Crypto Trilemma | Crypto’s Biggest Tradeoff!

So here we are running [music] into the underground crypto moon base research laboratory. >> Imagine trying to build a financial system that anyone in the [music] world can access. No central authority, no company controlling it, no single server maintaining the records. Instead, >> [music] >> thousands of computers around the world maintain the system together. That idea sounds powerful, but that it introduces a fundamental challenge. Every participant must agree on the same version of reality. And if you know how that goes, most people do not agree on the same version of reality. When someone sends a transaction, the network must verify it. Every node must check the rules and confirm that the state change is valid. Or updating the ledger, they have to agree that whatever you're updating it to is legitimate. The more participants [music] you have verifying the

system, the more decentralized it becomes, but there is a cost. Verification takes time and resources, as does everything take time and resources, [music] so it's nothing new. If every node must process every transaction, the system throughput becomes limited. The network becomes secure and decentralized, but not very scalable. So, great decentralization, great security, if not a lot of people are using it. Now you'll get You'll still have your decentralization, you'll still have your security, right? But if a lot of people come in and use it, it gets very, very slow and very, very expensive. This tension led to what many developers call the blockchain trilemma. So, we just kind of gave you an overview of what the blockchain trilemma is. And what does trilemma mean? Problem, right? The blockchain [music] issue or problem that we're trying to solve and make

better all the time here in the blockchain or block space, right? So, the blockchain system wants three things and it wants it all at once. It wants decentralized, meaning anybody can participate. It wants to be secure, meaning attacks are extremely difficult. And it wants to be scalable, meaning it can process large volumes of transactions. The problem is that improving one of these often weakens the other. So, to be more scalable, you have less security. To be more secure, less scalability. To be more decentra- to be more decentralized, usually risk one of your other um issues like security. So, the problem is that improving often weakens one of the other three, and that's what makes it like a trilemma, right? Like it's a tri means three dilemma. So, Bitcoin prioritized decentralization and security. So, this was the way that the

original blockchain network went about it, right? They prioritized decentralization and security and not speed, right? As a result, it sacrifices transaction throughput. Throughput means how many things can be put through or finalized on the blockchain at a time or over a certain period of time. So, think of throughput as speed. Some newer blockchains prioritize scalability, allowing faster transactions and higher capacity. But, these these systems often require more powerful nodes, reducing the number of participants who can run them, right? So, participation, as far as decentralization goes, when you start scaling, sometimes it can be difficult because in order to have these very fast throughputs, you need very powerful nodes or systems. The nodes are often very much actual physical servers, computers, GPUs, whatever you want to call it. But, a physical thing nonetheless. So, over the years, the industry began

searching for ways around this limitation. And one thing I want to say is how, for example, when Bitcoin network was relatively small, right? Not a lot of people knew about it. It was pretty much brand new. Think like 2013 or 2014. You could mine whole Bitcoins. Whole Bitcoins from just your GPU mining out of like a desktop. You know what I mean? That's pretty crazy. Now, it takes warehouses full of power in order to get like a couple Bitcoin. Very, very different. So, instead of forcing every node to process every transaction, developers began experimenting with layered architectures, right? Layer two systems emerged, processing transactions off-chain and settling the results back to the base layer. I've gone over what layer twos are a lot of times. Rollups compress activity into batches. Modular blockchain separate execution from data availability, and we've

talked about data availability a lot. Each of these innovations attempts to push beyond the limits of the trilemma. Everybody's trying to fix the trilemma without sacrificing any of the other things. And as technology always has advanced, I think they will they'll do it at some point. At some point they will figure out a way to do it. But the underlying challenge remains. Every blockchain design still reflects a balance between decentralization, scalability, and security. Understanding this trade-off help explain why crypto systems are designed the way they are, and why the industry continues searching for better solutions and evolving that blockchain technology. Let me get to our talking points of the night. So, there it is. We set the foundation for what we're going to be going over. All right. So, let's talk about what I want everybody to focus on.

And that is the blockchain trilemma. So, what is the blockchain trilemma? Well, hopefully you got a little bit of an idea. So, what does tri mean? Three. And what is dilemma? Right? We put that together, we get trilemma. The blockchain trilemma describes the difficulty of achieving three goals simultaneously in a blockchain system. So, here are the three goals: decentralization, security, and scalability. Most networks can optimize two of these properties, but improving all three at once has proven to be extremely challenging. Why the trilemma exists in the first place? Decentralization requires many independent nodes to verify transactions, but when many nodes verify everything, transaction throughput becomes very limited. Scaling often requires reducing the work each node performs, which can reduce the decentralization. Early blockchain designs, Bitcoin, prioritized security and decentralization. Which one of those three are we leaving out? Anybody

following along at home out there? Anyone could run a node and verify the network independently, but this design limited throughput, allowing only small numbers of transactions per second. Scaling tradeoffs. Some networks increase scalability by increasing block size, reducing node requirements, and using fast consensus. But, these changes can make it harder for individuals to run nodes, reducing decentralization. So, if you haven't figured out yet, a big part of decentralization is many people being capable of running nodes and maintaining the network and not reducing that power to a small collective of people as it becomes very expensive to run a node because you need better and sophisticated equipment in order to really run the nodes, then you're limiting it because not everybody can do that. Bitcoin works so well at first with the idea because not a lot of people were

using it and most people, almost everybody, had at least a desktop or laptop with a GPU in it and that's all they really needed to participate. So, layer two and roll-up solution. Instead of scaling the base layer directly, many systems now use layer two solutions. Think, you know, Polygon Matic, Base Protocol, Arbitrum. Roll-ups process transactions off-chain while posting the data back to the base layer for security. This approach attempts to preserve decentralization while increasing throughput. Modular blockchain architecture, the opposite basically of monolithic chain architecture. Newer blockchain designs separate responsibility across different layers. Execution on one layer, settlement on one layer, and data availability on another. This modular approach attempts to improve scalability without sacrificing security. Why the trilemma still matters. Every blockchain design decision still reflects this trade-off. Every modern system must balance decentralization, scalability, and security. The industry

response. The crypto industry continues experimenting with rollups, sharding. You don't hear about sharding enough, right? Uh modular chains, and new consensus systems, right? Think proof of liquidity, proof of useful liquidity, and there are many other fringe consensuses as well. Each approach attempts to push the limits of a trilemma. Core insight here. The blockchain trilemma explains why crypto systems look the way they do, and why scaling solutions continue to evolve, aka the evolution of blockchain technology.