What Is the Blockchain Trilemma?

There is a limit on the number of transactions that a blockchain can process in one second. For instance, the Bitcoin network can execute around seven transactions every second. If blockchain technology is going to be used on a global scale, it has to be able to process much more data at much higher rates. This will allow for a greater number of users on the network without the network being unusably sluggish or costly to access. However, due to the underlying architecture of many decentralized networks, increasing scalability tends to reduce the network's level of decentralization and its level of security. This predicament is referred to as the trilemma of the blockchain. To find a solution to this issue, developers are researching and testing on a variety of consensus methods and scalability options, including sharding, sidechains, and state channels.

Introduction

A blockchain is essentially a decentralized and digitally distributed database. Data is divided into blocks that are then arranged in chronological order. Cryptographic proofs are used to both connect the blocks and provide security for them. The widespread use of this technology across various sectors is already causing shifts in how we work and live.

The concept behind decentralized and secure blockchains is that they make it possible to live in a future where we do not need to depend on third parties for the operation of networks or marketplaces. However, most industry professionals believe that a fundamental issue must be resolved before this technology can garner wider consumer interest. The issue at hand is referred to as the "blockchain trilemma" by those in the know.

Buterin, one of the co-founders of Ethereum, is credited with popularizing this phrase. You need to be aware of three separate aspects of a blockchain that are desirable in order for it to make sense, and those aspects are decentralization, security, and scalability. The term "blockchain trilemma" refers to the concept that it is difficult for blockchains to concurrently reach ideal levels of all three qualities at the same time. When one variable is increased, another is often reduced as a result.

This article will look at all three components of the trilemma and provide a more in-depth explanation of each one. A clearer knowledge of how and why the blockchain trilemma exists may be attained by going into further detail about each of the three topics and how they relate to one another. This article will also discuss some of the possible solutions developers have suggested.

What is decentralization?

Decentralization is baked into the code of blockchain networks like Bitcoin and its ilk. Because of the way the whole system is set up, no one person or group is in command. Instead, it has a decentralized structure. The network layer welcomes participation from anybody who is interested in taking part. As a direct consequence of this, control is no longer concentrated in the hands of a single organization. Everyone may see the same information at the same time. If someone tries to cheat the system by changing the records to their advantage, the other participants will not accept the changed information and will reject it as fake.

This topic may easily get fairly complicated, but to illustrate, let's look at the Bitcoin network. There is not a third party involved in the management of this. Contrast this with the fact that the financial system absolutely requires banks. The banks guarantee that all records are accurate and that there is confidence between the parties involved in the transactions. Before being uploaded to the digital database, all of this information is first distributed throughout the Bitcoin blockchain and made available to every participant in the network so that it may be validated and verified. The end result is a system that does not need the participation of any outside parties in order to function.

The development of something referred to as Web3 is made possible by decentralization. We are now using Web2, which is the modern version of the internet. It is packed with websites and applications managed by businesses yet includes material that individual people created. The subsequent stage is known as Web3. A decentralized blockchain technology-based internet that gives users authority over their own data and their lives lived online.

However, one thing to keep in mind is that because of how these distributed systems operate — with the requirement for a wide variety of participants to agree on the validity of any data — transaction times can be slow due to the way information needs to be shared and processed. This is something that should be taken into consideration. As a result, blockchains need to be scalable, which means they need to be able to process a greater volume of data at a higher rate. When we get to the part on scalability, we'll circle back to this point.

In addition, the goal of decentralization can only become a reality if the underlying blockchains can be trusted. If a blockchain does not have enough security, then any malicious user may take control of it and alter the data to their advantage. This brings us to the second half of the trilemma, which is the question of safety.

What is blockchain security?

It is irrelevant if a blockchain is decentralized or not if it does not have any security. A strong blockchain network should be able to withstand assaults from actors with bad intentions. The fact that a centralized system is closed is the primary factor that contributes to the system's overall level of security. Those in charge are the only ones who can ensure the data is unaffected by intervention. But how can something like this be accomplished within a decentralized system where everybody may participate?

Even if it's a difficult subject, we can always go back to Bitcoin as an illustration of how decentralized blockchain security works. The blockchain uses a mix of encryption and a network consensus technique known as Proof of Work for Bitcoin transactions (PoW). In the context of cryptography, each block may be thought of as having its own unique digital signature (or hash). Because any modifications to a block's contents would result in the block's hash being calculated differently, the block's data cannot be altered without compromising its integrity. If someone tried to change the data, the rest of the network would notice right away.

Another piece of the problem is the consensus process known as "proof of work. It contributes to the ledger of the cryptocurrency's security. Mining is the sole activity that allows members of the network to validate new transactions and add them to the distributed ledger. Understanding Proof of Work has its own subject, but for our purposes, notice that mining is the only activity that allows this to happen. This requires the use of computer power in order to resolve a mathematical conundrum. These machines are required to carry out a number of different hashing functions as part of the procedure. This worsens the scaling problem since the PoW process is safe but takes a long time to finish transactions.

It is important to remember that the network is inherently more secure when more members (nodes) are involved. When a higher number of parties are involved, it is far more difficult for a single malicious actor to seize control of the system. This is connected to something that is referred to as the 51% assault. To provide a general overview: if a single entity (or group of bad actors) can control more than fifty percent of the total network hashing rate of a blockchain, then they would be able to override consensus and change the chain's data to benefit themselves, such as by double spending tokens. This would allow them to change the chain's data to benefit themselves.

To sum up, security is an important part of a blockchain's success because without it, enemies can take control of the chain and make it useless for its intended purpose.

What is scalability?

The concept of scalability refers to the objective of developing a blockchain that is capable of supporting an ever-increasing number of transactions per second. If blockchain technology is going to be useful to a larger society and perhaps billions of users, scale is a must. However, this is where the majority of blockchains are currently having problems.

This is due to the fact that decentralization and security are such essential aspects of blockchain technology that they are often prioritized first. Because decentralization is so important to the ethos and purposes of blockchain, you'll find it at the very center of most blockchains now in use. As we've gone over, security is one of the most important aspects that must be present for a blockchain to be effective and helpful.

However, scalability will be difficult to achieve if decentralization and security are given the highest priority. There may be strict limits placed on the total number of transactions that a chain may process. It has been said that a centralized payment system such as Visa is capable of supporting 24,000 transactions each and every second. This is due to the fact that the network is closed, meaning that it does not take into account things like public nodes or consensus. When compared to some of the most well-known blockchains, this stands apart.

According to an article published by Bloomberg in 2022, "As of September, Bitcoin was unable to handle more than seven transactions per second and Ethereum, the second-most popular network, was limited to about 15 per second." This was a lifetime compared to the transaction speeds of conventional exchanges.

As was previously mentioned, the transaction speeds of these blockchains are restricted due to the manner in which the information needs to be processed by the various participants that make up the decentralized network, as well as the inherent characteristics of the PoW consensus mechanism itself. Because blockchain networks can only handle a limited number of transactions at once, if more and more people start using this technology, the networks will become crowded.

Why the blockchain trilemma exists

In return for increased size and speed, the most apparent and fundamental answer to the issue described above is to lower the number of participants validating and adding to the network data. However, doing so would weaken the decentralization, with a smaller number of players being given control of the situation. When the number of players goes down, it makes it more likely that someone will do something bad to the system.

Given the relationship between the desirable features of decentralization and security, the basic nature of how blockchain works makes it difficult to grow. This is the trilemma. When you strengthen one, you automatically weaken another. How can scalability be improved without sacrificing decentralization, security, or both?

Solving the blockchain trilemma

The trilemma does not have a single, clear-cut answer that everyone can agree on. However, in light of the significance of finding a solution to this issue, the community has developed a variety of diverse techniques, each of which has produced intriguing outcomes. In order to provide you with a better understanding of the activities that are taking place in this area, let's go through an outline of some of the most prominent developments:

1. Sharding

This is a way of dividing blockchains (or other kinds of databases) into more manageable blockchains that are partitioned into smaller pieces that can only handle certain sorts of data. This configuration relieves the strain often placed on a single chain to handle all of the transactions and interactions that occur on a network. Each individual blockchain split is referred to as a shard, and each shard has its own individual ledger. After that, these shards are able to conduct their own transactions. Nevertheless, the interactions between shards are managed by a beacon blockchain or a main chain. Since sharding is a change to a blockchain's mainnet, it is now thought of as a Layer 1 network scalability improvement.

2. Different consensus mechanism

Proof-of-Work is implemented to guarantee the network's integrity is one factor contributing to the existence of the Trilemma in the Bitcoin network. Because of the need for miners, cryptographic methods, and enormous quantities of decentralized processing power, the system is safe but also quite sluggish. The trilemma may be solved in a number of different ways, one of which is by devising an alternative strategy for achieving agreement. One of the motivations for Ethereum's transition from Proof of Work to Proof of Stake was this very thing (PoS).

In blockchains that use the proof-of-stake consensus model, individuals who validate transactions must stake (lock) their tokens. There is no requirement for mining equipment that is particularly specialized. Increasing the number of validators in the network is a straightforward and convenient process. With scalability in mind, PoS is simply one of many alternative approaches to consensus processes that are now available.

3. Layer-2 solutions

Layer-1 solutions include sharding as well as other consensus processes. Layer-1 solutions are also known as topologies. They are looking at ways to alter the core architecture of the network under the surface. However, some developers interested in finding a solution to the trilemma have been working on solutions constructed on top of an existing network topology. In other words, they believe that the solution may be found in the second layer, sometimes known as Layer 2. Sidechains and state channels are two examples of this kind of communication.

A sidechain may be thought of as a distinct blockchain that is linked to the primary chain. It is designed in such a manner that there is no impediment to the free transfer of assets between the two. Importantly, the rules that govern how the sidechain operates may be changed, which opens the door to increased speed and scalability. In a similar vein, state channels offer an additional mechanism for removing transactions from the primary chain and relieving some of the strain on Layer 1. Users can engage with one another via a state channel by using a smart contract rather than a separate chain. This allows users to avoid broadcasting their transactions to the blockchain. Only the beginning and end of the channel are ever recorded on the blockchain.

Closing thoughts

The scalability trilemma prevents blockchain from reaching its full potential as a disruptive technology that might alter the course of human history. Suppose blockchain networks are only capable of handling a modest number of transactions per second in order to preserve decentralization and security. In that case, it will be difficult to achieve widespread adoption of the technology. But developers who are trying to find a solution to this problem are now coming up with ideas that show that blockchain will continue to make technical progress and that these networks may be able to handle a lot more data in the future.

That's all for today, see ya tomorrow! If you want more, be sure to follow our Twitter (@croxroadnews)

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.

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