Before diving into the blockchain trilemma, let’s explore what a blockchain fundamentally is. A blockchain, in simplified terms, is a public distributed ledger that is accessible by anyone. It maintains a record of transactions in a decentralised way. All participants, or nodes, of a blockchain hold the exact same list of transactions. This creates a trustless system as the majority of the nodes must agree that a transaction is valid for it to be written into the blockchain.
Due to the blockchain being a distributed public ledger, it needs three key components to function: decentralisation (the nature of a blockchain), security (necessity), and scalability (the primary challenge).
What Is the Point of Decentralisation?
At this point, those unfamiliar with blockchains might think that it is much easier to let one nominated person or entity maintain all the records for everyone. This resembles the existing financial system. With centralisation, the entity in charge has the power to withhold services from certain people, freeze funds, or even falsify records. This gives rise to a plethora of problems that the masses have zero control over.
The blockchain wants to be the solution to these problems. Although it is very much a nascent technology today, with enough time and development, it could very well become a viable alternative to today’s financial system and make financial services more equitable. We can see how it might operate in decentralised financial applications today, although it is very much in its infancy.
This is, of course, a very simplified version of the problems that arise from centralisation. Let’s move on to the problems with decentralisation, the most pressing of which is the blockchain trilemma Vitalik wrote about several years ago in a blog post.
The Blockchain Trilemma Explained
Back to the three key components of a successful blockchain, let’s explore each one a little deeper.
Decentralisation
This is the nature of a blockchain. The ultimate goal with this technology is to create systems where we can remove the centralisation of power, and thereby wealth, knowledge, and everything else that comes with it.
Security
Needless to say, this is necessary for a blockchain to function properly. An unsecured blockchain would be prone to hacks and attacks, jeopardising all of the information on it, and rendering the blockchain useless. This is a non-negotiable component of a blockchain.
Scalability
This is where the real challenge of creating a blockchain lies. In order to secure a blockchain, consensus mechanisms are used. In the case of Bitcoin, the first blockchain-based currency, it used the Proof-of-Work (PoW) consensus mechanism. This made Bitcoin extremely secure and decentralised, but also limited its scalability.
PoW requires a great deal of computational power and energy to run, and in the case of Bitcoin, can only create one block every 10 minutes. This limits its scalability not only in terms of the volume and speed of transactions on Bitcoin but also in terms of environmental sustainability.
The Trilemma
Although these are the three components necessary to make blockchain technology mature enough to replace any sort of existing system, it has been a real challenge trying to achieve this. The PoW model is highly decentralised and secure but lacks scalability. Other models have been devised, but none have really quite hit the sweet spot.
Centralised models are easy to secure and scale since it all depends on just one entity, but that goes against the primary nature of the blockchain, hence negating all that it tries to achieve. On the other hand, it seems like current decentralised systems must pick between being less secure or less scalable. Let’s explore some of these alternatives.
What Are the Alternatives?
Since Bitcoin was first created in 2009, many alternative consensus mechanisms have been developed. The most popular of which is the Proof-of-Stake (PoS) model. With PoS, users stake crypto coins to validate a blockchain. The more tokens a validator stakes, the higher the likelihood of it being selected to create the next block and earn rewards.
PoS is highly decentralised and scalable and uses significantly less energy than the PoW model. However, it is vulnerable to more forms of attacks such as 51% attacks. This happens when a single person or entity owns at least 51% of all staked tokens, effectively allowing this individual to decide which transactions are or aren’t valid on the blockchain.
Another model, the Proof-of-Authority (PoA) model, works similarly to the PoS model, except validators stake their reputation rather than tokens. This requires validators to undergo a KYC process to assess their eligibility to validate the chain. PoA is much more secure than PoS since all validators are known and risk their reputation by validating and is just as scalable. However, since this is limited to a small group of validators, PoA is not as decentralised.
Yet another example of an alternative consensus algorithm is Solana’s Proof-of-History (PoH) model. This uses something like a cryptographic timestamp to allow validators to validate transactions with a small bit of information, increasing the blockchain’s throughput significantly while maintaining a high standard of security. The drawback to this is that Solana has specific hardware requirements for validators, limiting its decentralisation.
Has the Blockchain Trilemma Been Solved?
Notably, two chains claim to have solved the blockchain trilemma. Algorand uses what they call the Pure Proof-of-Stake (PPoS) model to achieve security, scalability, and true decentralisation. Dragonchain also claims to have solved the blockchain trilemma through a hybrid approach to limit the shortfalls of existing blockchain architectures.
These seem very promising theoretically, but require real-world testing using a large number of users to prove that these solutions really do solve the problem. In any case, these are exciting steps forward in the evolution of blockchain technology.
The Future of Blockchain
Even in its current form, the blockchain industry is making waves globally and in financial markets. With many brilliant minds constantly building in this space, new breakthroughs are bound to happen, bringing blockchain technology closer to how it was originally envisioned. It’s not a matter of if, but when the blockchain trilemma will be solved and adopted widely. The decentralised future is close.
