Bitcoin Trilemma – Decentralization, Security and Scalability
Long time crypto followers know the ‘Bitcoin Trilemma’ well, many may even understand how it players into our current market situation. New members, however, likely have never had the term explained, or have not connected all the dots just yet, so let’s take this moment of interesting market state to educate, and discuss what’s next.
What is the ‘Bitcoin Trilemma’?
First of all, despite the name, this is not a bitcoin specific issue, and also called the ‘Crypto Trilemma’ or ‘Blockchain Trilemma’ as well. All Crypto in the space in the past ~5 years have been slowly fighting towards solving the ‘Triliemma’.
The ‘Trilemma’ is a clever twisting on words to describe three major goals of Crypto, and how they seemingly fight against each other. Those three goals are:
- Decentralization – Having an entire network participate in the consensus, to make the system censorship resistant.
- Security – The capacity for the network’s judgements to be stable and resistant to malicious attacks.
- Scalability – The capacity for the network to have a high throughput, and perform many transactions per second.
These three elements often fight against each other. For example, a small, decentralized network can still be very fast, but as the number of nodes increases, time to communicate through the network grows if all nodes must all agree on something to proceed.
Bitcoin and Ethereum are the most commonly referenced coins fighting with this Trilemma currently. Both are Decentralized and Secure, but are struggling to solve Scalability problems, with low transaction rates (Which then cause high fees).
How did this ‘Trilemma’ create the create the current market?
Firstly, a massive number of coins introduced in the past ~5 years have their main focus on solving this trilemma, either legitimately, or by trying to obfuscate the fact that they fail in one category or another. It is not an overstatement to say that virtually all ‘ETH Killer’ and ‘BTC Killer’ type coins/networks were created with the primary intent to beat ETH/BTC to solving this Trilemma problem.
Now, lets fast forward a few years from ~2016 to ~2020. A large number of coins have come and gone claiming to solve this problem, only to fail. We’re only now starting to really see a more significant set of offerings which genuinely solve the Trilemma, however, these networks are largely still in their infancy, or have other issues still.
Distributed Applications as a concept and system are now relatively Mature; there are multiple applications turning profits on various networks of all kinds. It’s become clear that dApps are likely here to stay, and furthermore, the incredibly lucrative and exciting world of Decentralized Finance has appeared. This exciting new frontier has one major problem keeping it from truly blowing up though: Scalability of their parent networks still remains poor, causing rising, out-of-control network fees.
Enter the Binance Network
Binance clearly identified the problem as others did: There is a massive demand for a responsive, cheap network to host dApps and De-Fi applications on. Binance also realized something else a few other market players have. The current market cares far less about Decentralization than it does about Scalability.
Enter, the BEP2 Network. Binance runs over half of the (only 21) validator nodes, allowing them to create a fast, mostly centralized network, with trivial fees, to get in on the ‘De-Fi’ game by sacrificing one leg of the Trilemma that most investors don’t seem to genuinely care about, rather than solving it.
Binance also has the advantage of being the largest market in the game, and they can use that leverage, and existing install base of BNB to help push their new offering. Thus, an explosion of BNB value, as their new De-Fi trading solutions seem to solve everything, while actually just cutting off one of the usual legs of the Trilemma, and conveniently avoiding the subject in their marketing.
Where do we go from here?
At this point, it will become a push-pull between a few factors:
- Entrenchment in ETH and belief in ETH2 – Many systems already run on ETH, and haven’t been looking to change, even with rising costs, on the belief that ETH2 will arrive within time to be relevant and solve their problems. Ironically, as network traffic moves to the BNB network, it also helps the ETH ecosystem by lowering throughput and thus costs. An equilibrium exists somewhere here.
- Rising Stars – As mentioned at the start of this post, many networks are rising that look to genuinely solve the trilemma, such as IOTA or Cardano (etc., this list gets long). It’s still possible these networks (many of which are well-funded already and flush with cash for development/marketing) may come to take a piece of the crown sooner rather than later.
- Does the market actually care about Decentralization? – If the market proves to genuinely just not care that the Binance network is highly centralized, the new BNB DeFi Offerings may run away with the show entirely.
- Does anyone care about Privacy? – Some major crypto players/developers have pointed to network Privacy as likely to be the next frontier and point to add to the ‘Trilemma’ (‘Quadlemma’?). At present the vast majority of cryptos offer no or nearly no privacy options built in at the network layer, forcing systems such as coin mixers, etc. to obfuscate transactions. This hasn’t been a major concern for De-Fi, but as time marches on, we’ll see if it presents hurdles for other crypto use cases, or if the chase for another dollar subsumes any interest in privacy.