What is the Blockchain Trilemma: The Make-Or-Break Factor For Crypto
Blockchain — the big idea that was launched in tandem with the Bitcoin white paper, has ushered in a new era of decentralized innovation, but with this new opportunity came a new set of challenge, known as the “blockchain trilemma.” What exactly is it, and why is it a fundamental challenge in the world of blockchain?”
A Quick Backstory
When Satoshi Nakamoto introduced Bitcoin through that now-iconic white paper in 2008, he simultaneously developed the concept of blockchain technology, in which a global shared database, secured by cryptography instead of a centralized institution, manages the store and transfer of money.
Time has proven Bitcoin’s design to be sound technology–its blockchain is the only one that has never been hacked till date for the past 15 years.
It also let the technological genie out of the bottle and got people thinking — what other financial functions can be performed via blockchain? One of these people, Vitalik Buterin, a Russian-Canadian programmer, went on to develop Ethereum, a programmable blockchain with smart contract capabilities, enabling a whole host of other financial functions such as saving, lending, borrowing, trading and investing under the umbrella term of “DeFi” applications.
But in order to compete with existing financial systems, Ethereum needed to be able to support mass adoption. Its blockchain was not able to scale up, resulting in high transaction fees for its users.
What is Blockchain Scalability?
This problem that Ethereum faced is known as the problem of scalability; low scalability manifests in the form of slow processing times, high fees and poor use experience.
It’s a stubborn problem because increasing scalability usually means more streamlining, which in turn means greater centralization and greater security risk — hence the conundrum called the “blockchain trilemma” coined by Buterin.
What is the Blockchain Trilemma?
In the realm of blockchain, the term “trilemma” encapsulates the intricate balancing act that developers, architects, and stakeholders must navigate. This trifecta of security, scalability, and decentralization represents a set of interconnected goals, and achieving one often comes at the expense of another.
- Security: The foundation of any blockchain is its security. By design, blockchains aim to provide tamper-proof and transparent ledgers. This is typically achieved through cryptographic hashing, distributed consensus mechanisms like Proof of Work (PoW) or Proof of Stake (PoS), and decentralization. Security is the assurance that transactions are immutable and resistant to malicious attacks.
- Scalability: Scalability pertains to a blockchain’s ability to handle an increasing number of transactions or participants without sacrificing performance. In other words, as more users join the network or as transaction volumes grow, the system should not slow down to a crawl. Scalability is crucial for blockchain technology to compete with traditional financial systems, which process a high volume of transactions per second.
- Decentralization: Decentralization is a defining feature of blockchain technology. It eliminates the need for intermediaries and third parties by distributing the ledger across a network of nodes. This ensures censorship resistance, removes a single point of failure, and promotes transparency. The more decentralized a blockchain is, the more resistant it is to control or manipulation by a central authority.
The challenge lies in striking the right balance between these three elements. Increasing one often means making sacrifices in the others.
For instance, if a blockchain network prioritizes security and decentralization, it might become less scalable, leading to slower transaction processing times. Conversely, focusing on scalability might necessitate trade-offs in decentralization, as it could lead to a more centralized network due to the need for faster consensus mechanisms or larger block sizes.
To put it into perspective, Bitcoin prioritizes security and decentralization at the expense of scalability. As a result, it processes a relatively small number of transactions per second compared to traditional payment systems.
On the other hand, newer blockchain platforms like Ethereum, Solana, Avalanche or Near Protocol are constantly striving to address the trilemma by experimenting with different consensus mechanisms and architectural designs. These projects are known as “Layer 1” solutions, and aim to enhance scalability while maintaining high levels of security and decentralization. (This is also partly why there are so many cryptocurrencies around–many of these are trying to one-up another in solving the blockchain trilemma.)
However, as we have witnessed, the higher scalability that many of these newer blockchains have achieved come with a cost to either decentralization or security. For example, Solana can process up to 65,000 transactions per second (TPS), far surpassing the capabilities of many existing blockchains, but has suffered multiple outages due to its more centralized blockchain, which results in single points of failure that can be easily disrupted or hacked.
A key point here: hardcore Bitcoin enthusiasts will argue that this conundrum has indeed been solved with the innovation of the Lightning Network, which is a “Layer 2” solution built on top of the Bitcoin blockchain to increase its scalability. So far, it has been well-received and increasingly adopted. In fact, River, a Bitcoin company, reported recently that the Lightning Network has grown by 1,212% in 2 years.
Conclusion
As for the rest of the crypto space, the blockchain trilemma represents a spectrum of trade-offs rather than a binary problem. Blockchain projects continuously iterate and refine their protocols to find a balance that suits their specific use cases and goals. While newer blockchain projects have made significant strides in addressing the trilemma by improving scalability, security, and decentralization, complete resolution remains elusive. Blockchain technology is still in its early stages, and ongoing research and development will likely lead to further improvements and innovations in this area.
