Crypto's Trilemma Trinity: Balancing Security, Scalability, and Decentralization

@andreydidovskiy

Digital Asset Investor, Crypto Content Wizard, and Blockchain Architect solving pr...

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The cryptocurrency industry is built on a fascinating foundation of computer science, information technology, and economics. Whenever exploring the designs of crypto networks these disciplines overlap and provide a framework within which it becomes possible to create sophisticated systems of value transference and storage that reflect the nature of reality.

Stemming from the fundamental principles of physical life, crypto networks are subject to the same existential nuances that pervade other areas of human life.

Namely tradeoffs in decision-making.

Making a decision is a simultaneous action of accepting something and denying everything else. When you choose to buy a Mercedes, you are at the same time choosing to not buy a BMW or Honda. Selecting the Mercedes you make a tradeoff of paying a higher rate, but in return, you get a higher degree of reliability and brand recognition.

Within the context of crypto, there are three core subject matters within which design decisions require tradeoffs in properties based on the desired philosophical alignment of the asset/network.

CAP Theorem

Source: https://en.wikipedia.org/wiki/CAP_theorem

Brought to light by computer scientist Eric Brewer, the CAP theorem relates to the operations of distributed systems that claim only two-of-three properties - Consistency, Availability, and Partition Tolerance - can be present simultaneously at any given moment.

Consistency

The C in CAP stands for consistency. Consistency is the property that guarantees all nodes/participants on a network see the same exact information.

Picture a network of 100 nodes. If Node 1 sent a message to the network and Node 2 read the message that said “I love cookies” then Nodes 3–100 must all see the same exact message. If they do not, then a system is not consistent.

Availability

The A in CAP stands for Availability. Availability refers to the frictionlessness or ease with which clients are able to provide a response. A key property to the liveliness of a distributed system availability is necessary in order to have reliable connections established between separate systems.

As an abstract example, we have the electric car. Whenever it is running low on energy it must be able to pull up into a charging station, plug in, and begin refilling its battery. What happens if the charging station lost its connection to the grid? Then the car becomes useless for as long as it cannot be charged. Availability is a property that is quintessential in the smoothness of any operation.

Partition Tolerance

The P in CAP stands for Partition Tolerance. Partition Tolerance is the ability of a network to resist halting functionality in the event of a fault. Disruptions in connectivity are unavoidable; computers go offline, Internet Service Providers have hardware malfunctions, and severe weather conditions might cause radio frequencies to interrupt signals, whatever the case may be, partition tolerance is a property that states a system must be able to continue operating regardless of anything.

Let’s use the 100-node network again. Imagine that the network is serving financial data to exchanges. Those exchanges have very high demands in the frequency with which they must be able to request price updates. They don't care what happens to a computer, they only care about serving their customers accurate information so that no money is magically dislocated. Partition tolerance is the cornerstone principle that helps guarantee that the network will continue fetching data updates from its sources and that it will be able to relay that information back to the exchanges.

As it applies to crypto, CAP theorem applies to the core, base layer network functions that power and secure cryptocurrencies. CAP is not relevant to Dapps.

Blockchain Trilemma

Source: https://www.researchgate.net/figure/Scalability-Blockchain-Trilemma_fig5_347444005

It's incredible to see that after 14 years of this technology existing, the vast majority of people still do not understand what blockchain is. At its most fundamental, the term refers to a data structure. Within and of themselves, they are not networks. If you break the word down into BLOCK + CHAIN, you will be able to get a sense of what the data structure looks like.

Is it possible to have a blockchain network? Yes, then it simply means it is a network that abides by the blockchain data structure.

When it comes the designing a blockchain network there is what is known as the Blockchain trilemma, a tradeoff between the three principle attributes of decentralization, scalability, and security that provide the underlying “philosophy” of a system.

Decentralization

As one might be inclined to intuit, decentralization refers to the degree of ownership distribution among network participants. As a rule of thumb, the more decentralized something is, the more difficult it is to coordinate, the higher the communication costs, and the higher the security.

Many crypto maxi’s and wannabe cypherpunks are constantly harping on projects being decentralized. While there is an obvious benefit to this, they completely miss the bigger picture that in order for something to be maximally decentralized, there must be a sacrifice made, in either the scalability or the security. Something like Bitcoin is an anomaly in the sense that it is among the only systems where users prefer it to be slow but secure and decentralized. This unique mixture of poor performance is actually preferable for something like a digital store of value. However, as we now know, using Bitcoin for payments has proven to be awful due to the transactional delays.

Scalability

Scalability is the ability to expand operations, to be able to grow at a rate that matches or exceeds the demands of a network. The more scalable something is, the more instrumentation can be built on and around it, the more users can use the system, and the more susceptible it is to change the underlying system over time.

Whenever we think about something being scalable, we can automatically make the assumption that it will either be un-secure or centralized. Personally, I find nothing wrong with some degree of centralization in order to optimize performance, however, I have no interest in any network that is scalable, decentralized, and not secure.

Security

This one should be rather self-evident, but just to make sure we are on the same page; security refers to the ability of a network to deter attacks.

Whether a malicious takeover by some loon that needs to assert their dominance or a mercenary capitalist that cares about nothing except profits, security is the single most important property for maintaining a sound system; especially a monetary one. Security comes in two shapes, via an expansive node network that provides an extremely high level of computation (hello BTC) or trust in a concentrated group of entities to protect against any potential threats. History would show us that human nature is a parasitic one, where centralized operations have always been compromised by external and internal forces. Due to the opaqueness of centralized operations, the limited insight that we gather does not provide the full picture of truth.

This has been made extensively visible through the crappy actions of shady crypto projects and NFTs. Scammers collect money, fake getting hacked by using anonymous accounts to drain their own wallets, then put on a facade to the public and disappear with everybody's money.

Money Trilemma

Source: https://medium.com/the-capital/searching-for-stability-the-evolution-of-money-e22e335da81f

Monetary theory states that in order for some object of value to qualify as a money it must have three properties. It must be convenient for accounting value, it must be capable of being used as a medium of exchanging value, and it must also be able to store value.

Until today, there has never been a “perfect” form of money created. Sure, some people will argue that Gold is that perfect money. I Disagree. Others argue that “Eth is Sound Money”, while it was a POW system, maybe it could have been, after transitioning to POS, it no longer will be in my eyes.

Medium Of Exchange

In order for something to qualify as a form of money we must be able to use it for commercial activity. There are three sub-properties that define an object as a medium of exchange; it must be portable, divisible, and widely accepted.

Portability refers to the ease with which the object can be carried/brought with your wherever you go. The need for an exchange can occur at any given moment; therefore having an asset (for payment purposes) that is not able to travel with its owner is generally pointless.

Divisibility simply means the ability to fragment an asset into smaller portions without disrupting the fractional value of the overall asset. Goods are never going to be priced perfectly and change must be made possible. Easy example here being a Dollar; a dollar can be broken down into 100 micro units of cents. If you are buying a Twinky for $0.50 but you only have a $1.00 bill, the store owner must return $0.50 to you.

The third sub-property is a bi-product of the degree of an asset's effective application, it's basically confirmation of an asset being socially recognized and accepted.

Unit of Account

Straightforward in its meaning, the second monetary property of accountancy refers to the ability to price things. As a unit of account, money must serve as a universal form of measuring the value of objects against each other. So if we’re measuring in dollars, there must be an obvious way to distinguish the severity of the difference in value between a car and a couch. (bullsh*it branding aside) In the event that a car is priced at $50,000 it would be relatively understandable to price a couch at $1,000. Obviously, the cost to manufacture the two objects diverges radically, the car cost >$10,000 to just create while the couch should be like $200. Moreover, the intrinsic value/ level of impact that the object provides to its owner’s life is another vector of distinguishing value. If, for some strange reason, both of the objects were priced at $5,000; then the monetary asset being used is not effective.

Within the Unit of Account metric, we will also find yet another meta-property of fungibility. Every unit of a monetary asset must be exactly the same as another. 1 BTC = 1 BTC or 1 USD = 1 USD. This is a baseline requirement for accurate pricing.

Store of Value

Money must be able to retain its economic buying power over the course of time. Money is the material representation of social energy. Effort was put forth in order to obtain this money, therefore it must be able to keep its value while its owner saves it for use at another time.

Imagine being paid in apples. That would be extremely inefficient for a multitude of reasons, but as it pertains to storing value, the object of an apple does not satisfy as one because of the fact that it rots. As we all know, rotten apples have no value to us because we cannot do anything with them. When you earn a dollar, it can technically lay there indefinitely and retain its base intrinsic value (a piece of printed colorful paper) until you are ready to use it. I'm not here to argue the devaluation of the dollar, I'm here just to express the underlying principle.

As the world continues to evolve into a digital superstate and humanity inches closer towards singularity, crypto has become the frontier of global economic innovation.

Understanding these core concepts will help fully appreciate the fundamental nature of this nascent industry.

Crypto is the digital realization of money.

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