What is blockchain trilemma?

Blockchain trilemma is a piece of cake that is hard to swallow in the world crypto. Who will be the first to find this holy grail?

"This is the first step in the great journey of Ethereum towards becoming a complete system", Vitalik Buterin, founder Ethereum spoke after the success of The Merge event.

Just like Vitalik said, you can watch The Merge is the first step in a long journey of finding the "holy grail" to solve trilemma for the industry crypto: security, decentralization, and scalability.

More than anyone else, Vitalik is always on the lookout for a solution to one of his most thorny problems technology blockchain. In 2017, it was he who coined the term “blockchain trilemma” to talk about the necessary trade-offs that crypto projects must make in order to achieve “scalability,” since no one can eat it. whole piece of cake.

But the founder of Ethereum not the first to speak out about the issue, computer scientist Hal Finney wrote about it on a forum in 2010. When Finney got it Bitcoin transaction first from Satoshi Nakamoto, he warned that in his original design, blockchains could not scale on their own.

He proposed adding a simpler and more efficient secondary system on top of the main blockchain. "Self Bitcoin cannot scale to inform everyone about every financial transaction in the world or put all of these transactions on the blockchain," wrote Finney.

Blockchain trilemma is the challenge that developers face when trying to achieve security, decentralization, and scalability in a blockchain. 

At first glance, it may seem that most blockchains possess all three of these qualities, but if you delve into each cryptocurrency, it can be seen that most of them possess only two-thirds of the characteristics. For example: Bitcoin decentralized and secure, but by itself not highly scalable.

• Decentralized: A blockchain must be decentralized with a network node large enough to be able to provide a trustless payment system for users and without a central authority. 
• Security: A blockchain must provide security to its users and be resistant to hacker attacks such as 51% attack, minting attacks and denial of service attacks (DDoS)… to keep the network running 24/7.
• Can be expanded: A blockchain used by millions of people worldwide must have the processing power to execute thousands of transactions per second, similar to Visa and MasterCard.

“Blockchain trilemma” is a situation where you can't go forward, you can't go back, you can't stand still. Because scaling the blockchain to a certain point will inevitably affect its remaining two fundamental elements:

• Decentralized structure: Brings transparency and trust to users as it operates independently of third parties and governments.
• Confidentiality: Protect data from hackers.

In short, we can have scalability, decentralization or security, but we can't have all three.

Why is blockchain trilemma a problem in crypto?

In public blockchains, digital ledgers record account balances, contract codes, and other data using complex digital keys. Knowing that those records are public and cannot be deleted, altered, or copied builds trust.

This allows distributed groups of collaborators to work or transact with each other on blockchains without the need for an intermediary. That trust is reinforced by replicating and verifying information across multiple computers on the network.

For this reason, many native blockchains cannot handle more transactions than one computer in the network can handle. That can lead to blockchains being overwhelmed by workload, causing delays and costing users exorbitant fees, especially during times of crypto market volatility.

As of this September, Bitcoin cannot process more than about 7 transactions/second and Ethereum limited to about 14 transactions/second - a giant compared to conventional electronic exchanges.

This was not a problem as cryptocurrency was still a “niche” technology used by a group of enthusiasts. Now, traditional finance and other mainstream industries are moving to use blockchain as a transparent, trusted environment for exchange and collaboration. At this point, the “blockchain trilemma” becomes a major obstacle.

Ethereum's recurring congestion and high fees have caused it to lose market share in applications DeFi into the hands of rival blockchains such as BNB Chain (formerly Binance Smart Chain) and Solana - capital is faster and cheaper because they can use fewer parties when making transactions.

Trade-offs in blockchain trilemma

Decentralization

A blockchain project can sacrifice decentralization and still work.

Eg: Ripple (XRP) is in the top 10 largest cryptocurrencies by market capitalization, but the ledger XRP designed for banks and it is one of the most centralized cryptocurrencies. 

Another problem related to decentralization is the consensus mechanism of the blockchain: proof of work (PoW) and proof of stake (PoS).

PoW . Model, Okay Bitcoin and some other cryptocurrencies use, is considered more decentralized because the network cannot be defeated unless there is a mining pool owns more than 51% hash rate. Even if this mining pool gets close to 50%, new miners will emerge and start a 'hash war', further decentralizing the network. The downside of this mechanism is that it consumes a lot of energy - in one year Bitcoin alone consumes the same amount of electricity as Switzerland.

While, paradigm PoS is said to be more centralized as a percentage of the coin is usually owned by venture capitalists, angel investors, and project partners. However, Vitalik Buterin argues that the PoS model could be more secure, as an adversary would have to buy more than 51% of the network, or $70 billion based on Ethereum's market cap (July 2022 figures). ). 

But this is just a rationalization from Vitalik, because if there is an end-game scenario, a PoW chain will "last" more than a PoS chain. If a PoW chain is hit by a 51% attack, new miners can emerge and filter out bad actors, but with a PoS chain, there is no way to restore consensus without completely forking the network.

Security

Security problems arise from bugs in the code, and most crypto projects do a good job of filtering out security flaws, even if they lack decentralization and scalability. Most of the current "chaotic" newspaper attacks happen to DApp layer-2 on Ethereum and supporting chains DeFi.

But historically, the biggest blockchains have been the target of attacks. In August 2010, when Bitcoin was trading at $0.06, a hacker exploited a bug in Bitcoin's code to generate 184 billion Bitcoins. Errors are quickly corrected Satoshi Nakamoto handle.

Ethereum is the target in the case "hack KNIFE"- one of the cases hack most shocking in the history of cryptocurrency. In 2016, a hacker found holes in the Ethereum code and used them to transfer 3.5 million ETH (US$150 million at the time) from the ICO sale. The founders of Ethereum had no choice but to hard fork the network and get their money back.

Ability of extension

If a blockchain is scalable, it can handle thousands of transactions per second (TPS) and withstand stress tests without network congestion.

Visa and MasterCard, the networks that power the global retail network, have 5,000 - 10,000 TPS for a fee knife from 1 - 1.5% per transaction. Newer generation blockchains like Solana offers TPS over 10,000 for a much lower fee.

By moving to PoS, blockchains have largely overcome the scalability issues that occurred with older generation blockchains. With the staking model, validators can quickly process thousands of transactions per second. Previously, Ethereum had 14 TPS, but by switching to PoS in Ethereum 2.0, they will scale up to 100,000 TPS.

Bitcoin's on-chain scalability remains unresolved, as the developers have refused to hard fork the network as well as make adjustments to the PoW consensus mechanism. The Bitcoin network can only handle 4-5 TPS on-chain, while off-chain scaling solutions like Lightning Network and Liquid The network can handle up to a million transactions. The downside is that these layer-2 solutions are highly centralized.