Blockchain trilemma, sometimes referred to as scalability trilemma, is as old as the industry itself. The goal to create a decentralized, scalable and secure peer-to-peer digital cash is the utopia that directs the industry’s efforts. Starting with Bitcoin’s whitepaper, Satoshi Nakamoto created a system where trustless currency tokens can be created via mining and transactions validated via a consensus algorithm. Initially, this was regarded as an experiment meant for nerds and not much attention was paid by the tech community in the first few years. Fast forward ten years and today, Bitcoin’s market capitalization is over $100 billion and there are hundreds, if not thousands, of projects trying to solve the same problem with different approaches.
Which project is closest to achieving the equilibrium that Satoshi set out to achieve? Let us have a look.
What is the blockchain trilemma?
A blockchain project can provide sufficient competitive advantage and stability over any sovereign or Fiat currency only when it satisfies these three conditions, collectively known as the trilemma:
Decentralization is one of the basic tenets of blockchain. It means a blockchain should not be dependent on one company or individual. Decentralization allows permissionless and censorship free functioning of the blockchain. This is usually achieved with consensus mechanisms like Proof-of-work or Proof-of-Stake.
Security can be achieved only by sufficient decentralization since it eliminates a central point of attack. If some nodes in a network are attacked and transactions reversed, it will not matter as long as 51% of the nodes have the correct transaction history. It will always be reconciled and the bad actors can be identified and eliminated.
This is the last and the weakest point as of now. Scalability is the pillar that will hold the ecosystem together but hasn’t been built and tested as yet. The benchmark here is Visa’s transaction processing capacity of 24,000 transactions per second. Currently, most projects have a capacity of less than a few hundred transactions per second. This is because if a network is sufficiently decentralized, the ledger needs to be updated on all nodes before the transaction is processed. This makes it a slow process. So slow that Bitcoin can currently process only 7 transactions in a second.
The only real problem to be solved is that of scalability. The challenge is not to compromise on the other two pillars while solving this problem. Otherwise, the solution is rendered meaningless. A scalable network with only a few nodes is as bad as a centralized network like Visa’s.
Every project is trying to solve it differently. Let us look at some promising solutions that might be the blockchain of the future.
Bitcoin’s core developers have decided to take the ‘second layer’ route. They are building the ‘Lightning Network’, which will allow users to transact on a second chain amongst their network. This chain will then be used for regular transacting and the fee for Bitcoin’s transaction will be paid only when the final balance is settled. This means fewer transactions on the main blockchain so faster processing time.
This approach has some limitations that haven’t been tested as yet. The speed of the second layer, the security of it and the challenges of liquidity — since each second layer channel requires liquidity to process transactions — will be to be tested.
Ethereum’s founder Vitalik Buterin and the Bitcoin Lightning Network creator Joseph Poon have created another solution for Ethereum called Plasma. Plasma operates through Ethereum’s smart contracts where any entity can create child-chains and these child-chains can have their own child-chains.
Other solutions on Ethereum include Raiden Network — which is Ethereum’s second layer solution — and sharding. Again, the effectiveness of these solutions is still unproven.
DEXON is a relatively new project and is not as popular. But this needle in a haystack has achieved what most “old” projects could not do in their lifetimes. DEXON’s “Responsive Byzantine Agreement” is capable of reaching finality faster because their validators interact with each other forming a peer network for validation. The block confirmation time only depends on the actual network delay instead of a predetermined amount of time.
DEXON has already achieved the speed of more than 10,000 transactions per second on their testnet and their main net was launched recently. This is one project to watch out for.
While Bitcoin started out strong and was the seed of this revolution, the technology has largely stagnated with investors waiting for the promised second layer solution. Most projects with huge market caps have yet failed to deliver a blockchain that can solve this trilemma. Newer projects tend to take the advantages of the legacy blockchains and innovate on them. That seems to be the way forward.