The Crypto Trilemma
A Liquid Exploration of Decentralization, Scalability & Security
Introduction
Water is high quality, chemically and physically, if it is colourless, odourless, and tasteless. In blockchain technology and in the crypto space generally, the three qualities used to measure the quality of a token, protocol, or coin are Decentralization, Scalability, and Security.
This situation where the achievement of two of the three qualities prohibits the achievement of the third has raised a technical term in the crypto space referred to as a ‘Trilemma’. This prevalent situation in the crypto space is considered a trilemma due to the difficulty of any token to meet (with complete satisfaction) any of the three fundamental requirements that make it a cryptocurrency or protocol. Thus, unlike our initial analogy where we cited the qualities of water — which is of the essence and cannot lose its place to any other liquid or fluid, there has been a consensus that a product that meets 2/3rd of the qualities is acceptable.
Defining these qualities gives us the needed lens to frame critical discussions about how to evaluate cryptocurrency. The benchmark of cryptocurrencies against traditional currencies has existed since the advent of blockchain technology. The big question arises: can crypto assets replace primordial assets like gold and other precious metals?
Decentralization
The need for cryptocurrencies to replace the traditional currencies, and the need to come up with a more reliable system to defy the intervention of humans in day-to-day transacting and decision-making in financial institutions gave rise to the first fundamental character — the decentralization of the operating system and governance board of cryptocurrencies.
The primacy of decentralization arose as technology progressed and in conjunction with the need to dismantle established (and limit) financial barriers. As we’ve seen, when power concentrates in the hands of centralized financial institutions like banks, customers are at risk of losing money over the course of transacting due to the banks’ governance policies. Hence, decentralization became a solution to eliminate transaction inefficiencies and bad governance seen in banks.
Owing to the need for a reformation in payments, data storage, cloud computing, and e-businesses, the first cryptocurrency, bitcoin ($BTC), built on the blockchain protocol and launched in 2009 by presumably pseudonymous developer Satoshi Nakamoto, led the campaign and made decentralization one of the core qualities every cryptocurrency must seek to build first.
Later, Ripple ($XRP) came three years after Bitcoin and had the revolutionary idea to decentralize but gain the trust of the traditional banking system.
On the subject of decentralization, Ethereum ($ETH) launched in 2015 (six years after Bitcoin) and took the discussion a notch higher by providing a more robust definition to the meaning of the word ‘decentralized’. According to a statement by Investopedia, a financial website that defines financial terms, it “enabled the deployment of smart contracts and decentralized applications (DApps) to be built and run without any downtime, fraud, control or interference from a third party”. Ethereum provides the infrastructure for individuals and companies to build on and brings up deeper features that transcend monetary transactions.
Decentralization has not been a troubling issue in the crypto space seeing that it is the bedrock of its technology. However, the landmark improvements made and the preferences have been the extent of decentralization targeted by creators and how other fundamental criteria will not suffer neglect while trying to achieve this objective.
Scalability
Scalability in regards to a blockchain protocol is the ability to support high transactional throughput and future growth. In other words, due to financial transactions being the leading activity in the crypto space, the more scalable a protocol is the more transactions it can carry out per second. That is, more transactions are processed. We can define scalability as the number of transactions completed per second.
Achieving scalability together with decentralization is often considered near impossible. Why? Scalability is gradually becoming the metric for basing the efficiency of every crypto protocol. Scalability moves blockchains towards becoming centralized and permissioned networks allowing only select users access to records.
Due to the uncertainty surrounding its initial acceptance when it was launched, the Bitcoin blockchain’s major flaw was the limitation to process a maximum of 7 transactions per second, which led to the tiring wait for confirmation of transactions. With Ripple, $XRP, efficiency got introduced in the volume of transactions per time at a cheaper cost despite the assurances of its security. Other factors relating to security did not get due attention owing to the influence of traditional institutions, as many were sceptical due to the fact that having lost a lot of money in the financial market in the 2008 banking crisis, any untested scheme or financial system will come with the fear of its uncertainty. Ethereum provided a flicker of hope. In the era where bitcoin and its users could only guarantee seven transactions, the Ethereum protocol, which had many programs, could deliver up to thirty transactions per second, making it faster.
However, in scalability, it’s not just a question of time taken in processing transactions, cost is also of utmost importance. While Bitcoin is slower due to its inability to process more transactions per second than Ethereum, the average cost of processing Bitcoin transactions is $25, Ethereum transaction costs can rise to over $100 in peak periods, while the Cardano which processes about a million transactions per second costs about $0.5.
The preference and sustainable scale of $BTC has been due to the low transaction fees it maintains while delivering on decentralization. Ethereum has gathered the majority of crypto projects due to its expressibility (Turing completeness) while Ethereum’s founder, Vitalik Buterin, has pledged to a scalable Ethereum 2.0 scheduled for launch in 2022. According to an article written by Rene Millman and Liam J. Kelly, Buterin promises that the advantage of Ethereum 2.0 is its scalability. Ethereum 2.0 will have shard chains that can conduct up to 100,000 transactions per second, whereas Ethereum can support only 30 transactions per second.
With the launch of Ethereum 2.0, there will be a significant reduction in the cost of transactions (gas fee), which will provide competition with Bitcoin. There is a predicted rise in belief in the scalability of Ethereum. Many projects will follow the design of the Ethereum blockchain due to its reliability over time and openness.
Security
As we stated earlier in our water analogy, the three qualities of good water cannot be improved upon or negotiated. However, the situation becomes different for a blind man who cannot tell the colour of the water presented to him. If such a sample of water meets the tasteless and odourless qualities, the possibility of the man drinking such water is likely 100%.
This analogy is similar to the sentiment that drives crypto space. Blockchain technology is more secure when it is more decentralized. Hence, the less control and governance vote people have over a particular token, the more secure such a token is. We consider the security of a protocol the most critical factor when choosing the infrastructure for a blockchain project. Blockchain security is the most important of the three fundamentals which protect the blockchain network from being interrupted by malicious attacks. This factor is considered as the most critical of all three factors due to the fact that for blockchain to remain a reliable technology that will revolutionize the financial world, it should guarantee that when people put in their money, it will be safe and it will appreciate over time.
The Bitcoin protocol, in its 13-year existence, has never been breached by hackers. Apart from the fork that led to the Ethereum Classic, the Ethereum blockchain can be relied on.
Conclusion
It is important to emphasize that of the components that create the trilemma, at the moment, several protocols built have shown the impossibility of meeting up with the three features. However, crypto being revolutionary promises to come up with dimensions of possibilities. We will maximize two of these as a tradeoff in their order of importance, decentralization takes the first place, security comes next, and scalability is considered last.
Presently, leading protocols, Bitcoin and Ethereum have placed decentralization ahead of Security and Scalability. However, being revolutionary technologies, more is to come as new inventions spring up.
Author Bio
Khaleb Ogbonna is a technical writer and digital investment analyst.
BanklessDAO is an education and media engine dedicated to helping individuals achieve financial independence.
