Placeholder Partners: Modularization Will Bring a Golden Age of Web3 Innovation

Written by: Joel Monegro, Partner at Placeholder

Translated by: Luffy, Foresight News

Pioneers of new technologies must raise substantial funds to build infrastructure, which can lead to over-investment and speculative bubbles. When these bubbles burst, weaker companies fail, and market forces consolidate around industry leaders and their paradigms. Through this consolidation process, we can identify common elements in applications and separate them into standard modular components that can be open-sourced or sold as standalone services. These abstracted components make it easier to build more complex applications and facilitate a shift from capital expenditure-driven to operational expenditure-driven cost structures, enabling new products to be launched faster and reducing startup costs. This model is now unfolding in the emerging Web3, where new "modular" technologies (such as Rollups) accelerate technological development and usher in an era of lean startup innovation.

Capital Expenditure vs. Operational Expenditure

As technological infrastructure becomes more standardized and widely available, it becomes more powerful and easier to use. However, before this, early entrepreneurs had to invest heavily in building their own infrastructure before they could build and distribute their applications, such as Edison inventing the power grid to help sell light bulbs or early internet startups deploying data centers to run web pages. As the market matured, the emergence of open standards and on-demand infrastructure services provided companies adopting them with more efficient business models, as they no longer needed to spend excessive time and money to bring products to market.

For example, after the internet bubble burst in 2000, the internet industry shifted from purchasing servers and building data centers (capital expenditure) to renting cloud servers (operational expenditure). The emergence of many open-source frameworks (such as the LAMP stack, Ruby on Rails, Django, and NodeJS) aimed to simplify web development, while industry leaders like Microsoft, Amazon, and Google leveraged their scale to establish new standards and low-cost infrastructure services. This, along with the API boom that began in the late 2000s, further simplified the complexity of the internet by providing specialized backend functionalities under a pay-as-you-go business model. Within a decade after the crash, these abstraction layers enabled small teams to build and scale new applications quickly and cheaply, accelerating innovation for startups and ushering in a golden age.

Web2 infrastructure has become so abstract that modern web applications do not even run directly on physical servers but rather on simulated servers: virtual machines (often encapsulated in containers that can be easily moved or replicated across many environments with minimal reconfiguration). Virtual machine technology allows a single powerful server to run multiple applications simultaneously, helping to scale Web2, and it can easily add or reduce computing resources to applications as needed to meet demand and control costs.

The concept of virtualization illustrates how abstract infrastructure can become, but I emphasize it here because Web3 infrastructure follows a similar path to the invention of Rollups, which similarly help blockchains scale by allowing them to support multiple "virtual blockchains" on top.

Abstraction Layers

Early blockchain startups had to build all the infrastructure, including custom blockchain protocols, frontends, wallets, SDKs, APIs, etc., before they could start building applications. Smart contract networks like Ethereum reduced the need to build proprietary blockchains for many applications, but they imposed significant limitations on cost, programming conventions, and scalability, restricting the range of possible applications. More ambitious ideas require a degree of flexibility and throughput that is often difficult to achieve on public chains, meaning many of the most exciting applications could not be realized.

Platforms like Cosmos and Polkadot later provided tools to create custom blockchains with shared security and interoperability features, making it easier and safer to launch blockchains. However, using them still requires substantial resources and expertise, making them out of reach for most developers. But just as more abstraction layers simplified cloud services, emerging Layer 2 (L2) standards (such as Rollups) allow developers to quickly and cheaply deploy blockchain environments.

Rollups execute transactions and smart contracts off-chain and bundle the results of multiple operations into periodic, cryptographically verifiable transactions on the main blockchain, inheriting the security of the underlying network. This is similar to how credit card networks process many payments and settle with merchants through weekly batch wire transfers. With this technology, a single blockchain can simultaneously secure many high-performance virtual blockchains, significantly increasing network throughput while minimizing transaction costs.

Importantly, Rollups are not blockchains, at least not in the same way that virtual machines are not actual machines. Rollups are virtual blockchains, simulated environments, and if the abstraction is ignored, smart contracts in Rollups run as if they were on a real blockchain. As long as operators regularly settle outputs on a trusted blockchain and do not compromise data, Rollups can be operated centrally according to performance, control, or compliance needs. But they can also achieve decentralization through the use of "shared sequencer" technology.

Beyond scalability, separating the "execution" layer from "data availability," "settlement," and consensus layers gives developers flexibility while leveraging the security of the main chain. For example, if a developer dislikes Solidity but wants to leverage Ethereum's security or ecosystem, they can choose to use a Rollup that employs Python as the programming language to deploy applications to Ethereum. Open-source frameworks like OP Stack, ZK Stack, Polygon CDK, Arbitrum Orbit, or Rollkit have already enabled developers to easily deploy custom Rollups with varying levels of trust, while decentralized sequencer projects like Espresso and Astria offer options for decentralizing the execution layer, if needed. Meanwhile, an increasing number of low-code "Rollup as a Service" (RaaS) products, such as Dymension, Conduit, Caldera, and Gelato, allow anyone to launch a custom virtual blockchain in minutes.

The broader "modular movement" further provides developers with standards and services covering other areas of the stack, further reducing the cost of building and scaling blockchain applications. Ethereum's EVM dominates as the "operating system" for smart contracts, while Solana's SVM is rapidly emerging as a high-performance alternative (both can be used in standalone Rollups). Protocols like POKT standardize the RPC/API layer across networks, while frameworks like SyndicatePolywrap abstract multiple protocols into a single frontend SDK; cross-chain bridges like Across enable liquidity to flow between different blockchain networks, and services like SAFE or Squads, along with "wallet as a service" (WaaS) companies like Magic, allow any user on any chain to easily create custom wallets. There are even new types of L1s built specifically for virtual blockchain environments, like Celestia.

Millions of Virtual Blockchains

The current strategy for Web3 startups is to first launch on high-performance, low-cost networks (like Ethereum L2 or Solana) and plan to migrate to custom, application-specific runtime environments if scaling is needed. Even existing protocols that have built their own chains, such as Celo or POKT, are transitioning to L2 architectures to simplify infrastructure costs, echoing the era when internet companies with data centers had to adopt cloud services. If you do not embrace the new, you can easily be outpaced by competitors who do.

Many believe that applications running on high-throughput blockchains like Solana can achieve "network scale" without L2, but the significance of network scale is greatly underestimated, as most activity on the internet occurs in the background. Every click triggers hundreds of hidden HTTP requests; loading Twitter.com alone triggers over 300 backend requests to various APIs and service providers within 2 seconds, just for a single user's action. Achieving network scale may mean processing millions of transactions per second for each application, but if demand on the internet side increases by a million, that is still far from sufficient. To reach this level of scale, virtualization is necessary, but we also need underlying ultra-high-performance L1s to achieve it. In addition to blockchains optimized for data availability throughput (like Celestia), high-performance blockchains (like Solana and Monad) are potentially interesting Rollup playgrounds.

That said, scalability is not the only important reason for virtual blockchains. Virtual blockchains are a powerful standard for online services in the Web3 era. The first wave of Rollups primarily consisted of "faster Ethereum" services. However, the flexibility offered by modular architectures makes virtual blockchains particularly useful for creating application-specific runtime environments or networks tailored for specific ecosystems, industries, or geographies. You can also create "virtual private blockchains" for use cases with strict access control or compliance requirements. The greater idea is that as blockchain and smart contract interfaces replace the Web2 paradigm of "cloud services and APIs," virtual blockchains may become the default backend infrastructure for all online applications.

We will explore these ideas in more depth in future articles, but the most important point I want to emphasize from a business perspective is that modularity represents a shift from capital expenditure to operational expenditure in Web3, and therefore, we can expect rapid scaling of the next generation of blockchain applications. Operational expenditure means costs scale with growth rather than being incurred upfront through large-scale financing before launch. This allows entrepreneurs to iterate faster, applications to scale cheaply, and investors to finance businesses with lower risk. Just like the Web2 that emerged after the internet bubble burst, these are the essential conditions for a golden age of innovation for Web3 startups.