Emerging Bitcoin Modular Ecosystem

What is modularity anyway?

Modularity is the result of an interesting experiment taking place on Ethereum in response to the poor scalability properties of blockchains. To solve this bottleneck, developers took a radical approach: auctioning off key features of the main chain to other blockchains.

This modular innovation centered around roll-up technology has completely redefined how products and services are built on top of Ethereum. Separating all elements of the stack allows you to design different architectures depending on your use case. Naturally, this led to the proliferation of blockchain.

Don’t joke. Everyone is getting hilariously rich selling blockchain again.

Each new consensus protocol offers new and exciting scaling opportunities, but it also creates strange coordination problems. How does the economy become more efficient when users are distributed across different networks? How can I keep everyone in sync across these distros? Maybe one more… Blockchain?

It’s a turtle all the way.

This fragmentation of the ecosystem has had some obvious consequences. First of all, users are isolated and trapped between intermediaries. Rollups have strong trust-minimizing properties, but the inefficiencies they introduce in and out of those systems impose unreasonable costs to users. It also exposes you to riskier options such as bridges and centralized services.

For developers, lack of interoperability between platforms creates friction and creates a competitive rather than collaborative environment. Every other day, a new protocol is created so that new and existing teams can compete for another copy of the same application. In many cases, teams choose to “bet on their own” and spin off into their own ecosystem (read: blockchain). It is important to highlight the appeal of this model, which allows customizing and optimizing various components for each application. This flexible architecture allows anyone to provide their own framework and inspire new designs. The possibilities are endless!

Unfortunately, these incentives have led to fragmented network effects. If what’s built doesn’t fit together, users will only be integrated into a few competing networks. As a result, economic activity is concentrated in fewer licensed systems.

The brand’s modularity distracted people from their goals. Using various interfaces to interact with the consensus protocol is a perfectly valid idea. However, Ethereum’s strategy turned out to be problematic. It views interoperability as an optional feature rather than a fundamental design principle. As long as Ethereum continues to pursue scalability by expanding its blockchain, the debate will continue, providing ample opportunity for competitors to exploit this distinction and sow discord. Divide and conquer.

Bitcoin Opportunity

In Bitcoin, a different architecture is emerging that favors a fundamentally different design. Using Lightning as the interoperability backbone, developers are slowly consolidating towards a technology stack that is much closer to Bitcoin’s peer-to-peer model.

Instead of trying to replicate global shared state, protocols like Cashu or Fedimint optimize local and permissionless interactions. Financial services can now be distributed across various economic hubs and remain connected via the Lightning Network.

Liquidity providers, Atomic Bridge, eCash Mint. A new financial network that all shares the same payment layer.

Nostr’s arrival provides the social abstraction that ties everything together. It is a social network based on similar principles to Bitcoin, offering a simple set of rules designed to maximize interoperability. Nostr is unleashing an explosion of open innovation from the Cambrian era by avoiding regulations for the functionality it enables.

Today, various projects are beginning to explore ways to facilitate Bitcoin commerce by making Nostr a fundamental component of the Bitcoin user experience. The public key infrastructure underlying the protocol is a natural fit for wallets and other payment applications, allowing them to communicate with each other and exchange messages securely. This communication layer can connect users with other people and various services provided through the network. Standards like Nostr Wallet Connect are creating new opportunities for Bitcoin applications to interface with Nostr’s growing ecosystem.

case study

Projects like Mutiny perfectly embody the differences in Bitcoin’s modular vision. Users can simultaneously connect to services such as Nostr Relays, Fedimint Federation, and Lightning Service Provider (LSP). Each of these gives you access to more and more features and applications. Using Nostr as a discovery service allows you to leverage social networks to identify and natively access applications and services endorsed by your peers. This trust web presents an interesting alternative to so-called trustless systems. Participants can begin to rely on market incentives to engage in more efficient exchanges unencumbered by the trade-offs required in a more decentralized system.

Eventually, a marketplace will emerge where liquidity providers, ecash mints, lenders and CoinJoin coordinators can advertise their services through Nostr. Decentralized order book project Civkit integrates seamlessly with Mutiny, allowing users to engage in peer-to-peer trading. All integrations are designed around permissionless engagement, allowing users to maintain complete sovereignty over their interactions.

Platform and Protocol

Bitcoin’s modular story has its own risks. A fundamental piece of the puzzle like an LSP involves significant capital requirements that create economies of scale among competing providers. Ecash Mint’s growth may be hampered by regulatory issues and operator fraud. The Nostr relay has already shown a tendency toward centralization, and it is still unclear how the network topology will progress.

The success of this approach depends on market selectivity and it is important to keep barriers to entry for these businesses low. To this end, various efforts are being made. For example, several Lightning companies are currently collaborating on a specification that will allow any market participant to implement their own LSP.

It is still too early to predict how these architectures and protocols will evolve. As the two worlds continue to collide, it is likely that the rollup will find a place within the Bitcoin ecosystem. Application-specific designs, such as exchange rollups or zkCoin, do not require global state and can be made interoperable with Lightning.

The tension between the two methods is reminiscent of the early days of the Internet. Commercial interests may favor platforms that can capture and monetize some of the network effects. It may take longer for more open, permissionless protocols to actually take off. The Internet offers a cautionary tale about consolidating services and applications into walled gardens. We hope that the current Bitcoin development path will resolve into a future that prioritizes interoperability and permissionless access over financial silos.