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.

Ethereum market share of bridges by TVL. Source: Dune

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…

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