The Blockchain Trilemma: Can We Solve the Inevitable Trade-off Between Security, Decentralization, and Scalability?

Blockchain was born out of the purpose to create a world that is financially free and inclusive. The aim was, and for the most part, still is to enable people to control their finances and for world networks and markets to function outside a dependency on third parties. But like all innovation, challenges arise and can pose problems for growth. A modern challenge today is the blockchain trilemma which refers to the inherent trade-off between decentralization, security, and scalability. This article will explore the blockchain trilemma and some of its potential solutions!

What is the blockchain trilemma?

The blockchain trilemma, a term first coined by Vitalik Buterin (founder of Ethereum), poses that it is difficult for blockchain to support all three functions of decentralization, security, and scalability simultaneously, without compromising an aspect. Let’s first break down each concept.

Decentralization — Decentralization is when control and decision-making are transferred from a centralized entity (person, organization, or group thereof) to a distributed network. In the case of blockchain technology and crypto, this is the move away from third-party governance of finances and data through banks and other organizations to a distributed community of people.

Security — Security is a vital pillar of a decentralized finance network. Without a secure blockchain, transactions are exposed to cyber-attacks and hackers. Security is easier in centralized systems because they’re closed systems free from data interference. However, blockchain has familiarised itself with many ways of providing high-level security, the methods being consensus and cryptography which encodes data transactions.

Scalability — As stated in the introduction, a primary goal of blockchain is to create global financial freedom. To achieve this, blockchain needs to be scalable to handle billions of transactions and serve users anywhere in the world.

‘So, what is the big deal?’ you may find yourself asking.

Blockchains can only handle a limited number of transactions per second. Due to the decentralized nature of blockchains, transactions are verified through a consensus algorithm made up of many participants who verify the code. These participants are called ‘miners’. Mining allows for even distribution of control amongst a community of people rather than a single organization or entity. The more participants, the more decentralized the network becomes because control is being distributed amongst more people. More miners also strengthen security as there are more peers approving transactions, making it harder for data to be influenced. This refers to the ‘51% attack’. Put simply, if a single organization or group controls extra than 50% of the blockchain’s community hashing rate, they could alter the data to their advantage.

The process of mining, however, is very slow and can “take a lifetime compared to conventional exchanges” according to Bloomberg in 2022. This is a dilemma for scalability as the blockchain would need to be able to handle many more transactions, and much faster, to be truly adaptable to a global setting. Nevertheless, reducing the number of participants on any given blockchain would come at a significant cost to security, decentralization, or both. Fewer participants mean control is handed to fewer people, and there would be higher chances of attacks as there would be fewer users approving transactions.

The ultimate challenge that needs solving is how we create scalability without harming the integrity of blockchain decentralization and security.

Developers have acknowledged the problem and are making steps towards solving the issue of expandability, by experimenting with different consensus mechanisms and scalability solutions such as sharding, proof of stake (PoS), side chains, state channels, and nested blockchains. Solutions can generally categorize by Layer 1 solutions — solutions that apply to the layer one blockchain — or layer 2 solutions that exist on a layer on top of the blockchain.

Layer 1 solutions:

Sharding

In short, sharding is the process of splitting blockchains into smaller partitioned blockchains that manage particular data segments. Each partition is known as a shard and has its specific ledger. Sharding can remove some of the stress from a single chain.

Proof of Stake

PoS is a move away from Proof of Work (PoW). Ethereum’s merge was exactly this, an attempt to implement scalability through a new consensus mechanism that allows participants to readily validate thousands of transactions per second (TPS). Compared to the 14 TPS It was able to under the PoW model, Ethereum can now handle 100,000 TPS. Without going into too much detail, the PoS model requires that users involved in validating transactions must stake (lock) their tokens, which abolishes the need for highly specialized mining machines and makes adding more participants easier.

Layer 2 solutions:

Buterin highly favours layer 2 solutions, believing they are the only way to allow blockchain technology to reach its full potential in terms of scalability without harming decentralization and security.

Sidechain

A side chain is a separate blockchain that remains connected to the main chain. It’s established to allow assets to flow freely between the two. It allows for greater speed and thus greater scalability as the two chains can operate under different rules, lessening the pressure on the main chain.

Nested blockchain

Nested blockchains are interconnected webs of secondary chains built on top of the main chain. The main chain — or parent chain — delegates commands to the child chains which then process and return data to the parent chain after completion.

State channel

Rather than extra chains, a state channel is a smart contract that enables interaction between participants without having to publish transactions on the blockchain. The blockchain only records the start and end of the channel, removing the bulk of the pressure from the blockchain, and allowing more TPS to take place.

Conclusion

The blockchain trilemma is an ongoing issue that the crypto community is trying to solve. While there are many possible solutions, it’s still unclear which one will be the most successful in the long run. However, by understanding the trilemma and its implications, we can begin to make informed decisions about how to move forward with blockchain technology. With some of the innovative solutions outlined above, it’s only a matter of time before we find a way to have our cake and eat it too when it comes to blockchain technology.