The basic value promise of cryptocurrencies is to provide a safe, trustless money system that operates without the intervention of a centralized authority. At the same time, this system is only completely functional when there is widespread adoption because a currency is pointless if only a few people use it.
To attain the amount of scalability required for mainstream adoption, blockchain developers have discovered that they must compromise on decentralization and/or security—this is known as the blockchain trilemma. Sharding, rollups, side chains, and Layer-2s are some of the new technologies being used to address this trilemma.
Sharding, rollups, side chains, and Layer-2s are some of the new technologies being used to address this trilemma. A blockchain, at its most basic, is an open ledger that permanently saves data on a distributed, peer-to-peer (a phrase synonymous with “permissionless”) network of nodes. This data is essentially exchanges of value from one person to another on the Bitcoin blockchain, such as “Party A transferred 0.355 BTC to Party B.”
When Vitalik Buterin, a Russian-Canadian programmer, created Ethereum, a programmable blockchain with smart contract capabilities, blockchain technology was able to be used for more than just the transfer of value, but also a slew of other functions typically provided by banks, such as saving, lending, borrowing, trading, and investing.
However, to compete with existing financial systems, the blockchain must be scalable—and both the Bitcoin and Ethereum blockchains, which use a Proof-of-Work consensus mechanism, are not scalable—they simply cannot process a significant volume of transactions.
What Exactly Is the Blockchain Dilemma?
The blockchain trilemma refers to the difficulties that developers encounter when attempting to accomplish decentralization, security, and scalability in a blockchain. It’s a difficult challenge to solve because increasing scalability usually requires more streamlining, which means more centralization and increased security risk.
Most blockchains appear to have all three properties to an outsider. However, when we look closely at individual cryptocurrencies, we discover that the great majority only exhibit two or three of these qualities. Bitcoin (BTC), for example, is decentralized and secure, but it is not scalable, at least not on its own.
1. Decentralized: To provide a trustless payment mechanism for users and no central authority, a blockchain must be decentralized with a huge node network. It is not “trustless” otherwise.
2. Secure: To keep the network working 24 hours a day, a blockchain must provide security for its users as well as protection against Sybil attacks (51% takeovers), minting attacks, and DDoS attacks.
3. Scalable: A blockchain utilized by millions of people globally must be capable of processing thousands of transactions per second, akin to Visa and MasterCard.
Efforts to create a blockchain that satisfies all three criteria usually boil down to the industry’s current hot topic: is Proof-of-Work (mining) better than Proof-of-Stake (staking)?
Fundamental Blockchain Trilemma Concepts
What Is Crypto Decentralization?
Decentralization is undoubtedly cryptocurrency’s most essential promise. A decentralized cryptocurrency is a ledger that does not have a centralized authority. When a person uses a bank, they are using a centralized system that can accept or disapprove their transaction.
Satoshi Nakamoto (the Bitcoin creator) declared in the Bitcoin whitepaper that Bitcoin is completely “trustless,” which means that no trust in a central authority or a third party is necessary to transact on the Bitcoin network.
As a result, nodes cannot refuse payment if the transaction is genuine, i.e. the user has the funds.
A blockchain project can function without decentralization. Ripple (XRP), for example, is one of the top ten largest cryptos by market size, yet the XRP ledger was intended for banks and is one of the most controlled. The US Securities and Exchange Commission (SEC) announced that it will pursue ‘centralized’ crypto and XRP, sparking a mass delisting among exchanges.
The general assumption is that the more decentralized a cryptocurrency project is, the better because there is no subjective human judgment, biases, or flaws involved. The crypto community is currently divided over two primary consensus mechanisms:
Proof-of-Work (PoW): A mining model that relies on ASIC/graphics card miners to generate blocks. To create the coins, miners solve equations and use energy.
Proof-of-Stake (PoS): A staking-based approach in which a stake or ‘lock’ of coins is required to generate blocks. Users with a larger coin holding become validators and can create blocks.
The PoW paradigm, which is utilized by Bitcoin and some other cryptocurrencies, is regarded as more decentralized because the network cannot be shut down unless a mining pool controls more than 51% of the hash rate. Even if a mining pool reached 50%, other miners would emerge and begin ‘hash wars,’ further decentralizing the network.
The disadvantage is that Bitcoin consumes as much energy as the entire country of Switzerland every year. Because the coins are pre-mined at the genesis and a percentage is generally controlled by venture capitalists, angel investors, and project associates, the PoS (staking) model is regarded as more centralized.
Vitalik Buterin suggested that the PoS architecture is more secure because a hostile actor would have to purchase more than 51% of the network, which would amount to $70 billion at the time of writing based on Ethereum’s market worth. He explained himself. As a result, it would be easier to bring down a PoW chain than a PoS chain.
In an end-of-game scenario, a PoW chain is more likely to outlast a PoS chain. If a PoW chain is successfully Sybil-attacked, new miners may emerge to filter out the bad actors. If a PoS chain is successfully attacked, there is no way to restore consensus without completely forking the network.
What Is Crypto Security?
On the blockchain, security is the guarantee of user safety. Insecure blockchains can be the target of billion-dollar cyberattacks, causing innocent users to lose money. Since the early days of Bitcoin, blockchain engineers have wrestled with security challenges.
Bugs in the code cause security difficulties and most crypto projects do an excellent job of screening security bugs, even if they lack decentralization and scalability. The great majority of today’s hacks take place on layer-2 DApps on Ethereum and other DeFi-powered chains.
Hackers have always targeted the bigger blockchains. In truth, a hacker used a fault in Bitcoin’s code to create 184 billion Bitcoin in August 2010, when it was priced at $0.06. Satoshi Nakamoto himself swiftly fixed the flaw.
Ethereum was a target of the “DAO attack,” one of the most famous hacks in cryptocurrency history. Back in 2016, a hacker uncovered flaws in the Ethereum system and leveraged them to move 3.5 million ETH ($150 million at the time) from the ICO sale. The Ethereum founders were forced to hard-fork the network to regain the cash. Blockchains are still subject to security breaches, but this is becoming less of an issue as the projects mature.
What Is Crypto Scalability?
The blockchain scalability trilemma relates to the processing power and transaction limits of a blockchain. A scalable blockchain can handle thousands of transactions per second (TPS) and pass stress tests without causing network congestion.
The networks that run the global retail network, Visa and MasterCard, offer 5,000-10,000 TPS with fees ranging from 1-1.5% per transaction. Newer blockchains, such as Solana (SOL) and Kadena (KDA), provide TPS above 10,000 while charging significantly lower fees.
Blockchains have essentially overcome the scalability difficulties of older-generation blockchains by moving to PoS. Using the staking approach, validators may process thousands of transactions per second in record time. Ethereum now has 14 TPS, however by switching to PoS in Ethereum 2.0, it will be able to expand up to 100,000 TPS.
Bitcoin’s on-chain scalability remains unresolved, as original creators have refused to hard-fork the network and make changes to the basic consensus. On-chain, the Bitcoin network can only process 4-5 transactions per second, whereas off-chain scaling options such as Lightning Network and Liquid Network can process up to one million transactions per second. The disadvantage of these layer-2 settlement techniques is that they are highly centralized.
How Can Blockchains Help With The Crypto Trilemma?
The most noteworthy solutions to the crypto trilemma are sharding/rollups, side chains, layer-2, and random delegation.
Sharding: A unique mechanism that groups together transactions in huge pieces known as “shards”. Sharding enables validators to process data more quickly, freeing up new space for transactions and allowing for speedier finality.
This is how Ethereum intends to resolve the cryptocurrency trilemma.
Rollups: Rollups, like sharding, bundle transactions in large chunks off-chain. The data is processed quickly and then returned to the mainnet, allowing users with speedier completion.
A side chain is the concept of multiple chains running in parallel. The goal is to distribute transactions among dozens of separate chains to reduce the load on the mainnet. This is Kadena’s approach to resolving the crypto trilemma.
Delegation at random: Rather than having super-validators running around the clock and processing blocks, some blockchains assign random validators as super-validators and enable them to do so. This is how Algorand (ALGO) approaches the crypto trilemma.
Layer-2s: A side blockchain, like a rollup, can be connected to the mainnet yet have a completely independent consensus that allows it to scale. This blockchain then syncs data on the main chain, saving consumers money. Polygon (MATIC), Arbitrum, Optimism, Liquid Network, and other layer-2 solutions achieve scalability and aim to address the crypto trilemma in this manner.
Is the Blockchain Trilemma Over?
There are currently no initiatives that fully answer the blockchain trilemma; none were developed with that promise in mind (except Ethereum, which ultimately became a victim of its success).
The blockchain trilemma, which addresses decentralization, scalability, and security, is one of the most fundamental barriers that must be overcome before blockchain technology can be widely adopted. Today’s blockchains can sustain a big user population, but they still have security challenges, and there are heated disputes regarding decentralization, particularly the relative benefits of Proof-of-Work and Proof-of-Stake. At the same time, the industry is still in its infancy, and while the road ahead is still lengthy, tremendous progress has already been accomplished.
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