In 2023 may be the year of the modular blockchains

Over the past ten years, the public blockchain industry has grown from a few million dollars to a $1 trillion market. The space hasn’t yet succeeded in creating a decentralized, safe, interoperable solution, though.

Consider switching from Ethereum to Bitcoin, the biggest blockchain network. Centralized exchanges have traditionally been among the few secure, workable options for switching from one chain to another.

Via Wrapped Bitcoin, BitGo, a centralized solution provider, offers the biggest pool of liquidity for Ethereum users to access Bitcoin (WBTC). More than 93.6% of the Bitcoin crossed to Ethereum is represented by the BitGo IOU. To exchange BTC and WBTC, users must use BitGo partner services like centralized exchanges or CoinList.

WBTC is clearly vulnerable to centralization and regulatory issues because to its dominance. With the demise of FTX, Alameda Research’s platform RenBTC was shut down in December 2022; BitGo may follow suit. The recent legal assault on Paxos for releasing the Binance USD (BUSD) stablecoin, which is backed by U.S. dollars, may eventually lead the U.S. Securities and Exchange Commission to target BitGo.

It is also necessary to develop the interoperability between smart contract platforms and other blockchains designed for certain applications. 90% of the volume of cross-chain bridge transactions from Ethereum is made up of sidechains and rollups on Polygon, Arbitrum, and Optimist. The only other independent blockchains having a sizable amount of wealth locked on bridges with Ethereum are Near’s Rainbow and Fantom bridges.

A safe, scalable cross-chain platform was built using modularity from the ground up by a number of significant crypto projects, including Polkadot and Cosmos, with the eventual objective of creating an interoperable “network of networks.” But, Polkadot is still in development, and Cosmos hasn’t yet managed to bring in enough liquidity to its ecosystem.

Centralization of bridges as a problem

A “multichain future,” where different blockchains each host a unique function but are connected through interoperable solutions, emerged during the 2021 hype cycle. Because to their extreme primitiveness and centralization, the initial generation of bridges eventually became popular targets for vulnerabilities.

The next generation of interoperable solutions uses independent blockchains to increase security and implement decentralization. They consist of intermediary transfer tokens like RUNE from THORchain. The daily volume of transactions made through THORchain, however, has remained below $20 million, indicating that usage has not increased.

In Q1 2023, Threshold, which introduces a private and trustless site for Bitcoin on Ethereum, will go live. In order to bridge liquidity between Bitcoin and Ethereum, it will try to supplant centralized suppliers like BitGo.

Some protocols concentrate on the compatibility of different smart contract systems.

An application like decentralized exchanges and lending protocols can be developed on top of the omnichain interoperability protocol called LayerZero. Monolithic chains like Ethereum, Cosmos Hub, and Solana can communicate with these protocols. The first DEX created with LayerZero, Stargate has $324 million in liquidity across Ethereum, Polygon, BNB Smart Chain, and Avalanche.

A layer-1 blockchain called Celestia was created using the Cosmos SDK. The platform allows for the execution of smart contracts but is simply in charge of arranging transactions and improving data accessibility.

By compressing the rollup data for quicker Ethereum layer 1 execution, it seeks to serve as an intermediary layer between Ethereum rollups and the mainnet. While assisting in the optimization of the gas cost and execution speed, Celestia does not validate the block data. Moreover, layer-1 blockchains like Cosmos, Solana, and Avalanche will benefit from this functionality.

In order to launch public testing and reward testnet validators with a hypothetical airdrop of native tokens, the team will conduct an incentivized test in Q1 2023.

The startup behind Fuel Network, Fuel Labs, also created the Sway programming language and Fuel Virtual Machine, which accelerates transaction speed. The second beta testnet was introduced by the team in November 2022, and it is anticipated that the public testnet would be online sometime in 2023.

Some teams are working on decentralized solutions that will launch in 2023, despite the interoperability space still being undeveloped and vulnerable to centralization threats. These protocols will safely connect layer-1 blockchains and other decentralized finance protocols in terms of liquidity. Also, they will contribute to the creation of a multichain future in which the user interface will be independent of the chosen blockchain and the interactions between protocols would be smooth.

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