The Scalability Trilemma is an excerpt from the Sigma Network whitepaper which presents the team’s vision for the future of performance and scalability for blockchain technology.
In its essence, a blockchain presents a system in which two or more entities, who do not necessarily know or trust each other, can financially cooperate without the need for a trusted third party, such as a bank. “The root problem with conventional currency is all the trust that’s required to make it work” — Satoshi Nakamoto (Bitcoin open source implementation of P2P currency).
Blockchain usage has resulted in two primary benefits: decentralization and security, however with a trade off on scalability, which is generally limited due to the use of broadcast in non-custodial protocols in comparison to custodian systems.
The founder of Ethereum, Vitalik Buterin, referred to the trade-off blockchains face when dealing with scalability, security, and decentralization of transactions, and termed it the scalability trilemma (Ethereum Github Sharding FAQ). Solutions which have attempted to address scalability are detailed in the following section, including both on-chain methods, or Layer-1, and off-chain methods, or Layer-2, however a number of solutions result in adverse effects of more susceptibility to attack vectors and centralization.
Each of the three key properties is detailed in turn:
Decentralization is where a blockchain can store information immutably without relying on a central authority. Ethereum define decentralization as a system running where each party only has access to O(c) resources, where c is the size of computational resources and n is the size of the ecosystem.
The more decentralized a system is the lesser concentration of influence lies in the hands of the very few, resulting in higher collusion resistance. Secondly, decentralization diversifies the components of the system, thereby increasing fault tolerance. A further benefit is in terms of attack resistance due to the lack of central authority (Vitalik Buterin — The Meaning of Decentralization).
Security is defined as the defensibility against attacks, including 51% and DDoS attacks. Ethereum define security as being secure against attackers with up to O(n) resources, where n is the size of the ecosystem. Although no blockchain is immune to the possibility of an attack, increasing the number of nodes at random data locations decentralizes accumulation of power and lowers attack susceptibility. In a Proof of Work scenario, higher security could result lower throughput and network latency, impacting the performance and scalability of the blockchain.
As per the first two properties, scalability is to be considered more as a spectrum of degrees, rather than as a binary attribute. Scalability is defined as the final capacity of a network, and determines how large, ultimately, it can grow to fit processing requirements. A highly scalable blockchain has the capacity to handle a large number of transactions at a time. Ethereum define scalability as being able to process O(n) > O(c) transactions, where c is the size of computational resources and n is the size of the ecosystem. With higher scalability, system security can become more prone to external sources, while decentralization could also be impacted as nodes grow larger necessitating greater resources.