Summary

There is a limit to the number of transactions a blockchain can process per second. For example, the Bitcoin network can process about seven transactions per second. As blockchain technology becomes widely adopted, it will be able to process data much faster and more quickly without slowing down or increasing the number of people using it. However, the basic design principles of many decentralized networks focus on improving scalability, often at the expense of decentralization or security. This is known as the "blockchain trilemma." Developers are trying different consensus mechanisms and scalability solutions such as sharding, sidechains, and state channels to solve this problem.

Introduction

In simple terms, blockchain is a distributed digital database. Blocks of data are organized in chronological order. Blocks are linked and securely protected by cryptographic proofs. This technology is being implemented in various industries and is already changing the way we work and live.

The idea is that secure, decentralized blockchains will allow the world to run without relying on third-party networks or markets. However, experts generally agree that if the technology is to become widely used, it must first solve a core problem, the much-discussed "blockchain trilemma."

Vitalik Buterin, co-founder of Ethereum, popularized this term. To understand this concept, you need to know the three major elements of blockchain: decentralization, security, and scalability. The concept of the "blockchain trilemma" refers to the difficulty of blockchain to achieve optimal levels of these three properties at the same time. The improvement of one property usually leads to the weakening of another property.

This article will examine the three main elements of the trilemma and explain each in detail. A thorough discussion of each element and their relationship to each other will help deepen our understanding of how and why the blockchain trilemma exists. This article will also highlight several solutions proposed by developers.

What is decentralization?

Bitcoin and other similar blockchain networks are designed to be decentralized. The overall architecture of these networks is not managed by one person or a single organization, but is decentralized. The network level is open to all participants. Therefore, control is completely dispersed, rather than in the hands of a single entity. Everyone has access to the same data. If someone tries to cheat the system by changing the records to their own will, other participants can refute the incorrect data.

This is a bit technical, but let’s take the Bitcoin network as an example, where there is no third-party control involved. Compare this to the reliance on banks in the financial system. Banks enforce trust between the parties involved in a transaction and ensure that all records are kept correctly. However, the Bitcoin blockchain shares data with everyone in the network to ensure that the data is verified before it is added to the digital database. This creates a system that does not require the involvement of a third party.

Decentralization makes possible what is known as Web3. Our current internet is in the Web2 phase. In Web2, websites and applications are controlled by corporations, but users create the content. Web3 is the next step in development. In the Web3 internet, people take control of their data and online lives using decentralized blockchain technology.

However, it is important to note that the way these distributed systems work requires a large number of participants to agree on the validity of all data, which requires information to be shared and processed, which can slow down transaction times. Therefore, blockchains need to scale, that is, be able to process more data at a faster rate. We will continue to talk about scalability when we discuss scalability.

In addition, to achieve decentralization, the security of the underlying blockchain must be guaranteed first. If the blockchain lacks security, criminals will have the opportunity to tamper with data at will. This leads to the second part of the trilemma: security.

What is blockchain security?

No matter how decentralized a blockchain is, it won’t matter if it lacks security. A robust blockchain network must be resistant to attacks by malicious entities. Centralized systems provide security because they are closed. Those in control can ensure that data is not tampered with. But how can security be achieved in a decentralized system where everyone can participate?

This is a complex topic. Let's go back to Bitcoin and use its decentralized blockchain security as an example. The Bitcoin blockchain uses a combination of cryptography and a network consensus mechanism called "Proof of Work (PoW)". From a cryptographic perspective, each block has a digital signature, or "hash". Any modification will change the block's hash value, so each data block is connected in a way that cannot be tampered with. Any attempt to change the data will be quickly recognized by the rest of the network.

Proof of Work consensus is also at work here, effectively securing the cryptocurrency ledger. Understanding proof of work is a lot of work in itself, but for the purposes of this article, just remember that network members 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. The calculations require these computers to perform a large number of hash functions. While proof of work is secure, it is relatively slow, which leads to scalability issues.

Please also note that the more participants (nodes) there are in the network, the more secure the network is. The more participants there are, the less chance there is for bad actors to take over the system. This involves the so-called "51% attack." The general idea of ​​this concept is that if a single entity (or a group of bad actors) controls more than 50% of the hash rate of the entire blockchain network, they can arbitrarily overturn the consensus and tamper with on-chain data, such as double-spending tokens.

In short, security is the foundation for the success of blockchain. Without security, attackers can take control of the blockchain at will, and the blockchain will be worthless.

What is scalability?

Scalability refers to the goal of building blockchains to increase the number of transactions per second. For blockchain technology to serve the wider society, or billions of users, it must scale. However, this is a problem that many blockchains continue to struggle with.

The reason is that decentralization and security are fundamental issues of blockchain, so they always get priority. Decentralization is the core of the concept and goal of blockchain. Most well-known blockchains stick to this core. As mentioned above, security is the core requirement for the success and value of blockchain.

However, with decentralization and security as the top priorities, scalability becomes a challenge. The number of transactions that can be processed by a single chain is severely limited. Centralized payment systems such as Visa claim to be able to process 24,000 transactions per second because the network is closed and not affected by public nodes and consensus. Let's compare various well-known blockchains.

According to a 2022 Bloomberg report: "As of September, Bitcoin struggled to process more than seven transactions per second, while the second-most popular Ethereum network was limited to around 15 transactions per second. Compared with traditional trading platforms, this is so slow that it makes people question life."

As mentioned earlier, these blockchains are limited in transaction speed due to the way participants in a decentralized network must process information, as well as the nature of the proof-of-work consensus mechanism itself. If more and more people in society begin to use blockchain technology, the network's limited transaction processing capacity will lead to network congestion.

Why does the blockchain trilemma exist?

The most obvious and basic solution to the above problems is to reduce the number of participants who confirm and add network data, thereby expanding the network and increasing its speed. However, doing so will reduce decentralization and put control in the hands of a small number of participants. Fewer participants means more opportunities for attacks and reduced security.

The trilemma is thus formed: in the basic design of the operating principle of blockchain, the two necessary attributes of decentralization and security are closely linked, making scalability difficult to achieve. The three are in a state of mutual growth and decline. How to promote scalability without compromising decentralization, security, or both?

Solving the blockchain trilemma

There is no one-size-fits-all solution to the trilemma. Given the importance of solving this problem, the community has come up with a variety of different solutions with promising results. Let’s outline the most popular ones to give you an idea of ​​the latest progress in this area.

1. Sharding

This is a way of splitting a blockchain or other type of database into smaller partitions of blockchains that manage specific segments of data. This setup relieves the pressure on a single chain to handle all network transactions and interactions. Each partitioned blockchain is called a "shard" and has its own specific ledger. These shards can then process transactions on their own, but the beacon chain or main chain manages the interactions between shards. This is a change to the blockchain mainnet, so sharding has become an upgrade for the scalability of Layer 1 networks.

2. Various consensus mechanisms

One of the main reasons why the trilemma exists in the Bitcoin network is because of the way proof of work works to ensure security. Miners, cryptocurrency algorithms, and a huge decentralized computing power are necessary to achieve the security of the system, but they also make the system slow. Finding other ways to ensure consensus is also a way to solve the trilemma. This is one of the reasons why Ethereum switched from proof of work to proof of stake (PoS).

In a proof-of-stake blockchain, participants must stake (lock) their own tokens to participate in transaction verification, but they do not need highly specialized mining machines. It is easier and more convenient to add more validators to the network. The proof-of-stake consensus mechanism is just one of many ways to solve scalability.

3. Layer-2 Solution

Sharding and various consensus mechanisms are so-called Layer-1 solutions that aim to change the fundamental design of the underlying network. However, other developers are looking at building solutions on top of existing network structures in an attempt to solve the trilemma. In other words, they believe the solution lies in the second layer of the network, or "Layer 2." Examples include sidechains and state channels.

A sidechain is essentially a separate blockchain connected to the main chain. With this setup, assets can flow freely between the two chains. Importantly, sidechains can operate under different rules, which can increase speed and scalability. Similarly, state channels are another way to remove transactions from the main chain and relieve Layer 1. Instead of using a separate chain, state channels use smart contracts to allow users to interact with each other without posting transactions on the blockchain. The blockchain only needs to record the start and end of the channel.

Summarize

The blockchain trilemma has hindered the potential of blockchain technology to change the world. If blockchain networks can only process a small number of transactions per second to maintain decentralization and security, it will be difficult to achieve mass adoption. However, judging by the latest solutions proposed by developers to solve this problem, blockchain networks can only achieve a leap in data processing capabilities in the future if they continue to advance current technological progress.