The BlockChain Trilemma - What is it and Why does it Matter?
Hey Folks!
Here is the first in a series of blog posts that will hopefully communicate some key information about Crypto & Digital Assets. Will do our best to keep this short, non-technical, and digestible.
So, what is the Blockchain Trilemma?
In short, the Trilemma is a three-pronged problem which relates to the structure of a blockchain. There are three options that a new blockchain can seek to optimize - Security, Scalability, and Decentralization. First to quickly, sloppily, and easily define these terms, think:
Security is the ability (or lack thereof) of a person or institution to compromise the network and its data
Scalability is the ability of the blockchain to handle more transactions without compromising on performance, integrity, or speed
Decentralization is the extent to which a single entity has control over the network and requires your trust as the consumer/user that they will do what is right by you
The overarching theme here is that the “perfect” digital currency system optimizes for these three things. However, even Bitcoin lacks one of these, scalability.
For a few quick examples that are relatable, consider these:
Visa, Mastercard, Venmo, etc. - these are traditional finance’s best solutions so far. Scalable? For sure - you can pay someone in seconds and they can process millions of transactions almost simultaneously. Secure? Yes - There are fraud protection systems in place and it is very tough to hack/compromise these networks. Decentralized? Well, no - not at all. That is where traditional finance (TradFi) loses us.
If Mastercard, Visa, Bank of America, or whatever other bank/payment system you use simply wanted to drop you today and ‘de-bank’ you, well, they most likely can. This is because those companies are centralized entities with full control over the network. Violate one of their policies and you’re gone. Break a law and they can help the government seize your assets. There is not much you can do about it. However unlikely of a scenario that is, it is far from a free and decentralized system. For the millennials reading this, think about if you have a buddy who can’t send/receive Venmo because they were kicked off the platform for a silly reason. Venmo notoriously de-platforms users who caption their transactions with anything that might violate their policy. This would be a prime example. However, on a decentralized platform, it would be impossible to kick someone off; there is no central authority determining who to kick off.
Bitcoin - For technical reasons that we can discuss in another forum, let us consider that Bitcoin is the most decentralized and secure digital currency that exists today. Again, debatable, but it did have a fair launch distribution schedule as a PoW chain and has a market leading security mechanism. However, the network struggles to scale. If I were to send you a Bitcoin right now, depending on the amount of other transactions the network is processing, it could take anywhere from 20 minutes to 2 hours for you to receive it. This is due to congestion on the network causing a ‘bottleneck’ on the blockchain. If we are to truly every get the world’s financial system onto the blockchain, there needs to be solutions for this scalability issue (and there are), so that we can pay instantly at cash registers.
Solana, Ethereum, XRP (and many of the other names you’ve probably heard of) - Newer blockchains that sought to make improve Bitcoin’s scalability problem. To overgeneralize the result, they all made significant tradeoffs to do so.
Solana is very scalable and can handle throughput nearly on par with Visa and Mastercard, but its network goes does all the time i.e., too centralized and not secure enough to run the global financial system.
Ripple (XRP) is essentially just Mastercard or Visa on the blockchain - extremely centralized. Ripple Labs nearly controls the entire network and, therefore, effectively has total control over everyone’s funds on that network.
Ethereum, probably the second most recognized cryptocurrency, purported to solve Bitcoin’s scalability issues but lost its way. The network moved from a PoW to a PoS consensus mechanism. More importantly, and more impactful for the average user, Ethereum implemented a poor fee system to deal with bottlenecks on the blockchain. Essentially, the higher the congestion on the network, the higher the fees. Thus, small transactions are often subject to exorbitant fees that make the entire transaction moot.
What has played out in the DeFi world since the Bitcoin whitepaper is that various projects have sought the perfect balance between these three features. Unfortunately, nearly none of them have found the proper tradeoff. Although, I would note that some very impressive and promising advancements have been made, which may solve the Trilemma eventually; BlockDAGs, Rollups, Sharding, to name a few.
*Please note that none of this is tied to investment returns. There’s plenty of newer blockchains that have made fair tradeoffs and have real-world engineers building applications on their base layer, which means they might be great investment opportunities if you want to buy them - Grey Chain does not take a view on investment performance or make investment recommendations.
So, Why does this matter, why am I still reading this, and didn’t this guy say he’d keep this short and digestible? (I tried I swear)
Here is why -
While blockchain technology development has taken a backseat to Artificial Intelligence in terms of being in the ‘technology limelight,’ there’s still tons of development behind the scenes; even world governments are beginning to look at blockchain for voting, budgeting, tracking, and will likely add Bitcoin to their balance sheets. You and your businesses will be ahead of the curve by acknowledging a few points:
This is a complex market, that you and your business stand to benefit from if you understand it even if just a little bit more than the average person
Businesses will likely begin deploying blockchain and distributed ledger technology. We expect corporations will follow suit behind the US Treasury’s possible bitcoin reserve, first beginning to accept payment on DeFi networks and then beginning to store crypto assets on company balance sheets (many public companies already do this - see Michael Saylor’s implementation of the Bitcoin Standard at MicroStrategy)
Due to the trilemma, evaluating blockchains, their tradeoffs, their consensus mechanisms, and their security measures requires a technical expertise that most business owners do not have
Understanding these systems, mechanisms, and tradeoffs is paramount to understanding the safest and most secure way to implement some of this into your current business.
Thus, we have launched this Firm with the hopes that we can help businesses navigate this complex world of DeFi. We are here to be your knowledge base and implementation specialists for any and all crypto-related financial transactions: sending/receiving payments, creating a Bitcoin reserve, developing new treasury or banking relationship & practices, seeking low-interest loans using stablecoins - we do it all. Best of all, we can help do it with minimal hassle to you and the potential to increase your bottom line with cheaper