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 last decade to a $1 trillion industry. However, one thing that 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 shifting 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). The BitGo IOU accounts for over 93.6% of the Bitcoin bridged to Ethereum. Users must rely on BitGo partner platforms like centralized exchanges or CoinList to exchange BTC and WBTC.

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

The interoperability between smart contract platforms and other application-specific blockchains must also be developed. Sidechains and rollups on Polygon, Arbitrum and Optimism comprise 90% of the cross-chain bridge volume from Ethereum. Near’s Rainbow and Fantom bridges are the only independent blockchains with a notable 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 being to establish an interoperable “network of networks.” However, Cosmos has yet to attract sufficient liquidity to its ecosystem, and Polkadot continues to stay in development.

The issue o bridge centralization

The 2021 hype cycle witnessed the emergence of a “multichain future” where various blockchain host specific functions but are joined together through interoperable solutions. The first generation of bridges was highly primitive and centralized, eventually making them hot targets for exploits.

The next generation of interoperable solutions operate as separate blockchains to include decentralization and enhance security. These include intermediate transfer tokens like THORchain’s RUNE (RUNE). However, the daily volume of transfers via THORchain has stayed 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 in bridging liquidity between Bitcoin and Ethereum.

Some other protocols focus on the interoperability between smart contract platforms.

LayerZero is an omnichain interoperability protocol that allows the development of applications like decentralized exchanges and lending protocols on top of it. These protocols can interact with monolithic chains like Ethereum, Cosmos Hub and Solana. Stargate is the first DEX built using 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 the Ethereum layer 1. Celestia does not verify the block data but helps optimize the gas cost and speed of execution. This capability will extend to layer-1 blockchains like 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 and Sway programming language, which enhances 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 remains 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 decentralized finance protocols and other layer-1 blockchains. On top of that, they will also help build a multichain future, where the user experience will be blockchain agnostic and protocols will interact with each other seamlessly.

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