Summary
Blockchains can only handle a limited number of transactions per second. The Bitcoin network, for example, can process around seven transactions per second. For blockchain technology to be adopted globally, it would need to be able to handle a lot more data and at a higher speed, so that more people can use the network without it becoming too slow or expensive to use. However, the fundamental design of many decentralized networks means that increasing scalability tends to weaken decentralization or security. This is what is known as the blockchain trilemma. Developers who want to solve this problem are trying different consensus mechanisms and scalability solutions, such as sharding, sidechains, and state channels.
Introduction
In basic terms, a blockchain is a distributed digital database. The data blocks are organized in chronological order. The blocks are linked and protected by cryptographic proofs. The implementation of this technology in different industries is already changing the way we work and live.
The idea is that decentralized and secure blockchains enable a world in which we do not depend on third parties for networks or markets to function. However, experts generally agree that if this technology is to be more widely adopted, there is one fundamental problem that must be resolved first: the "blockchain trilemma."
Ethereum co-founder Vitalik Buterin was the one who popularized this term. To understand it, you must know the existence of three elements that are desirable in a blockchain: decentralization, security and scalability. The blockchain trilemma is the idea that it is difficult for blockchains to achieve optimal levels of all three properties at the same time. Typically, if you increase the optimization of one item, another will be weakened.
In this article we will analyze the three elements of the trilemma and explain in detail what each one is. Analyzing each one in detail and how they fit together allows us to better understand how and why the blockchain trilemma exists. In this article we will also highlight some of the solutions suggested by developers.
What is decentralization?
Bitcoin and other similar blockchain networks have a decentralized design. The entire structure is organized so that there is no single person or organization in charge, but rather it is decentralized. The network layer is open to anyone who wants to participate. As a result, control is completely distributed rather than falling on a single entity. Everyone has access to the same data. If someone tries to game the system by changing the records in their favor, the rest of the participants will reject the faulty data.
This can be quite technical, but let's look at the Bitcoin network as an example. There are no third parties that exercise control. Compare this to the traditional financial system's need for banks. Banks reinforce trust between people transacting and ensure that all records are properly maintained. The Bitcoin network, however, shares all data with all members of the network, so that it can be verified and confirmed before being added to the digital database. The result is a system that can exist without the need for third party participation.
Decentralization offers the possibility of what is known as Web3. Right now, we have Web2, today's Internet. It is full of sites and apps controlled by companies, but featuring user-created content. Web3 is the next step. An Internet where decentralized blockchain technology allows people to control their own data and their online lives.
However, one thing to consider is that due to how these distributed systems work and must have a wide variety of participants to agree on the validity of any data, transaction times can be slow due to the way it is shared. and processes the information. For this reason, blockchains must scale, which is to say that they must be able to handle more data at greater speed. We will return to this point when we talk about scalability.
Furthermore, the decentralized dream is only valid if the underlying blockchains are secure. If a blockchain lacks security, a malicious person can take control and change the data in their favor. This leads to the second part of the trilemma: security.
What is blockchain security?
If a blockchain has no security, it doesn't matter how decentralized it is. A good blockchain network must be resistant to attacks by malicious entities. Centralized systems base their security on the fact that the system is closed. Whoever is in control can ensure that the data is free of interference. But how is this achieved in a decentralized system in which anyone can participate?
It is a complicated topic, but we can again take Bitcoin as an example of the security of a decentralized blockchain. The Bitcoin blockchain uses a combination of cryptography and a network consensus mechanism called Proof of Work (PoW). In cryptographic terms, each block has some sort of digital signature or hash and is connected in such a way that it cannot be tampered with because any change would alter the hash of the block. Any attempt to change data would be quickly identified by the rest of the network.
The PoW consensus mechanism is another part of the puzzle. Helps protect the cryptocurrency ledger. Understanding the Proof of Work consensus would require a whole separate article, but for our purposes, keep in mind that members of the network can only verify new transactions and add them to the ledger through an activity called mining. This involves using computing power to solve mathematical puzzles. Part of the process requires these computers to perform various hashing functions. This plays into the issue of scalability, as the PoW mechanism is secure, but relatively slow.
It also considers that the more participants (nodes) there are in the network, the more secure it will be. The larger the number of parties, the more difficult it will be for a malicious actor to take control of the system. This relates to what is known as the 51% attack. As a summary, if a single entity (or a group of malicious actors) manages to control more than 50% of the total network hash rate of a blockchain, they could override the consensus and change the chain's data for their own benefit, for example, double spending tokens.
Simply put, security is a fundamental requirement for a successful blockchain because without it, attackers can control the chain and render it unusable.
What is scalability?
Scalability refers to the goal of building a blockchain that can support more and more transactions per second. It must be scalable if blockchain technology is to reach broader society and possibly billions of users. However, this is where most blockchains struggle.
This happens because decentralization and security are so fundamental to blockchain that they tend to be the first factors to be considered. Decentralization is crucial to the philosophy and goals of blockchain technology, which forms the very heart of the most recognized blockchains. Security, as we have already seen, is a central requirement for blockchain to be successful and useful.
However, by prioritizing decentralization and security, scalability becomes a challenge. The number of transactions a chain can handle can be very limited. A centralized payment system, like Visa, claims it can process up to 24,000 transactions per second. Since the network is closed and does not have to worry about considerations like public nodes and consensus, this becomes possible. Compare this to some of the most recognized blockchains.
According to Bloomberg in 2022: “As of September this year, Bitcoin could handle no more than seven transactions per second and Ethereum, the second most popular network, was limited to about 15 per second – a lifetime compared to conventional exchanges.”
As we already mentioned, the transaction speeds of these blockchains are limited due to the way information must be processed by different participants, depending on the decentralized network and the nature of the PoW consensus mechanism itself. If more and more people in society start using blockchain technology, networks will be bogged down due to the limited number of transactions they can handle.
Why the blockchain trilemma exists
The most obvious and basic solution to this problem is to reduce the number of participants that commit and add data to the network in order to scale and increase speed. But doing so would weaken decentralization, as control would be handed over to a small number of participants. Likewise, it would also negatively affect security, since fewer participants means greater chances of being attacked.
Here's the trilemma: Because of the connection between the highly desired properties of decentralization and security, the fundamental design of how blockchain works makes it difficult to scale. If you increase one, the other weakens. How can you drive scalability without harming decentralization, security, or both?
How to solve the blockchain trilemma
There is no golden solution to this trilemma. However, given the importance of solving it, a number of different approaches have been developed within the community with interesting results. Let's go over a summary of some of the most popular developments to better understand what's happening in the space:
1. Fragmentation or "sharding"
It is a method of separating blockchains (or other types of databases) into smaller, divided blockchains that manage specific segments of data. This setup prevents a single chain from handling all transactions and interactions on a network. Each split blockchain is known as a shard and has its own ledger. These shards can process their own transactions, but a beacon or main blockchain manages the interactions between the shards. This makes sharding a Layer 1 network scalability upgrade, as it is a change to the blockchain mainnet.
2. A different consensus mechanism
One of the reasons the trilemma exists in the Bitcoin network is because of the way PoW consensus works to ensure security. The need for miners, cryptographic algorithms, and large amounts of decentralized computing power leads to a secure, but slow system. Finding a different way to protect consensus is one approach to solving the trilemma. This was one of the reasons for Ethereum to move from the PoW mechanism to the Proof of Stake (PoS).
In PoS blockchains, participants involved in validating transactions must stake their tokens. No highly specialized mining machines needed. Adding more validators to the network is simpler and more accessible. PoS is just one of many consensus mechanisms that aim for scalability.
3. Layer 2 Solutions
Both sharding and the different consensus mechanisms are what are known as Layer 1 solutions. They seek to change the fundamental design of the underlying network. But other developers who want to solve the trilemma have been working on solutions that build on top of the already existing network structure. In other words, they believe the solution lies in a second layer, or Layer 2. Examples of this are sidechains and state channels.
A sidechain is basically a separate blockchain that connects to the main chain. It is configured so that assets can flow freely between both blockchains. It is important to note that it is possible for the sidechain to operate under different rules, allowing for greater speed and scalability. Similarly, state channels are another way to get transactions off the main chain and relieve pressure on Layer 1. A state channel uses a smart contract instead of a separate chain to allow users interact with each other without publishing their transactions on the blockchain. The blockchain only records the start and end of the channel.
Conclusions
The blockchain trilemma stands in the way of blockchain achieving its potential as a world-changing technology. If blockchain networks can only handle a small number of transactions per second in order to maintain decentralization and security, mass adoption will be difficult to achieve. However, the solutions that developers have been searching for and proposing for this problem suggest that the technological advances already achieved by blockchain will continue, and these networks will surely be able to handle much more data in the future.
