What is blockchain trilemma?

According to Vitalik Buterin, reconciling scalability, decentralization, and security is the biggest challenge for blockchain networks. It is a widely held belief that they can support two of three benefits, and sacrifices are unavoidable. The very concept of Ethereum 2.0 was born out of this trilemma. Why does it matter for crypto investors, and what are the solutions?

Untangling the trilemma for decentralized networks

The term blockchain trilemma refers to the difficulty of putting theory into practice. The technology behind decentralized finance is way ahead of our times. Although developers know how it is supposed to function, they struggle to retain all three of the fundamental features.

In a perfect world, scalability, decentralization, and security would go hand in hand. Unfortunately, humanity is yet to develop concepts that can allow their seamless integration. Despite the dominance of Bitcoin and Ethereum, the mass adoption of public blockchain networks is hampered by their rigidity. This creates the blockchain trilemma, as described in the diagram below.

Without solving this puzzle, developers cannot build a viable replacement for centralized finance. The brightest minds are hard at work, but Ethereum killers like Polkadot, Cosmos, and Solana have their flaws. In 2021, Algorand proudly announced that it had cracked the infamous trilemma. Here are the key things to know about the problem and its solutions in 2022.

Three pillars of blockchain technology

Rarely is a perfect balance possible. Blockchain creators typically make concessions, sacrificing one of the characteristics. Mastering the trilemma is a task for ambitious developers. Here is what each of its elements includes:

• Decentralization. This concept is central to any blockchain, as it underlies immutability — no single entity has the power to manipulate transactions. As control over the transferred data is distributed across the network, all of its participants are equals.
• Security. To prevent interference, blockchain networks must be equipped with ironclad defenses. Otherwise, transaction blocks may vanish, causing payments to disappear.
• Scalability. The number of users and transactions is constantly growing. A blockchain’s ability (or inability) to support this rising demand can seal its fate. A lack of scalability results in delays and ramped-up fees.

So, why do developers encounter problems when they try to combine these aspects? Let’s take a deep dive into the blockchain trilemma.

Blockchain scalability

This challenge impedes the adoption of Bitcoin and decentralized networks on the whole. Some projects claim to be extremely scalable — for instance, Solana can support over 7,000 times more transactions per second (TPS) than Bitcoin. However, most blockchains fail to support a massive user base seamlessly.

To be fair, nobody knows for sure how many transactions will make crypto use truly global. Scalability efforts do not target X users or Y TPS. Instead, it is a degree of efficiency to maintain 24/7.

We can make an educated guess about the scope by looking at social media. In the first quarter of 2022, Facebook had roughly 3 billion monthly active users, while Twitter had around 396.5 million users globally.

Meanwhile, Bitcoin has only around 80 million wallet holders. Its original speed (up to 7 TPS) is meager compared to global payment processors like VISA and PayPal. Even Ethereum is more efficient. Given the transaction fees, which peaked at $62.788 in April 2021, the Bitcoin network may be reaching its limit.

Scaling Ethereum from its average (15 TPS) to 6,000 TPS seems to be a giant leap forward. However, this would only suffice for roughly 50,000 active users whose transactions would be confirmed by several hundred nodes.

Pros and cons of scalability

A scalable network supports a growing workload without detriment to performance or costs. This agility is vital for protocols in social media, gaming, messaging, and video streaming, as they require more and more transactions by default.

One of the ways to scale the networks is by lowering their defenses. Enterprise blockchains adopt permissioned models to balance decentralization and an extreme throughput. Hyperledger Fabric, for example, allows only specific users to access and participate in its ecosystem.

Another way to improve scalability is by switching to another consensus mechanism — in particular, from Proof-of-Work to Proof-of-Stake. The latter is more sustainable as it replaces miners with stakers. However, it has its own imperfections, so the blockchain trilemma remains unsolved.

Blockchain decentralization

The blockchain philosophy is based on a simple premise: no central entity should be able to manage the transactions. Decentralized networks are called permissionless to reflect the parity of participation. Here is how this principle works for Bitcoin and Ethereum, which both use PoW.

Control is distributed across the network equally. All transactions are confirmed by miners — individual nodes with the same powers and privileges. A share of fees paid by users is turned into mining rewards.

No one party can change the network’s direction without approval from the nodes. This blockchain technology bestows more freedom on its participants compared to banking. It is particularly salient today when corporations and institutions are demonized for freezing accounts unfairly. As the political tensions deepen, who can guarantee that bankers will protect dissidents’ assets?

Such fears are pushing blockchains to the forefront of technological advancement. When perfected, they might ensure financial freedom for all — at least in the digital space. Yet due to the blockchain trilemma, decentralization often overshadows scalability.

Pros and cons of decentralization

Decentralization boosts security. All nodes in a decentralized network have equal status and influence. Governance-related issues are discussed through cooperation and proposals for protocol changes. The more nodes are involved, the harder it is to perform a 51% attack, which gives malevolent users control over the overall mining power.

If one node gets one vote, the model seems perfectly democratic, but this does not mean the community is infallible. It could make flawed proposals due to a lack of moderation. Controversial features could be brought forward and implemented.

What’s more, the veteran PoW blockchains are notoriously cumbersome and unsustainable. They require a large amount of mining power, while the speed is meager, and scalability is beyond reach.

Blockchain security

Without security, blockchain technology would be worthless. The distribution of control is supposed to make ledgers immune to tampering. However, quite a few blockchains are susceptible to 51% attacks. The reason is simple – decentralized technology is open-source. As the code is publicly available, any cybercriminal can read it and figure out ways to exploit it.

That said, Bitcoin hacks rarely succeed, but the use of smart contracts makes its competitors more vulnerable. In 2021, the simplest way to undermine a project was by exploiting flash loans, a common DeFi feature.

In a sense, security and scalability are means of achieving conflicting goals. The former aims to maintain stability and functionality; the latter allows blockchain networks to expand. In recent years, developers have become more prone to sacrifice some of the security in pursuit of scalability and decentralization.

Pros and cons of security

This is the bedrock of any blockchain network, a feature mandatory for its existence. The most fundamental task of any blockchain is to create the next block in the chain safely, reliably, and fast. This is what consensus mechanisms are all about. They must prevent interference and disruptions. Malicious actors have to take over most nodes to manipulate the ledger data.

The downside of security is the sheer amount of resources required for reliable blockchain platforms. PoW-based blockchains cannot maintain their overall security without a large army of miners. The trade-off here is scalability and TPS: the more miners participate, the more difficult it is to support high throughput.

PoW requires substantial computing power and causes high transaction fees at times of congestion. PoS is lighter but less secure. Individuals with malicious intent may take control by acquiring a large number of stake tokens.

Ethereum 2.0 as scalable and secure decentralized network

The Ethereum roadmap shows a possible solution to the trilemma. Its dual PoS model includes an execution layer for smart contracts and a consensus layer for transactions.

When the ecosystem transitions to PoS with sharding and side chains, it will become more sustainable, agile, and efficient, with TPS rising to 100,000. The transaction fees will also shrink. This vision incorporates decentralization, security, and scalability.

In March 2022, the team launched the Kiln testnet, the last “test” blockchain before the Merge – the final transaction to PoS with stakers instead of miners. The upgrade is expected to reduce energy consumption by over 99.9%.

Lightning network — Bitcoin’s response to blockchain trilemma

Bitcoin’s solution to the trilemma is its second layer for off-chain transactions. It is made up of multiple payment channels. Managing transactions beyond the mainnet (that is, without block confirmations) adds scalability to the original security paradigm. In June 2022, the Lightning Network hit the 4,000 Bitcoin public capacity milestone, doubling its results since July 2021.

According to some experts, Bitcoin’s Lightning protocol will usher in the next generation of decentralized finance. Each channel can process up to over 250 TPS, while the number of these channels is unlimited.

How Algorand solved the blockchain trilemma

Algorand is a programmable blockchain supporting smart contracts. Validation happens via a proprietary system called Pure Proof-of-Stake (PPoS). It is the only model to have officially solved the trilemma.

Users that propose blocks and vote on proposals are chosen in a random and secret fashion. The system establishes a new set of committees every time a new block is written. Each node has an influence proportional to its stake. While other PoS variations connect overall security to a limited subset of users, PPoS links it to the honesty of the majority.

This consensus mechanism is based on VRF (verifiable random function) invented by Algorand’s founder Silvio Micali. The network is about to achieve 3,000 TPS and could scale to 45,000 TPS in a few years. Its protocol is currently used by 384 companies.

Blockchain trilemma and global adoption of blockchain networks

Any decentralized ecosystem must balance security and scalability. Speedy and affordable transactions are only part of the equation — a public blockchain must also prevent malicious entities from tampering with its ledger. In 2022, the blockchain trilemma remains relevant, and the drive for solving it fuels the ongoing innovation.

While Ethereum is yet to make its scalable future a reality, Algorand has already offered a solution. Its viability shows that blockchain developers are on the right track, and widespread adoption is realistic.