The Blockchain Trilemma: A Crypto Nerd’s Perspective on Interoperability

The Blockchain Trilemma is one of the key concepts of blockchain technology. It highlights the three perpetual issues that blockchain developers face – Creating a blockchain that’s decentralised, scalable, and secure without compromising one feature for the sake of the other two.

More importantly, it also shows how we crypto nerds are always trying to rebel against long-established and straightforward systems.

Decentralisation

Blockchains are not supposed to be reliant on a central authority (e.g. a bank) to validate transfers. Instead, the responsibility lies with the blockchain’s individual nodes (a network of supercomputers around the world) and how quickly they can come to a consensus to authenticate a transfer.

The trade off for decentralisation is scalability (the ability to handle large amounts of transactions within a short period of time). For example, Bitcoin and Ethereum’s PoW (Proof-of-Work) consensus mechanism is extremely decentralised – anyone can authenticate transactions on the blockchain and earn cryptocurrencies as a reward. Because the entire network has to collectively agree on the validity of a transaction, it’s decentralised and secure, but also inefficient as compared to if transactions were immediately confirmed by a single entity.

To put that into perspective, Visa can process up to 1,700 TPS (transactions per second)  while Bitcoin can only process up to a mere 5 TPS.

The sheer amount of trouble that we go through just to bypass banks!

However, PoW blockchains can also become centralised if miners gain control of 51% of the network’s computing power. This will enable them to manipulate transactions (e.g. approve the same transactions twice). A 51% attack highlights the vulnerabilities of a centralised network – activities can be entirely controlled by a single malicious entity therefore risking the security of the network.

Scalability

PoW blockchains are unable to scale effectively, a trade off for decentralisation and security. A potential solution is the PoS (Proof-of-Work) consensus mechanism, soon to be adopted by Ethereum in its latest upgrade to Ethereum 2.0.

Because there’s no need to solve complex mathematical equations to validate transactions, PoS networks are believed to be more scalable. Unlike PoW blockchains, where all of the network’s miners have to collectively approve a transaction, only validators who put up a certain amount of cryptocurrency as collateral can “attest” a block of transactions in PoS blockchains. This means that fewer nodes can approve transactions, therefore “simplifying” the process and making the blockchain more efficient and scalable.

Along with other upgrades, Ethereum 2.0 will reportedly be able to handle up to 100,000 TPS, far surpassing Visa’s TPS.

But remember the oh-so-annoying three pronged conundrum?

Because the ability to validate transactions is in the hands of a select few (e.g. in Ethereum 2.0 one can only validate transactions by putting up 32 ETH at stake), PoS blockchains can possess a degree of centralisation.

This is especially apparent in blockchains such as EOS, which uses a variant of PoS known as DPoS (delegated proof-of-stake). Only 21 nodes are delegated to be in control of the entire network, therefore enabling it to process up to 4,000 TPS. It’s scalable, but extremely centralised.

PoS blockchains are also less likely to suffer a 51% attack because attackers would need to have 51% of the total staked cryptocurrencies. Hence, PoS blockchains are said to be secure and scalable, but rather centralised in nature.

Security

Security is a paramount feature of blockchain. As mentioned earlier, centralisation and scalability can result in a less secure network because a malicious attacker can gain control of the network and use it for personal gain. On the other hand, a secure network is also less scalable due to a higher degree of decentralisation.

See the “Trilemma” yet? It’s a never ending trio of complications. Achieve two objectives and the last one fails. No wonder we crypto nerds are always speaking in gibberish.

Possible Solutions

The current sentiment in the industry is that it’s extremely difficult to achieve all three objectives. But there’s hope! There are a number of solutions that can be implemented as “Layer 1” – solutions that are designed to improve the blockchain directly.

For example, a change in consensus mechanism (e.g. from PoW to PoS) might enable the blockchain to be more scalable. The Algorand blockchain is an example of a PoS network that’s attempting to solve the Trilemma by randomising the selection of validators. A technology known as “Sharding” (currently utilised by blockchains like Zilliqa and will soon be a feature in Ethereum 2.0) can break down groups of transactions into “shards”. Transactions are then processed in parallel by the network, therefore increasing its scalability.

Layer 2 solutions are designed to complement the blockchain, and they exist as a separate layer on top of the blockchain, hence the term ”Layer 2”. For example, Bitcoin has a layer 2 known as the Lightning Network, which adds to the number of transactions that Bitcoin can process, therefore improving its scalability. However, some critics believe that layer 2 solutions negate the purpose of the original blockchain.

What About Interoperability?

My personal take, as a crypto nerd wannabe, is that the trilemma can potentially be solved with “interoperability”, or the ability for blockchains to communicate with each other. Blockchains operate in isolation – it’s impossible to send Ether on the Bitcoin blockchain and vice versa. It’s akin to not being able to send and receive money between different banks, which means that it’s hard to envision a global financial system based on different blockchains for now.

The potential of interoperability is that it enables unique blockchains to operate under a unified network while maintaining decentralisation, scalability, and security. An interoperable network has the potential to serve as a foundation for Web 3.0, as it allows unique blockchains each serving a different purpose to work together (e.g. a blockchain for NFT gaming and a blockchain for decentralised finance), similar to the Internet’s multi-functional nature. Blockchains such as Polkadot are experiments in this area.

The Trilemma exposes the inherent issue with blockchain technology. However, with the ultra-competitive blockchain industry developing at breakneck pace, it won’t be long before the emergence of a trilemma-less (or even dilemma-less) blockchain ecosystem.

Till then, watch us pace around in triangles.