Each week, I will be posting my notes from MIT’s Blockchain and Money course to keep myself accountable for my learning.
The Buterin Trilemma, coined by Viltalik Buterin (founder of Ethereum), describes the current challenges of blockchain technology and trade-offs one must make when optimising against these challenges.
Many of the up and coming blockchain technologies aim to solve all 3 of these areas, which is essential for the mass commercial adoption of the blockchain technology while maintaining decentralisation.
Decentralisation
There are advantages and disadvantages of decentralisation.
The advantages of decentralisation are:
- Resilience to a single point of failure
- Economic rents (income derived form ownership over a limited asset)
The disadvantages of decetralisation are:
- Ease of coordination and governance
- Security
- Scalability
It’s important to understand that these advantages and disadvantages are not inherent to the concept of decentralisation, rather it is the result of the current technological capacity.
Scalability
In 2018, Visa was processing about 24,000 transactions per second. DTCC which settles all the stock trades in the US can process up to 100,000 transactions per second. At the same time, Bitcoin could only make 10 transactions per second.
High frequency transactions are also a challenge. Bitcoin a new block is only mined about 10 minutes and transactions may take an hour to be confirmed.
In proof of work’s case, handling current number of commercial transactions on its consensus mechanism would require a ridiculous amount of energy. This being said, the current centralised processing fees are not cheap either (~1% of the global GDP).
Most proposed solutions are having off-chain transactions that only updates the main blockchain with the net results. An analogy is different banks managing accounts rather than the central bank alone.
There are other proposed solutions such as simply increasing the block size, which has other trade-offs as well.
There are also more energy efficient consensus mechanisms such as proof of stake.
Security
There are contradictory tensions around privacy and security.
- Law enforcements and regulators want more transparency and metadata (descriptions about the transaction).
- Financial institutions and users may sometimes want privacy about their transaction data.
Another risk is around private key custody. If you lose your bank account password, there is some (despite difficult) way of getting it back. But if you lose your private key or have it hacked, it cannot be recovered.
One proposed solution to privacy and security is zero knowledge proof (proving your knowledge of a value X without giving any information about the value X).
There are further challenges that are pressingly difficult that more or less feed into the 3 categories described above:
- Interoperability — linking different blockchain projects to each other, and to legacy systems. This could be seen as one of the more difficult technical challenges to solve.
- Consensus needed for software updates — updates are usually not backward compatible as older version blocks will not validate the new ones (like how old software systems cannot recognise a file from a new version), leading to a hard fork.
- Collective action — blockchain applications derive their value from network effect. There are also concerns that individuals would work for self-interest rather than the common-interest (tragedies of the commons).
