TL;DR

Blockchains are capable of handling a limited number of transactions per second. The Bitcoin network, for example, can process around seven transactions per second. If the goal is global adoption of blockchain technology, it must be able to handle a much larger volume of data and offer faster transactions. This way, more people can use the network without slowdowns or high costs involved. However, the design of many decentralized networks makes increasing scalability decrease decentralization or security. This problem is known as the blockchain trilemma. Developers trying to solve this problem are experimenting with different consensus mechanisms and scalability solutions, such as sharding, sidechains, and state channels.

Introduction

In basic terms, a blockchain is a distributed digital database. These data blocks are organized in chronological order. Blocks are linked and protected by cryptographic proofs. The implementation of this technology in different sectors has already changed the way we work and live.

The idea is that decentralized and secure blockchains offer a world where we don't need to depend on third parties for networks or markets to function. However, most experts agree that if this technology is to be adopted more widely, there is a core problem that needs to be addressed. The problem in question is known as the “blockchain trilemma”.

This term was popularized by Ethereum co-founder Vitalik Buterin. It refers to three desirable elements in a blockchain: decentralization, security and scalability. The blockchain trilemma refers to the idea that it is difficult for a blockchain to achieve optimal levels of all three of these properties simultaneously. Focusing on one often causes the other to weaken.

In this article, we will cover the three elements of the trilemma and explain each of them in more detail. By discussing the details and the influence of each element on the other, we will have a better understanding of the blockchain trilemma and its possible causes. We will also look at some of the solutions suggested by developers.

What is decentralization?

The Bitcoin blockchain and other similar networks are designed to be decentralized. The structure was created in such a way that there is no one person or organization responsible. On the contrary, it is a completely decentralized structure. The network is open to anyone who wants to participate. Therefore, control is fully distributed and not held by a single entity. Everyone has access to the same data. If someone tries to game the system by altering the records in their favor, the rest of the participants will reject the tampered data.

This subject can be quite technical, but let's use the Bitcoin network as an example. There are no third parties in control. Compare this to the need for banks in the financial system. Banks reinforce trust between people carrying out transactions and ensure that all records are kept correctly. The Bitcoin blockchain, however, shares all of this data with everyone on the network so that it can be verified and confirmed. Once this is done, they are added to the digital database. The result is a system capable of functioning without the need for third parties.

Decentralization enables the development of the so-called Web3. We are currently users of Web2 — today’s internet. Web2 has many websites and applications controlled by companies, but with content made by users. Web3 is the next step. Web3 is an internet where decentralized blockchain technology allows people to control their own data and lives online.

It's important to note, however, that because of the way these distributed systems work — with a large number of participants who need to agree on the validity of any data — transaction times can be slow, as a lot of information needs to be shared and processed . Therefore, blockchains need to offer scalability, that is, they must be able to handle more data faster. We will return to this topic when we discuss scalability.

Furthermore, the dream of decentralization is only valid if the underlying blockchains are secure. If a blockchain lacks security, a malicious user can take control and alter the data in their favor. This brings us to the second element of the trilemma: security.

What is security on a blockchain?

It doesn't matter how decentralized a blockchain is if it doesn't have security. A good blockchain network must be resistant to attacks from malicious entities. Centralized systems derive their security from the fact that they are closed systems. Whoever is in control can ensure that data is free from interference. But how is this possible in a decentralized system, where anyone can participate?

It's a complicated subject, but we can again use Bitcoin as an example of a secure and decentralized blockchain. The Bitcoin blockchain uses a combination of cryptographic elements and a consensus mechanism called Proof of Work (PoW). In terms of cryptography, each block has a type of digital signature (or hash). Each block of data is connected in a way that cannot be tampered with, as any change would alter the hash of a block. Any attempt to alter the data would be quickly identified by the rest of the network.

The PoW consensus mechanism is another part of the puzzle. It helps protect the cryptocurrency ledger. To explain Proof of Work we need an entire article, but for our purposes in this article, understand that network members can only verify new transactions and add them to the ledger through an activity known as mining. This process involves using computational power to solve a mathematical problem. Part of the process requires computers to perform multiple hash functions. This contributes to the scalability issue, as the PoW mechanism is secure but relatively slow.

Also note that the more participants (nodes) there are in the network, the higher its security level will be. The greater the number of participants, the more difficult it is for a malicious user to take control of the system. This helps prevent a possible 51% attack. As an overview: if a single entity (or group of bad actors) controls more than 50% of the total hash rate of a blockchain, they could override the consensus mechanism and alter the blockchain data for their own benefit, e.g. double spending of tokens.

In short, security is a fundamental requirement for a blockchain to be successful because, without it, attackers can take control of the blockchain, rendering it useless.

What is scalability?

The term scalability refers to the goal of building a blockchain that can support more transactions per second. Scalability is necessary so that blockchain technology can serve society at large and potentially billions of users. But this is where many blockchains still struggle.

This is because the elements of decentralization and security are so fundamental to blockchain that they tend to receive the most attention. Decentralization is so essential to the ethos and goals of blockchain that it is often the main focus of the most recognized blockchains. Security, as we discussed, is an essential requirement for a blockchain to be successful and useful.

However, when prioritizing decentralization and security, scalability becomes a challenge. The number of transactions a blockchain is capable of processing can be severely reduced. A centralized payment system like Visa claims to be able to process 24,000 transactions per second. This is because the network is closed and does not depend on considerations of public nodes and consensus. Compare this to some of the more well-known blockchains.

According to Bloomberg in 2021: “As of September, Bitcoin is unable to handle more than seven transactions per second and Ethereum, the second most popular network, has a limit of about 15 transactions per second — a lifetime when compared to conventional brokers.”

As mentioned, these blockchain transaction speeds are limited due to the way information needs to be processed by the different participants that make up the decentralized network and also due to the nature of the PoW consensus mechanism itself. If more and more people start using blockchain technology, networks will become congested due to the limited number of transactions that can be processed.

Why does the blockchain trilemma exist?

The most obvious and basic solution to the problem described above is to reduce the number of participants committing and adding data to the network, in exchange for greater scalability and speed. But this would harm the decentralization factor, as control would be in the hands of a smaller number of participants. And it would also cause a weakening of security, as with fewer participants there would be a greater chance of attacks.

So here's the trilemma: given the relationship between the desired properties of decentralization and security, the fundamental working design of blockchain makes scalability difficult. By improving one, you weaken another. How to increase scalability without compromising decentralization, security or both?

Solving the blockchain trilemma

There is no single miracle solution to the trilemma. But given the importance of solving this problem, there have been a number of different approaches in the community with interesting results. Let's cover an overview of some of the most popular developments to give you an understanding of what's happening in the sector:

1. Sharding

This is a method of dividing blockchains (or other types of databases) into smaller, partitioned blockchains that manage specific data segments. This setup eliminates the need for a single blockchain to handle all transactions and interactions on a network. Each partitioned blockchain is known as a shard (fragment) and has its specific ledger. These shards are capable of processing their own transactions, but a blockchain beacon or main chain manages the interactions between the shards. This makes sharding a Layer-1 network scalability upgrade as it is a change to the main network of a blockchain.

2. Other consensus mechanisms

One of the reasons the trilemma exists in the Bitcoin network is the way PoW works to ensure security. The need for miners, encryption algorithms, and enormous amounts of decentralized computing power results in a secure but slow system. Finding a different way to ensure consensus is one approach to resolving the trilemma. This was one of the reasons for Ethereum's change from PoW to Proof of Stake (PoS).

In PoS blockchains, participants involved in validating transactions must stake their tokens. There is no need for highly specialized mining machines. Adding more validators to the network is simpler and more affordable. PoS is just one of many different approaches to consensus mechanisms that seek scalability.

3. Layer-2 Solutions

Both sharding and different consensus mechanisms are known as Layer-1 solutions. They attempt to change the fundamental design of the underlying network. But other developers looking to solve the trilemma are working on solutions that build on an existing network structure. In other words, they think the answer lies in a second layer, that is, in Layer-2 solutions ("layer"). Examples of this include sidechains and state channels.

A sidechain is basically a separate blockchain connected to the main chain. It is set up so that assets can flow freely between the two. It is important to note that the sidechain can operate under different rules than the main chain, allowing for greater speed and scalability. Similarly, state channels offer another way to take transactions off the main chain and offload Layer-1. Instead of a separate blockchain, a state channel uses a smart contract to allow users to interact with each other without publishing their transactions to the blockchain. The blockchain records only the initial and final states of the state channel.

Final considerations

The scalability trilemma prevents blockchain from fulfilling its potential as a world-changing technology. If blockchain networks are only able to handle a small number of transactions per second to maintain decentralization and security, it will be difficult to achieve mass adoption. However, the solutions presented by developers seeking to solve this problem suggest that the technological advances already made by blockchain technology are on the right track. In the future, networks will be able to handle a much greater volume of data.