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 that the space has yet to solve is a decentralized and secure interoperable solution.

Let’s take Ethereum (ETH) to Bitcoin (BTC), the largest blockchain network, for example. Until today, centralized exchanges are the only viable solution for switching from one chain to another.

A centralized solution provider, BitGo, provides the largest pool of liquidity for Ethereum users to gain 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, dissolved in December after FTX collapsed, and the same may happen to BitGo. The recent regulatory action against Paxos for issuing a USD-backed token, BUSD, may also eventually bring services like BitGo into the US SEC’s crosshairs.

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

Several major crypto projects, such as Polkadot (DOT) and Cosmos (ATOM), implemented modularity from the ground up to build a secure and 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 from bridge centralization

The 2021 hype cycle witnessed the emergence of a “multichain future” where various blockchain host-specific functions are but linked together 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 symbols such as Thorchain’s RUNE. However, the daily volume of transfers via Thorchain has remained below $20 million, indicating that it has failed to pick up usage.

Thresholdwhich 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 DEXs 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 $324 million in liquidity across Ethereum, Polygon, BSC 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 roll-ups and the mainnet by compressing the roll-up 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 Fuel Virtual Machine (FuelVM) and the Sway programming language, 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 space is still underdeveloped and exposed to centralization risks, various teams are working on decentralized solutions that will launch in 2023. These protocols will securely bridge the liquidity across DeFi 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 interact seamlessly with each other.

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