Blockchain technology offers a combination of speed, security, and scalability that promises to revolutionize everything from everyday purchases to sharing medical records. However, the same decentralized structure that delivers these benefits has some unique challenges that conventional centralized networks avoid.
Let's look at these challenges, known as the Blockchain Trilemma, and how new approaches aim to overcome them.
Blockchain technology could revolutionize several industries, but there are some critical hurdles to overcome, including the Blockchain Trilemma.
The Blockchain Trilemma
Computer scientists have long known the trade-offs associated with decentralized networks. In the 1980s, the CAP theorem stated that decentralized data stores providing consistency, availability, and fault tolerance could only handle two of three guarantees at the same time due to the inherent design of the underlying technology.
Similarly, Ethereum founder Vitalik Buterin coined the term Blockchain Trilemma, saying that blockchain technology providing security, decentralization, and scalability could only guarantee two of three simultaneously. Again, the challenge comes from the underlying structure of blockchain technology that requires inevitable trade-offs.
Blockchain technologies don't rely on a central point of control. For example, while Visa or Mastercard may process transactions between consumers and businesses, Bitcoin transactions happen between peers without any centralized intermediary. Instead, they are verified by a consensus among blockchain participants.
The downside of decentralization is that transactions take longer to process. Rather than a single entity approving or denying transactions, the entire network must agree on a decision through a consensus mechanism. That's why Visa can process 60,000 transactions per second compared to Bitcoin's ~10 transactions per second.
Blockchain technologies must be capable of handling an increasingly large volume of transactions to compete with centralized platforms. While blockchain technologies remain on the fringe today, they require massive improvements to scalability for technologies like DeFi to take over a significant volume of conventional transactions.
Fortunately, there are many potential ways to increase scalability, as we'll see below. For example, Polygon is a Layer 2 scaling platform built upon Ethereum, enabling developers to build dApps at a significantly lower cost using a proof-of-stake blockchain. Polygon’s could theoretically have thousands of chains, enabling millions of transactions per second.
Blockchain technology must be secure against attacks, software bugs, and other issues that could lead to problems. For example, the consensus mechanism of many blockchains is susceptible to a 51% attack, where hackers gain enough influence through consensus to modify the blockchain for their own financial gain.
Software bugs can also create significant issues for blockchains. For instance, a bug in an older version of Ethereum's network client, Geth, opened the door to double-spending attacks in mid-2021. The growing use of smart contracts in off-chain transactions could further increase these risks for certain participants.
Common Blockchain Trade-Offs
The Blockchain Trilemma suggests that several trade-offs are necessary when balancing decentralization, scalability, and security. For example, Bitcoin's unparalleled security and robust decentralization stemming from its proof-of-work consensus mechanism limits its scalability. While that's great for investment, it's less valid for smart contracts.
Proof-of-stake consensus mechanisms could dramatically improve scalability without compromising security, but putting power into the hands of a few prominent actors reduces decentralization. And less decentralization means that blockchain decisions are made by large entities rather than the wider community.
Finally, the rise of smart contracts enables blockchains to leverage distributed processing and other techniques to improve scalability and retain decentralization. However, these smart contracts and third-party interactions increase security risks as the large number of DeFi hacks and other security events have demonstrated in the past.
Solving the Blockchain Trilemma
The Blockchain Trilemma isn't mathematical proof that it's impossible to achieve all three goals—it's simply an observation that achieving them is difficult. Over the past couple of years, there has been no shortage of efforts to solve the problem through novel approaches, and some are bearing fruit.
Layer 1 Changes
Layer 1 refers to top-level networks, such as Bitcoin or Ethereum. While change happens slowly at these networks, several significant changes in the pipeline could improve performance. At the same time, new Layer 1 networks take advantage of these new ideas from the onset, providing a higher level of performance out of the box.
- Proof of Stake - Most conventional blockchains use a proof-of-work consensus mechanism involving substantial computing resources. The Ethereum 2.0 upgrade will become the most prominent project to date to use a proof-of-stake consensus mechanism, which promises to dramatically speed up transaction times by relying on game theory rather than raw computing power.
- Sharding - Many blockchains require nodes to hold a copy of every block ever created before adding a new block. Sharding is a new approach that would break down transactions into smaller datasets—or shards—and process them independently and in parallel. These smaller blocks are then reintegrated into the mainchain, speeding up the entire blockchain's performance.
Layer 2 Innovations
Layer 2 refers to networks that sit atop Layer 1 blockchains. For example, the Lightning Network is a Layer 2 solution built atop Bitcoin. These networks have become a popular way to improve blockchain performance without completely rebuilding Layer 1 solutions, enabling developers and consumers to reduce gas fees and improve performance.
- Nested Blockchains - Nested blockchains are similar to sharding in that a piece of work is delegated from the mainchain, processed in a child blockchain, and then added back to the mainchain to improve speed and reduce cost.
- Side Chains - Side chains are blockchain-adjacent transactional chains designed for large batches of transactions. They use an independent consensus mechanism optimized for speed and scalability and utility tokens as part of the transfer mechanism.
- State Channels - State channels are two-way communication mechanisms between a blockchain and off-chain transactions. Rather than requiring miners to validate a transaction, they have a smart contract mechanism that only reports the final "state."
The Bottom Line
Blockchain technology has the potential to revolutionize countless industries, but the Blockchain Trilemma highlights some critical challenges. Fortunately, the space is full of innovation, and many new approaches are helping to overcome these issues and improve performance while reducing transaction costs.