Cryptocurrency and blockchain are interconnected. Blockchain is a digital ledger that records cryptocurrency transactions, while cryptocurrency is a digital or virtual currency secured through cryptography. Blockchain creates an incorruptible, permanent, and verifiable record of all cryptocurrency transactions, making them almost impossible to alter or counterfeit. The inviolability of blockchain also makes it almost impossible to hack into user profiles or move funds without permission. Cryptocurrency transactions are thus more secure and dependable than traditional payment frameworks.
The idea is that decentralized and secure blockchains will create a world where we do not need to rely on third parties to operate networks or markets. However, experts agree that for this technology to become more widespread, an underlying problem must be solved. This problem is known as the Blockchain Trilemma.
The term was popularized by Ethereum co-founder Vitalik Buterin. There must be three different elements that are desirable in a blockchain: Decentralization, security, and scalability. The blockchain trilemma refers to the idea that it is difficult for blockchains to achieve optimal levels of all three properties simultaneously. Strengthening one of them usually leads to weakening the other.
In this article, we will look at all three elements of the trilemma and explain in more detail what each represents.
As we know, decentralization is an essential part of the blockchain. Decentralized blockchain networks, like Bitcoin, are not owned by one person or organization. Data is shared openly and validated by all participants. This enables Web3, the decentralized Internet, which is secure and fast.
Decentralization helps ensure that the blockchain remains resilient and unaffected by any potential malicious attackers. By decentralizing the system, each node (user) has an equal amount of power and authority, which helps to ensure fair and transparent transactions. Decentralization also keeps the system decentralized and prevents any one organization from having too much control over the network.
Blockchain security involves a combination of cryptography, consensus algorithms such as Proof of Work (PoW), and a large number of participants. Cryptography provides security by ensuring that blocks of data are linked and cannot be tampered with. Meanwhile, consensus algorithms, such as PoW, help protect the cryptocurrency registry by requiring miners to solve mathematical puzzles before new transactions are verified and added to the ledger. The larger the number of participants in a blockchain, the harder it is for one actor to take control and override the consensus.
Scalability is the ability of a blockchain to increase the number of transactions it can process per second (TPS) without sacrificing security or decentralization. Many blockchains struggle with scalability due to the need to prioritize decentralization and security, resulting in limited TPS compared to centralized networks. Blockchain scalability solutions are being developed to address this issue, such as through the use of different consensus mechanisms, sharding, and off-chain solutions.
Traditional blockchains: Bitcoin, Ethereum, or Litecoin. Each of their participants manages a complete node that validates each transaction. Such networks have a high level of security and decentralization but low bandwidth.
High-speed blockchains, including those based on Delegated Proof-of-Stake algorithms. They have a small number of nodes (10-100). At the same time, there are high requirements for each of them - the need to have expensive server hardware or a large number of native coins. The majority of its nodes are hosted in one location or by one organization, leading to a limited distribution of trust and control. These are productive and secure, but not sufficiently decentralized networks.
Multichain systems enable applications to be connected to multiple blockchains, with communication across these blockchains occurring through cross-chain protocols. This is an example of a decentralized and scalable network, but not a secure one. After all, an attack needs to take possession of most of the nodes in just one blockchain of the system to "break" the usual structure and cause negative consequences for all other participants.
The most obvious and basic solution to the problem described above is to reduce the number of participants confirming and adding data to the network in exchange for greater scale and speed. However, this will lead to a weakening of decentralization when control is given to fewer participants. It will also lead to weakened security, as fewer participants mean a higher likelihood of attacks.
Thus, there is a trilemma: Given the relationship between the desired properties of decentralization and security, the fundamental design of the blockchain makes it difficult to scale. By increasing one, you weaken the other. How do you achieve scalability without sacrificing decentralization, security, or both?
The problem, which presents a demanding challenge to resolve, has led to some interesting innovations in the blockchain industry. There are various ideas, depending on the foundation of the project and whether it relies on a different project to operate (like, for example, a Decentralized application needs Ethereum), and it’s fascinating to see how they might impact the network in the future.
Without delving too deeply into the technology, here are a couple of interesting approaches that projects have taken:
Sharding has become a popular solution for scaling projects that do not rely on another network, such as Ethereum. When a network “shards”, it breaks the transactions that run on the blockchain up into easier sets of data that can be processed by the network more quickly. This means more transactions can take place at the same time without causing congestion. Security is maintained because the different shards interact with each other and send information to the main blockchain, so information isn’t compromised.
Rollups allow networks on Ethereum’s blockchain to “roll up” multiple transactions into a single off-chain (with validated proof) and then submit the rolled-up data to the main chain. It's comparable to carpooling. Rollups are clever because they reduce the amount of data required for a transaction, thereby reducing traffic and increasing speed.
The Lightning Network is referred to as a "layer 2" solution because it offers an additional layer that sits over the main network. Bitcoin, as our primary example, "suffers from success" and struggles with transaction speed and cost. The Lightning Network allows you to conduct transactions without having to interact directly with Bitcoin's main chain.
Instead of transacting on the main blockchain, you set up “channels” with people to transact with. Inside the channels, which are run by smart contracts, you can transact directly, instantly, and at a far reduced cost than that on the main blockchain. With a state channel, you create a channel (kind of like opening a tab), which is recorded on the main blockchain. From there, all transactions will take place “off-channel” (not on the main chain) until the channel is closed. When a transaction is closed, only the opening and closing information is sent to the main blockchain, rather than all information. Because state channels operate through smart contracts, security is maintained.
Instead of offering a one-blockchain solution, Polkadot favors the idea of blockchains collaborating with other blockchains (interoperability). The network is designed with “a relay chain” as the backbone to offer a highly scalable network. It does this by using “parachains” which are independent blockchains that connect to the main relay chain.
It means that the chains operate independently in their governance, allowing the network to scale, but ultimately unite for additional security.
Although most people are unaware of the blockchain trilemma, they are aware of the issues it presents (such as Bitcoin's slower transaction speed). If projects can successfully solve the trilemma, we may see new levels of blockchain adoption.
If there is a successful way to check the "decentralized" box without worrying about security or the inconvenience of a lack of scalability, we are looking at a scalable blockchain future in which individuals from multiple industries (from money to logistics, from legalities to property) can benefit. At its heart, blockchain offers a more fair and balanced playing field for individuals to thrive rather than relying on a traditional, centralized, and controlled system.