The Blockchain Trilemma
To understand the various kind of blockchain networks and solutions out there, it will help to understand a concept called the 'blockchain trilemma"
What is the blockchain trilemma?
A trilemma is a situation where there are three features, but at most two of them can be maintained simultaneously. The blockchain trilemma refers to three such features: decentralization, security and scalability
Decentralization – this is the one core concept of ‘blockchain technology’ that most people have some understanding of. Blockchains are by their very nature ‘decentralized’ (authority / power rests with several actors, and not with a central few, like say w/ traditional banks and exchanges). So, what do we mean by a trilemma where a blockchain is secure and scalable but not decentralized? It simply means the level of decentralization is lower than other blockchains. One such example is Solana – where the dependance on the original group of founders (called the Solana foundation) is still very high. Bitcoin and Ethereum networks on the other hand are much more ‘decentralized’. This is typically the easiest feature to deliver on.
Security – this is a fundamental feature of modern blockchain systems. Since a blockchain in only a ‘virtual record’, you do not want malicious actors to take over a network and change these records (as possible in what are called 51% attacks). While typically most blockchains deliver on the security features, there are several cases where this is compromised for the third feature i.e., scalability.
Scalability – This is the most difficult feature to deliver on for most blockchains today. What does scalability mean? Scalability of blockchain networks is the ability of that platform to support increasing load of transactions**. *Just for comparison, Visa today processes about 20-25K TPS (i.e., transactions per second), while Bitcoin network processes 7 TPS (0.03% of what Visa handles), and Ethereum is at 25 TPS (0.1% of what Visa handles).***This was ok till a few years ago when the number of transactions on these networks were low. But with increased demand, such low throughput is not sustainable.
The other aspect of low scalability (or low # of transactions per second) is the high associated transaction fees (called “gas fees”) to get any transaction through. This is very simply a demand supply problem. If the demand for transactions is high, but network can only process a certain number, then the cost automatically goes up. The transaction fees on Ethereum were up to a high of 70 USD at one point last year.
So how does one increase scalability without compromising security and decentralization? That’s where a set of solutions called “Layer 1” and “Layer 2” solutions come in. More on that in subsequent posts.