Modular blockchains could be the next hot crypto market trend in 2023

The public blockchain sector grew from less than a few million dollars in the past decade to a $1 trillion industry. One thing the space has yet to achieve is a decentralized, secure, interoperable solution.

Let’s take going from Ethereum to Bitcoin, the largest blockchain network, as an example. Historically, centralized exchanges have been one of the few safe, viable solutions for switching from one chain to another.

BitGo, a centralized solution provider, provides the largest pool of liquidity for Ethereum users to gain Bitcoin (BTC) exposure via Wrapped Bitcoin (WBTC). BitGo IOU accounts for over 93.6% of Bitcoin bridged to Ethereum. Users must rely on BitGo partner platforms such as centralized exchanges or CoinList to exchange BTC and WBTC.

WBTC’s dominance exposes it to obvious centralization and regulatory risks. RenBTC, a platform managed by Alameda Research, disbanded in December 2022 after FTX’s collapse, and the same may happen to BitGo. The recent regulatory crackdown on Paxos for issuing the US dollar-backed Binance USD (BUSD) stablecoin could also finally bring services like BitGo into the crosshairs of the US Securities and Exchange Commission.

The interoperability between smart contract platforms and other application-specific blockchains also needs to be developed. Sidechains and rollups on Polygon, Arbitrum and Optimism account for 90% of Ethereum cross-chain bridge volume. Near’s Rainbow and Fantom bridges are the only independent blockchains with a significant total value locked on bridges with Ethereum.

Several major crypto projects, such as Polkadot and Cosmos, implemented modularity from the ground up to build a secure, scalable cross-chain platform, with the ultimate goal of establishing an interoperable “network of networks.” However, Cosmos has yet to attract sufficient liquidity to its ecosystem, and Polkadot continues to be in development.

The question of bridge centralization

The 2021 hype cycle witnessed the emergence of a “multichain future” where different blockchains host specific functions but are connected through interoperable solutions. The first generation of bridges were very primitive and centralized, which eventually made them hot targets for exploits.

The next generation of interoperable solutions work as separate blockchains to incorporate decentralization and improve security. These include intermediate transfer tokens such as THORchain’s RUNE (RUNE). However, the daily volume of transfers via THORchain has remained below $20 million, suggesting that it has failed to pick up usage.

Threshold, which introduces a trustless and private portal for Bitcoin on Ethereum, will launch in Q1 2023. It will look to replace centralized providers like BitGo to bridge the gap between Bitcoin and Ethereum.

Some other protocols focus on interoperability between smart contract platforms.

LayerZero is an omnichain interoperability protocol that allows the development of applications such as decentralized exchanges and lending protocols on top of it. These protocols can interact with monolithic chains such as Ethereum, Cosmos Hub and Solana. Stargate is the first DEX built with LayerZero and has a liquidity of $324 million across Ethereum, Polygon, BNB Smart Chain and Avalanche.

Celestia is a layer-1 blockchain built using the Cosmos SDK. The platform supports smart contract execution, but is only responsible for ordering transactions and making a blockchain’s data more accessible.

It aims to act as an intermediate layer between Ethereum rollups and the mainnet by compressing the rollup data for faster execution on Ethereum layer 1. Celestia does not verify the block data, but helps optimize gas costs and execution speed. This capability will extend to tier-1 blockchains such as Cosmos, Solana and Avalanche.

The team will run an incentivized test in Q1 2023 to start public testing and reward testnet validators with a potential airdrop of native tokens.

Related: ‘Multichain future is very clear’ — MetaMask to support all tokens via Snaps

Fuel Labs, the team building Fuel Network, also developed the programming language Fuel Virtual Machine and Sway, which increases transaction speed. The team launched its second beta testnet in November 2022, and the public testnet is expected to go live sometime in 2023.

While the interoperable area is still underdeveloped and exposed to centralization risks, various teams are working on decentralized solutions that will launch in 2023. These protocols will certainly bridge the liquidity across decentralized finance protocols and other layer-1 blockchains. On top of that, they will also help build a multi-chain future, where the user experience will be blockchain agnostic and protocols will interact seamlessly with each other.