In economics, the Trilemma or the Impossible Trinity is the hypothesis that only two of the three different options can be chosen, and the other option must be abandoned. Today, certain options must also be chosen for blockchains. Let’s look at what a Trilemma is in the economy before examining it with an example on Ethereum.
The Trilemma in Economics
The Impossible Trinity occupies a special place in economics. This hypothesis includes the options of “Fixed Exchange Rate”, “Free Capital Flow” and “Independent Monetary Policy” in the economy. These options are at each corner of the triangle. However, countries can only take part in one corner or one line of the triangle with their monetary policies. For example, a monetary policy that prefers the line between the corners of Free Capital Flow and Independent Monetary Policy chooses the Flexible Exchange Rate regime. In economics, the Independent Monetary Policy refers to the independent use of policy instruments. And the Free Capital Flow means that there are no restrictions on the inflow or outflow of foreign currencies. In Türkiye, the Free Capital Flow was not preferred from time to time, and restrictions were imposed on foreign currency inflows and outflows. But at present, the Free Capital Flow and Independent Monetary Policy are preferred in Türkiye, and the Flexible Exchange Rate comes with them. In the Flexible Exchange Rate system, there is no Fixed Exchange Rate determined by the Currency Board. In this system, the exchange rate is realized within the supply and demand curves depending on the economic conditions in the market. The image below shows the Trilemma or the Impossible Trinity.
The Blockchain Trilemma and Ethereum
First, let’s look at the concept of blockchain. Blockchain is a structure in which every data to be processed is encrypted and stored in a structure called a block at certain intervals, in each new block there is a summary of the previous block, and all this data is stored in more than one data storage point. Blockchains consist of blocks with transactions in them, and each blockchain can store a certain number of transactions or data. Each blockchain has a transaction capacity. For example, the Bitcoin blockchain was developed to process a maximum of 5-7 transactions per second. And with the current version 1.0, the Ethereum blockchain can process a maximum of 15 transactions per second. That is why any transaction that exceeds the maximum transaction capacity on the network is queued, miners charge more for transactions, and both transaction times and fees increase drastically due to the density. And that causes some problems.
Blockchains have the potential to bring about a series of revolutionary changes both at the corporate level and at the level of non-governmental organizations and states. Moreover, blockchains have almost unlimited potential to enable fast transactions worldwide, create decentralized platforms, process official registration data for marriages and elections, etc.
The Blockchain Trilemma is similar to the Impossible Trinity in finance and economics. Introduced by Vitalik Buterin, the corners of the Blockchain Trilemma triangle, the three most important factors for a blockchain, are indicated. These are Scalability, Security, and Decentralization. Buterin explained that blockchains have to choose between these three options, and it is quite difficult to choose all options at once. And it is also quite difficult to achieve a balance between these three. If a blockchain chooses Scalability and Security, Decentralization needs to be compromised to provide these two features. Because in a decentralized distributed structure, stakeholders must be coordinated at the same time and have similar devices. And that requires the system to have a structure suitable for each stakeholder. Such a structure can only be achieved with fewer stakeholders and powerful devices that are often managed from a single center. Therefore, when Scalability and Security options are selected, the third option, Decentralization, loses power to a great extent.
Let’s look at the other option. For example, Ethereum is currently in the Security and Decentralization corners. And the biggest problem Ethereum has is Scalability. Because Ethereum wants to ensure Scalability without compromising the Security of the network or abandoning Decentralization. In secure distributed networks, it is difficult to ensure Scalability in terms of spreading to all stakeholders. Thus, Scalability suffers significantly when the other two options are selected.
Is It Possible to Achieve the Perfect Blockchain?
The dot in the center of the triangle has all three options and represents the perfect blockchain structure. To achieve this structure, first of all, Decentralization and Security must not be compromised. Because these two are embedded in the philosophy of blockchain. Abandoning them means going against the philosophy behind the emergence of blockchains. So, how can the other option, the Scalability issue, be resolved?
One way to solve the Scalability problem is a Hard Fork. Besides a Hard Fork, there are different methods to ensure Scalability, and the most popular of them is the Layer-2 solutions.
A Layer-2 Solution refers to the process of creating an additional layer on a blockchain to handle transactions that cause congestion on the blockchain and processing only the initial and final balances into the main layer of the blockchain. In this method, payment channels are created in the 2nd layer. These channels are valid until all transactions are performed. Only the initial balances uploaded to the network and the final balances resulting from all transactions are processed into the blockchain network. The transactions performed on the Lightning Network payment channel during the contact period are not processed into the blockchain network. In this way, the density of the network is reduced, and smooth operation is ensured.
