Since the inception of Bitcoin back in 2008, cryptocurrencies have wrestled with the blockchain trilemma. And even now, 15 years later, Bitcoin and the rest of crypto still face this challenge.
The blockchain trilemma is the term used to describe the three competing goals of decentralization, security, and scalability. The trilemma suggests that it's impossible for any single cryptocurrency to achieve all three of these goals simultaneously.
If a blockchain is fully decentralized and secure, it may not be scalable enough to handle a high volume of transactions.
If it is scalable and decentralized, it may not be secure enough to protect against attacks.
And if it is scalable and secure, it may not be decentralized enough to be considered truly decentralized.
Let's look at three leading layer 1 blockchains and analyse how they address this classic problem. Then we'll discuss what the blockchain trilemma means for new investments and your portfolio.
Bitcoin
Bitcoin is decentralized and secure, thanks to its Proof of Work consensus mechanism. However it’s not scalable, and can only handle approximately 7 transactions per second (TPS). This is paltry compared to Visa, which is capable of about 24,000 TPS.
There are scalability solutions available such as the Lightning network, however they still don’t scale Bitcoin to the point where it can reasonably contend with the likes of Visa as a global payment system. Bitcoin’s lack of scalability and speed also results in high transaction fees and network congestion.
And although the Lightning network does well to improve Bitcoin’s transaction speeds, for every problem that it may solve, a new issue is created. So as scalability is strengthened, security is weakened.
Offline transaction scams, stuck payments and other malicious attacks have plagued the Lightning network since its deployment, and stopped the protocol from completely solving the trilemma.
Ethereum
In contrast, Ethereum - the second-largest cryptocurrency by market cap - has prioritized scalability over decentralization.
The Ethereum network uses a Proof-of-Stake (PoS) consensus mechanism to achieve its higher scalability, but this has come at the cost of increased centralization, as validators are required to hold a minimum amount of Ethereum to participate in the consensus process.
Ethereum is considerably more centralized than Bitcoin. It has several vectors of centralization including
Cloud infrastructure,
Maximum extractable value (MEV)
And the proof-of-stake (PoS) consensus mechanism itself.
Consequently, gaining control of 51% of the network is far easier with Ethereum than it is with Bitcoin. And there are many promising layer 2 solutions such as Zk-Sync and optimistic roll ups, but do these really hold the answer?
Although these additions help Ethereum, and its PoS consensus mechanism enables much more throughput, Solana is even more scalable - primarily owing to its speed and low cost of transactions.
Solana
Solana, a newer layer 1 than Ethereum and Bitcoin, has attempted to solve the blockchain trilemma by utilizing a unique consensus mechanism called Proof-of-History. This allows for fast transaction processing and high scalability while still maintaining some degree of security.
However, this hasn’t proven to be the game-changer many said it would be and has failed to solve the decentralization element of the blockchain trilemma for Solana. This layer 1's architectural decisions open the network up to other serious risks.
The lack of nodes involved in Proof-of-History, combined with the weighty hardware required for the high speed throughput, arguably make Solana centralized. Also, Solana’s token allocation is concentrated to a handful of venture capitalists (VCs), core developers and Solana Labs.
And just this weekend (Saturday 25 February, 2023) Solana experienced yet another outage, where the network was down for almost 20 hours. During this time the blockchain was unable to process any transactions. This meant that all on-chain activity, including crypto, DeFi and NFT trading, came to an abrupt halt.
Solana engineers recommended restarting the network, and so validators had to downgrade to an earlier version of the software used to run nodes. This isn't the first, and probably won't be the last time Solana has gone down.
The blockchain trilemma and your portfolio
And the above problems demonstrate the blockchain trilemma perfectly. When layer 1 blockchains are not decentralized, they are vulnerable to outages, hacks and weighted voting.
So when you're considering investing in a new cryptocurrency, it’s important to establish how the project deals with this classic issue. If a crypto claims to solve the blockchain trilemma, thorough research is necessary to see exactly how it does so. If it sounds to good to be true, it probably is!
When diversifying your portfolio, having a spread of cryptocurrencies that deal with each element of the blockchain dilemma is a good way to mitigate risk and ensure you’ve got a healthy mix of secure, scalable and decentralized tokens.
There are many exciting projects and layer 2 solutions that help layer 1s address the trilemma. And as crypto continues to evolve, we will see new innovations that might achieve all three goals simultaneously. However, it’s also possible that the blockchain trilemma may never be fully solved!
~ Zac Colbert, The Crypto Journo
🤓 This piece is for educational purposes and not financial advice. If you liked what you read, follow for more deep-dive articles and fresh crypto content.
