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Three key ingredients must exist to build the perfect blockchain. However, these elements often work against each other, creating what’s known as the blockchain trilemma. But what is the blockchain trilemma, exactly, and what are its elements?
Simply put, the blockchain trilemma refers to the challenge of balancing three crucial aspects of a blockchain network: security, scalability, and decentralization. These three sides are often at odds with each other, making it difficult to optimize all of them simultaneously — optimizations in one area often require compromises in another. As a result, blockchains have struggled to solve the trilemma for over a decade. Let’s start with a more detailed look at the trilemma.
Key Takeaways
- The blockchain trilemma highlights the difficulty of simultaneously optimizing decentralization, security, and scalability in blockchain networks.
- Bitcoin offers the best of decentralized networks and security but struggles with scalability, while other blockchain networks like XRP prioritize scalability at the cost of decentralization.
- Layer 1 and Layer 2 scaling solutions aim to improve throughput and reduce latency without compromising network security or decentralization.
- Alternative mechanisms, such as proof of stake and proof of history, offer performance advantages but can pose security trade-offs.
- Blockchain developers for projects like Ethereum, Polkadot, and Avalanche are actively working on innovative architectures and mechanisms to address the blockchain trilemma.
The Blockchain Trilemma Explained
Vitalik Buterin, the most prominent co-founder of Ethereum, first coined the phrase blockchain trilemma to describe the difficulties in achieving a perfect balance between three essential elements of blockchain technology.
- Decentralization: Ensure that anyone can access the network and store transactions on a network of distributed nodes.
- Security: Prevent double-spending and prevent existing transactions from being reversed.
- Scalability: Provide a robust platform that can handle a growing number of use cases and increasing transaction volume.
Even in traditional finance, usability requires compromise. Our current financial system is composed of effectively centralized platforms, meaning it uses trusted intermediaries (banks, payment providers, and payment processors). Blockchain aimed to solve this centralization concern with a decentralized ledger (a record of transactions) and a method of ensuring anyone could participate. Balancing decentralization with security and scalability has proven more challenging.
Bitcoin, for example, excels at decentralization and security. However, the network struggles with scalability challenges. Transaction costs spike as demand for block space rises. Similarly, XRP is seen as secure and scalable. However, many would describe its validator network as highly centralized.
The blockchain trilemma suggests we need to find an optimal balance between these competing demands. Let’s examine each of these three elements in more detail.
Blockchain Decentralization
In our existing financial system, banks hold our money, making banks an intermediary. Banks and banking rules determine who can open an account and often decide where and when you can spend your money. An authority or intermediary decides which transactions are valid and which will be approved. Just as troubling, these intermediaries also decide who can participate.
Bitcoin was the first digital asset to solve the problem of centralization. Anyone can participate in the Bitcoin network without regard for how the funds are used, where the person lives, or whether they have the proper documentation. Bitcoin eliminated the middleman by using a worldwide network of nodes (computers) to validate transactions. Anyone can help validate these transactions, helping the network spread worldwide.
This decentralization offers two key qualities.
- Trustless network: Validators follow strict rules to prevent double-spending and adjust wallet balances.
- Permissionless access: Blockchain technology uses pseudonymous wallet addresses as identities on the network. Private keys held in user wallets control crypto assets on the blockchain. This structure allows anyone to participate and ensures that no one needs to ask permission to transact.
Now, anyone can transact with anyone else, in keeping with Bitcoin’s peer-to-peer goals (PDF whitepaper).
Decision-making power is also distributed among nodes. Changes to the protocol or network require consensus among participants. As a result, decentralization fosters trust among network participants, removing the need for “trusted” intermediaries.
Blockchain Security
Blockchain security focuses on two primary elements: preventing double spending and preventing changes to the existing ledger (immutability). However, the time required for the most robust security (proof of work) also affects another part of the crypto trilemma: scalability.
Let’s use Bitcoin as an example. Bitcoin uses an incentivized proof-of-work system to attract a worldwide network of Bitcoin miners. These miners (computers running specialized software) compete to solve a cryptographic puzzle. The mining process generates quintillions of hashes (encrypted values) across the network to mine a new block. This is the “work” in proof of work (PoW).
The first miner to complete the puzzle adds the next block of Bitcoin transactions to the blockchain. The other miners in the network also check the work to ensure the winning miner followed Bitcoin’s protocol. This represents the “proof” in PoW.
Many consider Bitcoin’s PoW the most secure consensus mechanism due to the cost of defrauding the system. A bad actor must control 51% of the network’s hash power. Even in that unlikely event, the perpetrator could only realistically affect the transactions in the most recent block. The Bitcoin blockchain platform rewards miners with new bitcoins and network fees for transactions within the blocks they mine. The incentive is to act honestly, while acting dishonestly offers little upside and brings significant expense.
Blockchain Scalability
A two-lane road can easily accommodate traffic at 2 AM. However, at rush hour, it might turn into an endless sea of brake lights. Scalability speaks to a similar problem across smart contracts and blockchains. Can decentralized networks handle an increasing number of users and transactions? Blockchain technology that slows to a crawl or crashes due to a surge in use provides a poor user experience, which also affects the chances of mass adoption.
Scaling issues present in two primary ways.
- Falling throughput: Most blockchain networks measure throughput in transactions per second. When the network becomes overloaded, throughput may fall.
- Increasing latency: Transaction latency refers to the delay between when a user initiates a transaction and that transaction is finalized. During high network usage, unprocessed transactions go into a holding area called a mem pool, further delaying those transactions.
Additionally, scaling issues often become evident in transaction costs. For example, the 2017 “Crypto Kitties” NFT (non-fungible token) craze caused a surge in demand on the Ethereum network. Transaction speeds slowed dramatically, and transaction costs skyrocketed. This event demonstrated that Ethereum, although powerful, had scalability issues.
Scalability remains one of the more challenging elements of the blockchain scalability trilemma. However, several solutions promise to alleviate the problem.
Solutions for the Blockchain Trilemma
The crypto trilemma has been a longstanding challenge in the development of blockchain networks. An adjustment to benefit one element of the blockchain trilemma may negatively affect one of the other two. Various innovative solutions hope to address this issue effectively, mostly focusing on scaling solutions. The goal, of course, is to achieve scalability gains without compromising security or decentralization.
Layer 1 (L1) Scaling Solutions
Several approaches to consensus protocols target scalability. For example, Solana uses proof of history (PoH) alongside proof of stake, creating timestamps for transactions. As a result, the network enjoys much higher throughput compared to many competing networks. Sui also incorporates a clock-based sequencing mechanism to speed transactions. These blockchain networks offer similar functionality to Ethereum, but their smart contracts allow much higher maximum throughput.
Ethereum has proposed solutions for its decentralized ecosystems as well. We’ll discuss Ethereum’s ongoing innovations in more detail later in the guide.
Layer 2 (L2) Scaling Solutions
Layer 2 networks use a Layer 1 network for security while handling traffic on connected chains. These take two primary forms: optimistic rollups and ZK (zero-knowledge) rollups. Layer 2 solutions host decentralized networks but use an L1 like Ethereum for security. For example, the Base Ethereum L2 network now boasts more than $2.5 billion in total value locked (TVL), a measure of value committed to the chain.
Sidechains offer another solution to the blockchain trilemma. However, instead of using the main blockchain for security, sidechains have their own consensus mechanisms. For example, the Rootstock sidechain uses a bridge from the Bitcoin blockchain but allows users to transact on decentralized applications using a Bitcoin-equivalent token (RBTC).
Alternative Consensus Mechanisms and Architectures
Proof of stake, proof of history, and other consensus mechanisms offer scaling advantages over PoW. However, many see these approaches as a compromise on security. PoS networks can be vulnerable to attacks if a bad actor controls a third of the staked tokens
Alternative architectures provide another possible solution. For example, several prominent projects use a Directed Acyclic Graph (DAG) rather than a blockchain, allowing parallel transactions to boost throughput.
Projects That Try to Solve the Blockchain Trilemma
Several blockchain projects are actively working to solve the crypto trilemma. Let’s explore three distinct approaches.
- Ethereum: Ethereum initially considered sharding (splitting the chain into smaller parts) as a scalability solution to the blockchain trilemma. However, due to concerns over decreased security, the project is now working on L2-focused solutions like danksharding. Additionally, Ethereum’s Pectra upgrade will enhance both scalability and staking security.
- Polkadot: Polkadot enables blockchain interoperability between compatible blockchain protocols called parachains. Polkadot’s sharding-like architecture achieves higher scalability while maintaining security and decentralization. This clever architecture uses Polkadot’s Relay Chain for security while giving specialized parachains autonomy and scaling benefits.
- Avalanche: Avalanche combines a unique consensus mechanism called Avalanche Consensus with a directed acyclic graph structure. Rather than a linear blockchain, its data is held in a graph, allowing any transaction to reference several previous transactions. Avalanche also employs a subnet structure, allowing specialized chains to implement their own consensus mechanisms. Each of these subnets also maintains its own DAG. The overall approach enhances scalability without compromising security or decentralization.
So, is the blockchain trilemma solved? Not yet. Although several projects work toward solutions, the blockchain trilemma remains a complex challenge. To balance decentralization, security, and scalability, most approaches focus on scalability improvements. Innovations like Ethereum’s danksharding and Pectra upgrade, Polkadot‘s parachain architecture, and Avalanche‘s subnet DAGs lead the way. However, many lesser-known projects use similar approaches and have developed innovations of their own.
Achieving a healthy balance between decentralization, security, and scalability allows blockchains to become more robust and secure and manage more transactions. The overarching goal is to make crypto safer and easier to use, fostering greater adoption. The progress thus far shows promise.
FAQs
What is the blockchain trilemma?
Why is decentralization important in blockchain?
How can blockchain networks maintain security without a central authority?
What are some solutions to the blockchain trilemma?
Which crypto solves the blockchain trilemma?
References
- Bitcoin Whitepaper (bitcoin.org)
- The Inside Story of the CryptoKitties Congestion Crisis (consensys.io)
- Access On-Chain Time (Sui.io)
- Ethereum Improvement Proposals (ethereum.org)
- Danksharding (ethereum.org)
- Prague-Electra (Pectra) (ethereum.org)
- What is the Avalanche consensus protocol? (avax.network)
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