The Blockchain Trilemma: How to Achieve Fast, Secure, and Scalable Networks


Proof of Stake, sharding, state channels, and sidechains have all emerged as solutions to the blockchain trilemma and network optimization for mainstream use.

Summary

The blockchain trilemma refers to the commonly held notion that, in terms of decentralization, security, and scalability, decentralized networks can only provide two of three benefits at any given time. However, constant innovation across the decentralized ecosystem has resulted in a varied spectrum of Layer-1 and Layer-2 solutions that are overcoming these challenges and finally resolving the trilemma.

Contents

What Is the Blockchain Trilemma?

While blockchain technology has proven to be extremely useful in a variety of areas, from finance to art, the underlying structure of decentralized networks poses significant issues when contrasted to centralized networks. Computer scientists devised the CAP theorem in the 1980s to express possibly the most significant of these difficulties.

The CAP theorem states that decentralized data storage, such as blockchain, can only satisfy two of three guarantees at the same time: consistency, availability, and partition tolerance (CAP). This theorem has evolved into a blockchain trilemma in the context of current distributed networks.

This is the widely held notion that public blockchain infrastructure must sacrifice either security, decentralization, or scalability.

Unlike central network infrastructures like VISA or the internet, which use client-server relationships, public blockchain networks use decentralized consensus methods. This entails overseeing a widely spread network of nodes in order to achieve data consensus over a resilient architecture that maintains transparency and equal, open access. It’s a challenge!

Bitcoin, for example, is decentralized and secure, but it can only process about seven transactions per second (TPS).

Enterprise blockchains, such as Hyperledger Fabric, are secure and can manage a huge volume of transactions, but they are centralized to a small number of consensus-achieving nodes. Fast and decentralized blockchains that are unsafe are subject to hacks that are unsustainable in the long run.

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As a result, the holy grail of blockchain technology is to create a network with impenetrable security over a broadly decentralized network while also being able to handle internet-scale transactional throughput.

This blockchain trilemma is being solved by a global community of corporations, start-ups, and technologists working frantically on Layer-1 and Layer-2 solutions. Layer 1 blockchain networks are designed for speed, security, and expansion.

Layer 2 refers to technology enhancements and products that can be utilized to expand the scalability of existing blockchain networks. Getting the perfect balance between the two layers might be a game-changer for blockchain adoption and the expansion of decentralized networks.

It’s critical to comprehend each component of the blockchain trilemma before we can begin to identify potential answers.

What Is Decentralization?

The underlying idea of blockchain technology is decentralization, which pushes projects across the ecosystem. Decentralized processes and technology eliminate the need for intermediaries across industries, and this presents itself in a variety of ways.

Decentralized finance (DeFi) systems, for example, are able to transfer revenues and governance to users and the larger community instead of a middleman by removing banking institutions from financial products.

Decentralized networks, on a more fundamental level, crowdsource consensus, implying that no single entity can control or censor the material that passes through them. Obtaining optimal decentralization, on the other hand, tends to reduce network throughput. Transaction speeds slow as more miners secure the network through consensus, which is seen as a barrier to wider adoption.

What Is Blockchain Security?

There’s an incentive to lower the geographical, numerical, or distribution of blockchain nodes to boost network performance on a blockchain network. However, on Proof-of-Work (PoW) networks, this shift toward higher centralization weakens security.

A 51 percent assault is more likely to occur when the agreement is reached on an open network with limited nodal distribution, as hackers may collect hashing power more easily. Hackers can take control a network and influence transactions for financial benefit by overwhelming it.

For example, in August 2020, the Ethereum Classic (ETC) blockchain — which is unrelated to Ethereum — was subjected to three 51 percent attacks that reorganized over 4,000 blocks, allowing the perpetrators to manipulate data and double-spend the ETC currency, resulting in a network value loss of millions of dollars.

Security on the blockchain is a vital network feature that must not be jeopardized.

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What Is Scalability?

The ability of blockchain technology to accommodate high transactional throughput and future growth is referred to as scalability. This means that the performance of a scalable blockchain will not suffer as use cases proliferate and the adoption of blockchain technology accelerates.

Scalability is a term used to describe blockchains that perform badly as usage grows. Greater scalability is feasible, but security, decentralization, or both would suffer as a result, according to the blockchain trilemma.

Scalability is the only option for blockchain networks to compete with legacy, centralized platforms, which currently have considerably greater network settlement speeds and usability.

While several blockchain systems have established decentralization and security, achieving scalability remains the major challenge for today’s leading decentralized networks.

So, how can we overcome the blockchain trilemma while simultaneously achieving decentralization, security, and scalability? Layer-1 and Layer-2 solutions are provided as the response.

Solving the Blockchain Trilemma: Layer 1

Layer 1 refers to blockchain protocols such as Bitcoin, Litecoin, and Ethereum in the decentralized ecosystem. There are a number of methods in development or use right now that aim to directly improve the scalability of blockchain networks.

Consensus Protocol Improvements: The consensus protocol currently in use on popular blockchain networks like Bitcoin is Proof of Work. PoW is secure, but it is also slow. Bitcoin, for example, only gets seven TPS.

That’s why many blockchain networks choose the Proof-of-Stake (PoS) consensus method, probably most notably Ethereum’s upgrade to Ethereum 2.0. The PoS consensus mechanism decides validator status based on a stake in the network, rather than requiring miners to solve cryptographic algorithms with significant processing power.

This is expected to significantly boost the Ethereum network’s capacity while also increasing decentralization and maintaining security.

Sharding: Despite its rather experimental character within the blockchain sector, sharding is adopted from distributed databases and has become one of the most popular Layer-1 scaling methods. Sharding divides transactions into smaller “shards” of data.

The network processes these shards in parallel, allowing for sequential work on multiple transactions at the same time. Furthermore, rather than having each network node maintain a copy of every block from the beginning to the present, this information might be partitioned and held by separate nodes, each of which would be consistent with itself.

Shards give proofs to the mainchain and communicate with one another using cross-shard communication protocols to transfer addresses, balances, and general status. Along with Zilliqa, Tezos, and Qtum, Ethereum 2.0 is one high-profile blockchain system that is researching the use of shards.

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Solving the Blockchain Trilemma: Layer 2

Layer 2 refers to a network or system that runs on top of an underlying blockchain protocol to increase scalability and efficiency.

For example, Bitcoin is a Layer-1 protocol, and the Lightning Network is a Layer-2 solution designed to speed up Bitcoin transactions. Layer-2 protocols have exploded in popularity in recent years, and they’re proving to be the most effective approach to solve scaling issues in PoW networks in particular.

Nested Blockchains: A nested blockchain is a decentralized network infrastructure that uses the main blockchain to specify network settings, with executions taking place on an interconnected web of secondary chains.

On this primary chain, many blockchain tiers are established, each with a parent-child relationship. The parent chain delegated work to kid chains, who completed it and returned it to the parent. Unless there is a need for dispute resolution, the underlying basic blockchain does not participate in network services. Layer-2 stacked blockchain infrastructure, such as the OMG Plasma project, is used above Layer-1 Ethereum to support faster and cheaper transactions.

The work distribution in this approach minimizes the processing load on the mainchain, resulting in exponentially improved scalability.

State Channels: A state channel improves total transaction capacity and speed by facilitating two-way communication between a blockchain and off-chain transactional channels via various approaches.

To validate a transaction over a state channel, the miner does not need to be involved right away. Rather, it’s a network-adjacent resource that’s protected via a multi-signature or smart contract mechanism. The ultimate “state” of the “channel” and all its inherent transitions are posted to the underlying blockchain when a transaction or batch of transactions is completed on a state channel.

State channels include the Liquid Network, Celer, Bitcoin Lightning, and Ethereum’s Raiden Network. In the trilemma tradeoff, state channels give up some decentralization in exchange for increased scalability.

Sidechains: A sidechain is a transactional chain that runs alongside the blockchain and is used for massive bulk transactions. Sidechains have their own consensus method, which can be adjusted for speed and scalability, and a utility token is frequently utilized as part of the data transfer mechanism between side and main chains.

The mainchain’s principal function is to provide general security and dispute resolution. In a number of important ways, sidechains differ from state channels. To begin with, sidechain transactions are not private between participants; instead, they are published openly on the ledger.

Furthermore, security breaches on sidechains have no effect on the mainchain or other sidechains. Building a sidechain from the ground up necessitates a significant amount of time and work.

Solving the Blockchain Trilemma

Despite the fact that the blockchain trilemma poses substantial obstacles to blockchain adoption, solutions are emerging to strike a balance between network security, decentralization, and scalability. While the CAP theorem has held true for nearly four decades, the adoption of Layer-1 and Layer-2 solutions, as well as the emergence of Proof of Stake in blockchain, is on the verge of moving the paradigm towards distributed, secure, and scalable decentralized networks.