Good morning!
In today’s edition of my “What is Web3?” series, I’ll be discussing key traits of the blockchain and how they relate to the so-called “blockchain trilemma”. As with most things in life - you can’t have everything. This is the blockchain equivalence to that statement. Hope you enjoy the read!
What is the blockchain trilemma?
In short, the blockchain trilemma is choosing between decentralization, scalability, or security.
As with most of these types of pictures, you can only choose 2 out of the 3. Below, I’ll break down the key components of each trait.
Decentralization
To put it simply, humans are emotional beings. Many of our decisions are based off our emotions. You know what doesn’t have any emotions? Computers and the blockchain (for now, at least… 👀).
The goal behind decentralization is to encourage peer-to-peer interactions and transactions by eliminating the component of human decision-making. Deemed as a reliable system to defy the intervention of humans in transactions and decisions, a decentralized blockchain depends on its users.
As mentioned in Part 1 of this series:
Essentially, cryptocurrencies that are decentralized exist as digital assets outside the control of governments and central authority figures who may have ulterior motives. This brings the power of the network to its users - AKA you.
In the world of web3, users are in control and have ownership of their assets. Decentralization is seen as the solution to eliminate transaction inefficiencies and poor governance seen in today’s banking system.
By decreasing decentralization in your blockchain (read: having a centralized blockchain), you are subject to the whims of the founders/governing board who may make changes to the underlying ecosystem. This is no different from current web2 companies like Facebook, Google, Amazon, etc..
Scalability
When referring to the blockchain, the term “scalability” indicates the ability to support high transactional throughput and future growth of the chain. Or in other words, how many transactions per second can the blockchain consistently produce, and with how many fees?
As with driving to the grocery store, to work, or even back home - your car uses gas (or electricity if you drive an EV). This is the “cost” to go somewhere.
This analogy is transferred to the blockchain. Every transaction you make with the blockchain results in a “gas fee”:
Transferring Ethereum from your Coinbase account to your Metamask wallet
Buying an NFT
Selling an NFT
Sending your friend an NFT
You get the picture. Every time you make a “transaction” on the blockchain, you will pay the corresponding gas fee which ensures that the transaction goes through.
“How high are gas fees though?”
Ah, now that is a good question. Depending on which blockchain you use, how busy the network is, and other factors, the gas fee can differ greatly. Not only that, but the amount of gas that you pay also depends on the scalability of the blockchain.
Furthermore, you can offer to pay even more gas in order to prioritize your transaction on the blockchain. Think of this as a paid fast pass. By willingly paying a higher gas fee, you’re pretty much signaling to the network that “hey, I’m first”.
Gas fees on Ethereum can average anywhere between $20-300 for a single transaction that may take several minutes to go through (based on personal experience within the past 3 weeks). A transaction can cost $125 during high-volume periods (during the day), while at night that same transaction may cost only $35 (I usually find 11pm-4am Pacific Standard Time to be the best time to capitalize on low gas fees). Ethereum is a blockchain that emphasizes decentralization and security, and as a result has a low amount of scalability (though this is being worked on with L2s, zk-roll-ups, etc.).
Other blockchains which prioritize scalability will see average gas fees at ~$0.01-0.07 that takes a couple of seconds to finalize. But these blockchains have their own issues.
To summarize: scalability refers to the transactions per second and the cost per transaction of the blockchain; however, increased scalability generally leads to blockchains becoming more centralized and prone to outside influences.
Security
Finally, a term we all understand. Security essentially refers to a blockchain’s ability to protect against malicious attacks. No one likes malice.
Secure blockchains tend to be a bit slower since they are validating each transaction to make sure there are no discrepancies.
When a blockchain is more decentralized, it is inherently more secure due to the network being distributed across many different nodes and validators. Conversely, in order to achieve a high scalability throughput, one must compromise on security in order to allow the transactions to proceed at the fast speeds that it does.
If blockchain technology and web3 will truly revolutionize the world, the blockchain that is incorporated must be deemed secure so that people don’t blindly lose their accrued assets. The general populace will never adopt a new technology if there is substantial risk of losing everything that they own.
Conclusion
Though impressive and revolutionary, blockchain technology is not perfect. In an ideal word, a single blockchain will solve for all 3 traits and operate like clockwork to provide a decentralized, cheap, fast, and secure way to engage in the web3 space. Alas, this is not the case.
Popular blockchains like Ethereum (ETH), Solana (SOL), Avalanche (AVAX), Cosmos (ATOM), and many more, are racing to see how they can implement a steady balance between the 3.
Some in the crypto space believe in a “One-Chain-To-Rule-Them-All” theory, while others believe in a “Multi-Chain” future. As more developers migrate to the space, many changes will be made to enhance the user experience. As more users are onboarded into web3, they will ultimately determine who the winners are. And by then, the web3 space may look completely different than it is today. Only time will tell.
Next week, I’ll be discussing some differences between the current web2 world and the burgeoning web3 space.
Until then, have a safe weekend!
Best,
Philip
Disclaimer:
All thoughts and opinions are my own; please DYOR (do your own research) and remember that this is NFA (not financial advice). After all, I’m just another dentist.