What is the blockchain trilemma?
Blockchains must balance between offering the best secure and scalable infrastructure while still staying reasonably decentralized. Is this a realistic future for Web3?
A fundamental building block for blockchains is decentralization, a functionality that enables people to transact without the requirement of a central authority. This formed the crux of the Bitcoin (BTC) white paper that Satoshi Nakamoto published in 2008. It serves as the base for any Web3 product from a network and ethos vantage.
However, as more people flocked the chain, a couple of other functionalities seemed crucial, scalability and security. While Bitcoin is considered the most decentralized of all networks, its transaction speed does not make it conducive for building applications on top of it and this is what other layer-1 chains capitalize on and strive to solve.
While the creators and developers of L1 networks claim about them being the most secure, most scalable and most decentralized network of all, is that the case? Can blockchain networks be created with equal emphasis on decentralization, scalability and security?
If yes, then the blockchain trilemma will cease to exist. But, sadly, that is not the case and almost all L1 networks fail to cater to all three aspects, leaving the door open for a pioneer to solve blockchain’s biggest challenge, albeit the biggest money spinner.
Let us look at three top L1 networks, Bitcoin, Ethereum and Solana and assess them across the three dimensions namely, decentralization, scalability and security.
Which L1 chain is the most decentralized?
Studying the priorities of Bitcoin, Ethereum and Solana will help shed light on how these priorities affect the properties of a blockchain. Decentralization is the ability of a blockchain network to distribute governance through its consensus mechanisms.
Architecture is about understanding where to make the compromise. That is precisely the case when it comes to each of the L1 chains in consideration and in assessing how they have addressed the blockchain trilemma.
True to its ethos, Bitcoin remains the most decentralized of all L1 chains due to its adherence to proof-of-work (PoW) and a lack of central authority controlling the development and governance ensures this. While Ethereum and Solana claim to be decentralized, are they as decentralized as Bitcoin? The answer is probably not.
Solana’s token allocation is heavily centralized, with venture capitalists, developers and Solana Labs owning close to half of the fund allocated. This has drawn criticism from many Web3 evangelists and thought leaders about Solana trudging away from the ethos of Web3. It has also been affected by the FTX collapse more than Bitcoin and Ethereum because of the token allocation.
Comparatively, Ethereum as a network is more decentralized than Solana. However, it still lacks Bitcoin’s decentralization advantage. Ethereum also has several vectors of centralization like cloud infrastructure, maximum extractable value (MEV) and the proof-of-stake (PoS) consensus mechanism.
Which L1 chain is the most scalable?
Blockchain networks must scale seamlessly to be able to serve real-world use cases like payments and micro-transactions. Can decentralization and scalability co-exist?
Web3 is still at a nascent stage. For it to gain prominence and see mass adoption, it has to be available to the masses. Hence, scalability is a paramount factor and for a network to scale, it requires transactions to be completed swiftly and there lies the problem for Bitcoin.
Despite being the most decentralized and secure blockchain, scalability plagues the pioneer of blockchain technology. Its low throughput ensures its inability to be available to the masses, which is the reason we do not see many decentralized applications on the network as user experience goes for a toss.
Comparatively, Ethereum and Solana are much more scalable owing to higher transaction speeds and throughput. While Ethereum uses PoS to achieve scalability, Solana uses proof of history. Both of these consensus mechanisms enable more throughput, however, but Solana is more scalable owing to its speed and low cost of transaction. Yet, Solana’s architectural decisions open them up to other risks which are addressed in the next section.
Which L1 chain is the most secure?
Over $2.1 billion got stolen in 2021 within Web3 by hackers. How can blockchain networks ensure security while still remaining scalable and decentralized?
Where there is money, there is a risk to security and the threat of cyber attacks. In the Web3 world, security is extremely crucial as it is plagued by scams and hacks. Unlike TCP/IP (Transmission Control Protocol/Internet Protocol), the protocol that today’s internet works on, blockchain protocol layers store real-world value. Therefore, security breaches can result in monetary losses.
As much as Ethereum and Solana enable scalability, both of these L1 chains lack the security that Bitcoin boasts. Bitcoin’s PoW mechanism, combined with network decentralization, makes it robust from a decentralization and security perspective. Also, gaining control of 51% of the network is easier with Ethereum and Solana as compared to Bitcoin.
Are L2 networks the saviors?
While the world was busy solving the blockchain trilemma at the L1 level, there were a bunch of smart developers who understood that optimization need not necessarily happen at the L1 level. One can create a network on top of L1 networks to solve fundamental problems.
There are a few L2 networks, such as Polygon, Immutable and the Bitcoin lightning network, which use concepts such as sharding and rollups to solve for scalability. They are able to keep security intact as the L2 chains execute transactions and L1 chains remain relevant for the settlement of transactions.
While there are multiple networks that are starting to emerge at the L1 and L2 tiers and a few front runners at each tier from a market capitalization perspective, none have completely solved the blockchain trilemma. The network ecosystem that solves it will be poised to rule the future of capital markets and the internet.