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The dialogue surrounding blockchain scalability and architectural efficiency has intensified following the cryptocurrency bull cycle of 2021. This report delves into the apparent shift from the traditional monolithic blockchain architectures to the contemporary modular approaches and how MultiversX is positioning itself to capitalize on the best of both worlds. Historically, blockchains like Bitcoin and Ethereum operated on a monolithic system where all functions were integrated into a single chain. Although foundational, this architecture exhibited significant scalability limitations as user numbers grew. In contrast, the recently adopted modular blockchain architecture, seen in systems like Cosmos and Polkadot, offers a more nuanced and flexible approach. By segregating functions such as execution, consensus, and data availability into different layers or chains, modular blockchains aim to enhance scalability, security, and efficiency. 

This report provides 

• a comprehensive comparison of these two architectural paradigms
• a look into how other alt-L1 protocols have attempted to “go modular” and 
• a thorough analysis of Sovereign Chains that set a new standard in modularity

Modular vs. Monolithic

After the cryptocurrency bull cycle of 2021, the crypto space has experienced a notable shift in the discussions around scalability and blockchain architecture. As opposed to the early “first generation” design ideas around a single monolithic blockchain, the community has since (mostly) pivoted to various “modular” solutions, including architectural designs such as Subnets, Parachains, or Zones.

Historically, blockchains operated on a monolithic architecture, which integrates all functions on a single chain. This approach, however, has shown limitations in flexibility and scalability (Bitcoin and early Ethereum being prime examples), struggling particularly as the network scales to accommodate millions of users. 

Scalability in blockchain refers to the network's ability to increase the amount of work and transaction volume it can handle without compromising on the protocol’s decentralization, permissionlessness, or other aspects. The latest proposed design is to “modularize” the previously fully integrated components of the blockchain stack, creating separate chains or layers that allow for optionality and specialization. This challenge resembles traditional IT systems, where increasing demands are managed by distributing tasks across multiple machines. In blockchain, however, the solutions diverge into two main strategies: horizontal scaling (sharding) and vertical scaling (layers and modularization). Sharding distributes (or splits up) execution across multiple nodes/shards in which shards complete their portion of the work simultaneously. Scaling via layers and/or modularization does not “split up” the execution work but rather outsources specific components of the entire process (execution, consensus, data availability, settlement) to more specialized chains. 

Modular Design

Modular blockchains (Cosmos, Polkadot, Ethereum+rollups) adopt a divide-and-conquer strategy, where key functions such as execution, consensus, settlement, and data availability are separated:

• Execution Layer: Handles transaction processing and state changes.
• Settlement Layer: Ensures transaction execution and manages disputes.
• Consensus Layer: Maintains transaction order and finality.
• Data Availability Layer: Provides essential data for state transition validation.

This separation allows legacy blockchains, like Ethereum, to achieve higher throughput and scalability while maintaining robust security and censorship resistance. However, with inherently scalable L1s like MultiversX, the “modularization” of the chain is less about scalability and more about providing optionality and autonomy to new protocols and Sovereign Chains.

Modular blockchains provide significant benefits, particularly in flexibility and efficiency. They allow for high transaction throughput, which is crucial for applications demanding rapid processing, such as high-frequency trading, gaming, and social networks. Additionally, the modular structure enables developers to build scalable decentralized applications (dapps) without the constraints typically found in monolithic chains.

The modular approach, however, introduces complexities in interoperability, composability, liquidity accessibility, and arguably a worse UX. Fragmentation of state and liquidity across various layers can complicate data retrieval and asset exchange, posing significant hurdles for decentralized finance (DeFi) applications that rely on seamless interaction and liquidity.

Monolithic Design

Monolithic blockchains (Solana, Aptos, Sui) offer a unified solution where all operations occur on a single chain. This approach simplifies the design but often leads to congestion and competition for block space, as all transactions and operations vie for the same resources. Despite these theoretical challenges and numerous real-world examples of congestion issues, some blockchains, such as Solana, continue to advocate for monolithic designs, emphasizing potential advancements in hardware and software to overcome scalability limitations.

Monolithic chains offer simplicity and autonomy in operation, allowing for the development of custom logic and smart contracts without concern for inter-layer transactions or competing chains. This can, like in the case of the Solana blockchain, lead to a more streamlined, though potentially less flexible, solution. The limitation of most current monolithic designs lies in their scalability. As demand increases, the limited block space becomes a bottleneck, leading to higher transaction costs and potential processing delays. However, MultiversX’s adaptive sharding base layer and Sovereign Chain design greatly minimize this drawback. 

MultiversX’s Modular Solution: Sovereign Chains

MultiversX, already known for pushing the boundaries of blockchain scaling with its dynamic sharding design, is now looking to introduce its own modular scaling solution known as Sovereign Chains (Sovereign Chain). Sovereign Chains share many similarities with the app-chain model scene in other blockchains, such as Cosmos, Polkadot, Avalanche, and more. 

Despite the broad capabilities of general-purpose blockchains like MultiversX, certain applications demand more specialized solutions. App-specific blockchains address this need by providing dedicated block space and computational resources to individual applications, thus optimizing transaction speed, reducing latency, and lowering fees. This specialization is particularly beneficial for applications requiring high throughput or complex operations, such as gaming, high-frequency trading, and Sovereign Chainial media platforms. Additionally, thanks to the customization and flexibility of Sovereign Chains, new specialized Sovereign Chains can opt to pay gas fees in their own tokens or make certain operations free.

Advantages of App-Specific Blockchains

1. Enhanced Performance: By allocating all resources to a single application, app-specific blockchains can achieve higher transaction processing capabilities and reduced latency.
2. Customization and Sovereignty: These blockchains allow developers to tailor aspects like the security model, fee structure, and governance mechanisms to suit specific needs. This level of customization supports innovative incentive schemes and unique user experiences, fostering user retention and creating competitive advantages.
3. Institutional Adoption: For institutions looking to leverage blockchain technology, app-specific blockchains offer the opportunity to operate under tailored specifications and potentially in a private manner.

With the future launch of Sovereign Chains, MultiversX will be an industry leader in L1 scalability. Together with Sovereign Chains, this design facilitates the processing of tens of thousands of transactions per second, making it an attractive platform for developers to deploy decentralized applications (dApps) using smart contracts. 

Unlocking New Highly-customizable Chains

Sovereign Chains on the MultiversX platform represent a transformative approach to blockchain customization and scalability. These Sovereign Chains act as fully independent chains equipped with a comprehensive suite of features that mirror those of the MultiversX main chain, including smart contract processing, ESDT transfers, delegation, staking, and governance.

Developers have significant latitude when configuring Sovereign Chains. Features can be selectively activated or deactivated, and new functionalities can be integrated at the protocol level, adapting the chain to specific application needs or developer preferences. This level of customization extends to the consensus mechanisms, where developers can opt between several models such as Proof of Authority, Proof of Stake, or any other.

The configuration of validators is also flexible, allowing developers to set minimum and maximum numbers and establish specific criteria, such as staking different tokens. The economic model of the shard, including the fee model and gas token, is equally configurable, providing options to eliminate transaction fees under certain conditions, such as in private chain setups or for specific user groups. This is facilitated by defining the gas token as an ESDT.

Virtual Machine Integration and Execution

Within the MultiversX architecture, developers can create and integrate multiple virtual machines (VMs). This includes connections to the WasmVM and SystemVM, ensuring seamless interactions and built-in composability across different computing environments. Developers can also build new VMs according to their specific requirements, including options like EVM, Move, or other specialized VMs.

High-Level Features of Sovereign Chains

• High Performance: Sovereign Chains are capable of processing over 4,000 swaps per second, tailored for DeFi and gaming applications.
• Consensus Efficiency: The new consensus model allows for 90-95% of the consensus time to be dedicated to processing, supported by fewer, high-performance nodes.
• Specialized Execution: Utilization of WASM WARM instances enables the retention of all contracts as instances, which execute at nearly machine-level speed, enhancing the performance.
• Privacy and Accessibility Options: Sovereign Chains can be configured as either private or public, accommodating specific privacy requirements and access controls.
• Configurable Virtual Machines: The default SystemVM and the WasmVM can be run in parallel with other VMs.

Sovereign Chains and Composability with the Mainchain

Sovereign Chains will serve as autonomous entities that process and validate transactions within their respective environments. The ultimate aim of Sovereign Chains is to empower developers with an SDK to create efficient, custom chains that are fully integrated into the broader MultiversX ecosystem or even other L1 chains. With decentralization at its core, MultiversX currently operates with ~3,200 validators, ensuring a robust, public, and open blockchain network. This integration promises a unified user experience across all dApps, akin to operating within a single blockchain environment. Features like relayed transactions and paymaster smart contracts simplify interactions, enhancing usability and composability across the network.

By default, Sovereign Chains inherit the SPoS protocol from their parent blockchain (but can also choose to run another VM), maintaining the same consensus mechanisms, validator rating systems, and staking/delegation contracts. This approach ensures that the basic services a PoS network must provide—block production and blockchain maintenance—are robust and trustworthy. User interactions, such as transaction requests, are validated through consensus rules, ensuring a reliable network response, typically the inclusion of the transaction in a block validated by a supermajority of operators.

Sovereign Chains operate on three fundamental trust assumptions:

1. Economic Trust: This form of trust derives from stakeholders who have a financial interest in the network, ensuring their motivation aligns with the overall network health.
2. Decentralized Trust: Achieved through a network operated by independent, geographically dispersed validators, enhancing the integrity and resilience of the network.
3. Inclusion Trust: Trust in validators to fairly and accurately process and include transactions as agreed, based on the consensus protocols they utilize.

These trust paradigms are crucial as they provide assurances backed by financial risks, making it economically irrational for validators to act maliciously.

Validators in Sovereign Chains have the critical role of maintaining the connection to the main MultiversX chain through various processes, including cross-chain processing, settlements, and ensuring data availability. These validators utilize EGLD, the native token of MultiversX, as gas to post data and execute transactions on the mainchain.

Every two minutes, the Sovereign Chain is required to post the block header to the mainchain for settlement. Regarding data availability, the Sovereign Chain periodically posts compressed state changes from the last data availability push to the current one. The correctness of these state changes can be verified by using the previous root hash, applying the state changes, and validating that the resulting root hash matches the one posted from the header. Initially, it is estimated that posting one header at 2-minute intervals would cost approximately 2 EGLD per day.

Launching A Sovereign Chain

The base token of MultiversX is EGLD, which plays a crucial role in the network's economic activities. Additionally, central to its functionality is the ESDT token standard, which simplifies and economizes token transfers, thereby contributing to the system's scalability. However, it is important to note that anyone can launch a Sovereign Chain, leveraging EGLD and their own native token, to secure the new chain utilizing a novel restaking (or dual staking) mechanism discussed in greater detail in future sections.

While anyone can launch their own Sovereign Chain using the SDK, certain financial commitments are required for a Sovereign Chain to qualify for the shared security from the mainchain. Sovereign Chain within the MultiversX ecosystem. Initially, a minimum of 1,000 staked EGLD must be locked specifically for the Sovereign Chain. This amount is the baseline for launching, but it is often beneficial to secure significantly more than this minimum, which can be achieved through community sponsorship or crowdfunding. Additionally, each validator node on the Sovereign Chain must lock 100 staked EGLD, with a minimum requirement of 20 nodes participating. Validators have the option to stake for themselves, automatically allocating their stake to their own node, or they can become "sponsors" by facilitating the staking process for others.

Beyond just validators staking, depending on how the Sovereign Chain is designed, users have the ability to participate by locking staked EGLD to specific nodes. There is also a cap on the maximum amount of staked EGLD, though this, along with other parameters, can be adjusted via governance votes. These votes utilize data from the Sovereign Chain Staking Contract and respond to changing market conditions and specific needs of the Sovereign Chains. Importantly, validators on a Sovereign Chain are not required to be validators on the mainnet, highlighting the independence of Sovereign Chains' growth. While these figures represent the minimum thresholds, individual Sovereign Chains may opt to increase these limits to suit their specific configurations, although decreases below the minimum are not permitted.

The Economics of Sovereign Chain and Comparisons to Other App-chain Designs

Starting a new PoS network involves significant challenges, notably in token distribution and economic stability. New tokens typically face high volatility and may be difficult to obtain due to limited exchange listings. Additionally, the security of these networks is closely tied to the value of their native tokens. Because of this, entirely new sectors of the crypto space have been created recently to address this very problem, with EigenLayer and restaking being the most recent example. However, other L1 protocols like Cosmos, Polkadot, and Avalanche also share some similarities. 

Cosmos is designed around the concept of application-specific blockchains that operate independently yet can interact through the Inter-Blockchain Communication (IBC) protocol. Projects within the Cosmos ecosystem launch their distinct chains, each upheld by its own set of validators, thereby creating a decentralized yet isolated network environment. This design allows for tailored security models and independence for each chain, with many opting not to connect via IBC. Despite the relative user-friendliness of the Cosmos Software Development Kit (SDK), the ecosystem faces challenges such as high development costs and limited network effects, with most chains functioning akin to isolated islands devoid of global market interaction.

Polkadot, on the other hand, employs a more rigid economic model and the concept of shared security. Validators do not choose which sidechains to validate; instead, they are randomly assigned to ensure equitable security across all sidechains. The entry threshold for validators is high, maintaining a controlled number of participants and potentially enhancing network security. Although validators receive sidechain transaction fees, there are no additional incentives, focusing rewards on maintaining the integrity and performance of the mainchain. This system facilitates simple and autonomous operation of side-chains, with state finality achieved through WebAssembly (WASM) based smart contracts. Crucially, Polkadot's bridges, which link to the primary Relay Chain, benefit from robust security underpinned by the ecosystem’s consensus mechanism, managed by collators.

Avalanche currently offers a slightly less flexible model with its subnets but allows for more customization than Polkadot. Avalanche offers a scalable Layer 1 (L1) solution employing Directed Acyclic Graphs (DAGs), which facilitates the launching of independent chains using its SDK. Similar to Polygon's supernets, Avalanche's subnets can operate independently with their own validators or through a predefined validator infrastructure. Validators in Avalanche can choose specific sidechains to validate, though they must meet a minimum stake requirement on the mainchain. Rewards are primarily distributed in AVAX tokens, derived from activities on the mainchain and supplemented by transaction fees from sidechains. This structure supports a balance between customization and security, ensuring validators have a vested interest in the network's overall health. 

MultiversX takes a different approach. Sovereign Chains provide each chain with the autonomy to establish its own governance, rules, and distinct token economy. This approach allows the development and management of unique tokens tailored to the specific needs and objectives of each individual chain, diverting from other current-day models like Ethereum rollups that utilize ETH as its gas token. With Sovereign Chains, each chain can design a token that precisely fits its intended purpose, community, and economic framework. This customization facilitates targeted incentives, network security, and the long-term viability of the chain.

Should a Sovereign Chain introduce its own token, it can also utilize a dual-staking mechanism (or restaking), where it leverages the existing economic structures from the mainchain while leveraging its own native token. 

This approach not only diversifies the potential sources of yield for validators and sponsors but also enriches the network's economic and security model. This system allows staking with EGLD, an established token with lower volatility and higher liquidity, alongside the network’s native token. This strategy significantly reduces the risks asSovereign Chainiated with new token volatility, as the economic security of the network does not solely depend on the new token's stability, as well as introduces a second avenue for yield generation.

The primary advantage of dual staking is the potential for dual yield, which is derived from multiple sources:

1. Stable Yield from EGLD: Validators and sponsors secure a stable income from the yields generated by staked EGLD, benefiting from the robust economic system of the mainchain.
2. Additional Rewards from Native Tokens: Validators can earn further from fees and rewards generated by the native tokens of the Sovereign Chains. This not only enhances the attractiveness of new chains but also encourages deeper investment in the network.
3. Increased Usage and Fees: As more developers and users engage with Sovereign Chains, the network experiences increased transaction volumes and, consequently, higher fee generation. This benefits both the validators of Sovereign Chains and the mainnet.
4. Enhanced Composability: With Sovereign Chains acting as focal points for dApps, there is an improved integration and interaction across the ecosystem, leading to enhanced composability and utility.

The next phase in the development of Sovereign Chains is defining an economic model that promotes the growth and usage of EGLD within these chains. This model aims to provide robust economic security as a foundation for the underlying projects, integrating concepts of shared security. The ultimate goal is to establish a self-sustaining, autonomous economic layer that supports innovative distributed systems and contributes to a more secure and advanced Internet infrastructure.

Cultivating MultiversX Adoption

MultiversX is gearing up to dramatically increase its footprint in the Web3 ecosystem through a series of strategic hackathons, university partnerships, and grant programs. The platform boasts a robust infrastructure and cutting-edge technology that is not only built and ready to use but also ideally suited for developers eager to elevate Web3 to the next level. These initiatives highlight the versatility and readiness of MultiversX for new and experienced developers alike.

Starting with a busy schedule of hackathons, MultiversX is a major player in fostering innovation and talent in blockchain development. The season kicked off with the Bucharest Hackathon on April 13-14, followed closely by a 24-hour coding marathon at Milton Friedman University in Budapest on May 7-8. These events provide a hands-on experience with MultiversX’s tools, demonstrating their capability to handle the demands of real-time, innovative development. June sees the Proof of Hack event, the first hackathon to feature a Sovereign Chain track for builders. The momentum continues into the summer and autumn, with major hackathons scheduled for August and xDay in October, details of which are eagerly anticipated.

Furthermore, MultiversX is deepening its educational impact through partnerships with universities both in Romania and abroad. In Romania, institutions like ULBS, UBB, UPB, and TUIASI are integral in introducing students to blockchain technologies through MultiversX’s resources. Internationally, notable collaborations include Old Dominion University in Virginia, where MultiversX is lecturing a comprehensive three-hour blockchain course, and Wien University of Economics and Business, which offers introductory courses to blockchain backed by real-world use cases facilitated by MultiversX. Upcoming partnerships with Cornell University and further engagements at ELTE University in Budapest will expand the reach and impact of MultiversX, preparing a new generation of developers to contribute to the Web3 landscape.

Finally,in a move to bolster innovation and community engagement within the blockchain ecosystem, MultiversX has joined forces with Bware Labs, a leader in decentralized infrastructure solutions. This collaboration introduces a new grant program designed to empower startups and developers with the tools necessary to build and expand their projects on the MultiversX network.

The partnership with Bware Labs leverages its Blast API platform, providing startups with crucial infrastructure services that are foundational for blockchain application development. By offering grants in the form of credits or free trials, this initiative aims to lower the barrier to entry for new projects, enabling them to focus on innovation and development without the initial overhead of infrastructure costs.

Grant Program Details

The grant program is structured to provide maximum support to eligible projects. Participants can benefit from:

• Free Trial Access: Projects will receive up to three months of free access to the Blast API. The trial includes one month for the Startup and Custom plans and extends to three months for the Developer plan.
• Post-Trial Subscription: Following the free trial, grant recipients will have the option to continue their subscription. This extended support ensures that projects can maintain their growth trajectory and continue to leverage the robust features of the Blast API.

Long-Term Benefits

By connecting emerging projects with Bware Labs' premier infrastructure platform, the grant program is set to enhance the capabilities of developers, strengthen the product offerings within the MultiversX ecosystem, and unlock significant growth potential for participants. This initiative not only supports the technical development of new projects but also contributes to the vibrancy and diversity of the blockchain community hosted by MultiversX.

Conclusion

The evolution from monolithic to modular blockchain architectures marks a significant advancement in the quest for scalability, flexibility, and efficiency in the cryptocurrency space. This shift, catalyzed by the limitations of traditional monolithic blockchains like Bitcoin and early Ethereum, has paved the way for innovative approaches such as MultiversX with its Sovereign Chains. 

MultiversX's Sovereign Chains add new optionality (and modularity) to the already highly scalable L1. These chains allow developers to create app-specific blockchains with dedicated resources tailored to their needs. One of the key advantages is the ability to launch a Sovereign Chain with its own native token, enabling customized economic models and incentive structures. This feature allows projects to define unique fee structures, governance mechanisms, and staking rewards that align with their specific objectives and community needs.

Additionally, Sovereign Chains support multiple virtual machines (VMs), providing developers the freedom to choose the best execution environment for their applications. For instance, they can opt for the WebAssembly VM (WasmVM) for high-performance execution or build new VMs like the Ethereum Virtual Machine (EVM) or Move VM to cater to specialized requirements. 

Moreover, developers can configure Sovereign Chains to operate with different consensus mechanisms, such as Proof of Stake (PoS) or Proof of Authority (PoA), tailoring the security model to their specific use case. The ability to adjust validator criteria, economic models, and even the gas token (including eliminating transaction fees in certain scenarios) further enhances the customization potential.

The robust integration with MultiversX's mainchain ensures that Sovereign Chains benefit from shared security, while also maintaining their autonomy. Validators on Sovereign Chains can participate in dual staking, leveraging both the EGLD token and the native token of the Sovereign Chain, which diversifies yield opportunities and enhances network security.

Finally, MultiversX’s proactive engagement with the developer community through hackathons, university partnerships, and grant programs underscores its commitment to fostering innovation and adoption in the Web3 ecosystem. As blockchain technology continues to evolve, MultiversX's strategic initiatives and cutting-edge architecture position it as a leader in the scalable, modular blockchain landscape.

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Disclaimer: This report was commissioned by MultiversX. This research report is exactly that — a research report. It is not intended to serve as financial advice, nor should you blindly assume that any of the information is accurate without confirming through your own research. Bitcoin, cryptocurrencies, and other digital assets are incredibly risky and nothing in this report should be considered an endorsement to buy or sell any asset. Never invest more than you are willing to lose and understand the risk that you are taking. Do your own research. All information in this report is for educational purposes only and should not be the basis for any investment decisions that you make.