionalities where possible. Rollups scale Ethereum in two ways: 1. transferring state (and execution) off-chain, i.e., moving it from L1 to L2; 2. parallel computation, where multiple Rollups can run simultaneously on Ethereum. Rollups alleviate the issue of Ethereum's state growth by transferring part of the state off-chain, but this does not miraculously eliminate the need to maintain state. Although Ethereum nodes do not need to maintain it, Rollup nodes must.

Currently, there is not much focus on state optimization in the Rollup space. Instead, most attention is concentrated on reducing L1 data, as current data is the most expensive cost item for Rollups. About two-thirds of Arbitrum's fees exist in the form of L1 calldata. EVM Rollups optimize the data published to L1, attempting to compress it as much as possible to provide cheaper fees for users.

However, we have not considered that costs will change dramatically in the modular era. As the base layer begins to provide data in large quantities (thanks to data availability sampling technology), Rollups will soon enjoy orders of magnitude cheaper data. Meanwhile, with less focus on state growth, state size will quickly become a major bottleneck in the modular world. Any blockchain, whether Rollup or L1, will incur permanent costs for operations that increase state. These operations consume not only the resources of current nodes but also the resources of all future nodes.

Source: Bing Ventures

Currently, Fuel has successfully built several demonstration use cases, such as AMM, multi-signature, oracles, and DAO voting. In the future, the Fuel team also plans to build demonstration use cases for other products, such as lending and NFT marketplaces. Although the UTXO-based execution method may seem somewhat counterintuitive, I believe Fuel's unique capabilities will give rise to new applications, pushing the limits of current DeFi capabilities. In summary, I am excited about the potential that Fuel brings to the modular stack. The data availability layer can expand data, but for a complete decentralized user experience, we also need to expand execution. Fuel is expected to fill this gap.

From our evaluation scale, the security of Fuel is provided by the Ethereum mainnet, which means that Fuel does not need its own validators or consensus mechanism and is not at risk of attacks or forks. However, this also means that Fuel needs to rely on the security and stability of Ethereum; if Ethereum experiences failures or upgrades, it may affect the operation of Fuel. The scalability of Fuel is achieved through its efficient transaction format and low-latency confirmation times, allowing Fuel to process thousands of transactions per second and complete transaction confirmations within seconds. However, this also means that Fuel needs to compete for resources and users with other rollup chains; if other rollup chains offer higher throughput or lower latency, it may affect Fuel's attractiveness.

The interoperability of Fuel is realized through its cross-chain transfer capabilities and multi-token support, enabling Fuel to be compatible and interoperable with Layer 1 and Layer 2 networks such as Ethereum, Arbitrum, Optimism, and Polygon. However, this also means that Fuel needs to compete with other cross-chain solutions for efficiency and security; if other cross-chain solutions provide faster, cheaper, or more secure transfer services, it will also affect Fuel's competitiveness.

In the future, Fuel can support various types of transactions and computations, including transfers, payments, smart contracts, oracles, etc. This enables Fuel to adapt to different use cases and needs while providing efficient and flexible services. At the same time, it accelerates integration and interoperability with various modular blockchain networks, including Ethereum 2.0, Celestia, etc. This will allow Fuel to leverage the data availability and consensus security of these networks and provide cross-chain transfer and interoperability features. Fuel can further enhance its execution efficiency and performance by increasing innovation and optimizing its technical solutions, including Merkle Patricia Trie, Zero-Knowledge Proofs, etc. These initiatives are expected to expand its universality as a modular execution layer in the future.