{"id":2968,"date":"2021-08-12T10:29:07","date_gmt":"2021-08-12T02:29:07","guid":{"rendered":"https:\/\/blog.btse.com\/?p=2968"},"modified":"2023-03-13T01:37:31","modified_gmt":"2023-03-13T01:37:31","slug":"blockchain-dilemma-part-1-of-3-the-impossible-triangle","status":"publish","type":"post","link":"https:\/\/www.btse.com\/blog\/blockchain-dilemma-part-1-of-3-the-impossible-triangle\/","title":{"rendered":"Blockchain Dilemma: The Impossible Triangle"},"content":{"rendered":"

Many may know about the dilemma that blockchains face, but some may not know what to do with the information. So why does it matter? This article, the first in a three-part series, answers that question and more.\u00a0<\/span><\/i><\/p>\n

You\u2019d be surprised by how much this dilemma dictates virtually every decision made by today\u2019s companies trying to build the decentralized world of the future. As some, or most, blockchains strive for mass adoption and real-world applications of their technology, they all have to ask themselves: How to overcome the blockchain dilemma?<\/span><\/p>\n

Practically any company operating in the decentralized space with aspirations to grow and scale its operations will be forced to align their strategies to this question. And <\/span>that<\/span><\/i> can have great implications, not only for them, but also for the thousands of people who support them financially or in other ways.<\/span><\/p>\n

 <\/p>\n

Blockchains and Their Different Security Protocols<\/b><\/h2>\n

Not all blockchains are created equal. Essentially, they are separated into three \u2018generations\u2019. Take the most prominent ones today, Bitcoin and Ethereum, which resemble the first two generations. Bitcoin\u2019s blockchain merely exists to store transaction records of Bitcoin, but Ethereum\u2019s is more like a platform, where developers can write and execute code for their own purposes.<\/span><\/p>\n

In a nutshell, if Bitcoin is nothing more than \u201cdigital gold\u201d, then Ethereum might be something like iron that you can melt and create things that have utility for different purposes. Now enter generation three, which can combine that iron with other ores like carbon to create even more things, like steel, for more use cases.<\/span><\/p>\n

The inherent distinctions between these blockchains stem from their vastly different security protocols. While Bitcoin uses proof-of-work (PoW) to secure its network — real-world computing power — Ethereum developed a system called proof-of-stake (PoS). PoS uses the virtual staking power of a token as a security measure.<\/span><\/p>\n

Knowing those differences and why they matter becomes helpful if not crucial to traders. They change not only how the different protocols go about scalability, but also their mere ability to do so. This, in turn, changes the underlying reasons for investing in them. Bitcoin wouldn\u2019t be valuable if people didn\u2019t believe it has value; Ethereum wouldn\u2019t be valuable if people didn\u2019t believe it has <\/span>utility<\/span><\/i>. No one buys gold because it\u2019s useful, but people buy iron because you can use it to build things.<\/span><\/p>\n

 <\/p>\n

The Significance of Triangles and Trade-offs<\/b><\/h2>\n

When most people think about trade-offs they think about them on a binary scale: \u201cPizza or Thai for dinner?\u201d Trade-offs in real life occur when there are two desirable outcomes, but you can only choose one, thereby eliminating the other. You can\u2019t have your cake and eat it too.<\/span><\/p>\n

What seems like a simple definition then suddenly becomes really complex when it comes to technology, and you have to scale it up to 10 or even more dimensions. To say the least, our brains aren\u2019t good at contemplating 10 dimensions at once. There needs to be a set of rules for information in order to derive valuable meaning from it: It needs to be easy to visualize, its concept easy to grasp, and changes easy to measure. Three seems to be the golden middle here that checks all boxes, and many variations of those are used in traditional strategic management (like the scope triangle).<\/span><\/p>\n

Now how to apply this concept? As an investor, you work with a set amount of funds. There are multiple promising projects, but putting more into one means you can put less into another. You are now trying to gain an understanding of your potential investment opportunities.<\/span><\/p>\n

You want to find the cherry that yields the most profit in order to minimize trade-offs. Knowing triangles is a valuable tool to examine the trade-offs between certain approaches: you can now evaluate them, helping you find that cherry (later on how this works with Bitcoin and Ethereum).<\/span><\/p>\n

 <\/p>\n

Three Metrics That Don\u2019t Get Along<\/b><\/h2>\n

In the context of public blockchains, the impossible triangle presents the idea that a blockchain can have decentralization, security and scalability all to varying degrees — but cannot achieve all three to an extent that is sufficient. Being able to evaluate a coin based on this can help to separate the wheat from the chaff. The three dimensions are as follows:<\/span><\/p>\n

    \n
  1. Decentralization<\/b> means that no single entity controls the network. Anyone is able to join the network and participate as a block-validating node. In a fully decentralized network, all nodes have the same access to data and the same voting rights.<\/span><\/li>\n
  2. Security<\/b> refers to the measures in place that prevent adversaries from validating fraudulent transactions. In a perfectly secure blockchain, it is impossible to create fraudulent data without controlling more than 50% of the protocol\u2019s security assets; at the same time, it is close to impossible to gain that control.<\/span><\/li>\n
  3. Scalability<\/b> is the number of transactions a blockchain is able to handle without slowing down or becoming too costly. On a strongly scalable blockchain, the whole globe would be able to use the system to record transactions, with nearly instant execution at any given time or day and almost no transaction fees.<\/span><\/li>\n<\/ol>\n

    Now, the logical approach for most blockchains is to perfect the dimensions in this exact order. That\u2019s mainly because decentralization and security are the fundamental ideas of blockchain. This order, however, creates a certain set of boundaries when trying to expand the triangle in any one direction.\u00a0<\/span><\/p>\n

    The Bitcoin blockchain, for example, uses the PoW system, which has proven to be exceptionally secure (it has never been hacked). The only problem lies with its use of physical processing power: it becomes cripplingly slow. Meanwhile, Ethereum (a generation 2 blockchain) uses PoS, which in theory should enable it to scale better than Bitcoin\u2019s protocol. This is crucial as it is trying to offer a platform for developers to write code on — it <\/span>needs<\/span><\/i> to be scalable. The problem: it is not as fundamentally secure.<\/span><\/p>\n

    Let\u2019s come back to the point above on boundaries. With Bitcoin, you can tweak the code here and there to squeeze a bit more out of the protocol, but its fundamental approach to security sets a clear boundary: it will never be as scalable. In contrast, Ethereum has set a different goal, but its reliance on a virtual recourse means it will probably never catch up to Bitcoin in terms of security. Now when it comes to evaluating coins, things like the security protocol, transaction fees, block sizes, and block creation times all come into play. As you now know about these trade-offs, seeing claims of high TPS with a PoW security protocol should at least ring some alarm bells. Similarly, a well-thought-out protocol that provides ways for scalability should also mention how it plans to combat the compromises on security or decentralization.<\/span><\/p>\n

     <\/p>\n

    Comparing with Centralized Systems and Outlook<\/b><\/h2>\n

    Say, for an instance, you think that security (to the best of your knowledge) will be the number one most important factor of decentralized systems in the future, while electricity usage and scalability are not as important. Now considering that you see Bitcoin\u2019s future not as a global payment system that will run the world of finance, but rather as a form of digital storage of value, then you wouldn\u2019t really see scalability as important.<\/span><\/p>\n

    In fact, you would probably evaluate the high factor of security as way more significant to Bitcoin\u2019s success. Based on that, you might decide to invest in Bitcoin rather than Ethereum.<\/span><\/p>\n

    Any blockchain today seeking mass adoption in the future has to compare itself to the current benchmarks in the traditional financial world. Visa\u2019s 50-year-old centralized payment protocol is able to handle up to 50,000 transactions every second, while the current load sits at just below 2,000 at the time of writing. Those are numbers any blockchain would dream of hitting today. It may seem like people currently don\u2019t have any other option than to abide by Visa\u2019s centralized system.<\/span><\/p>\n

    If, however, blockchain technology would be able to manage today\u2019s global throughput while still offering decentralization and better security, we would potentially be rewriting tomorrow\u2019s history books today. And there <\/span>are<\/span><\/i> ideas with promising approaches. However, the key word here is <\/span>reliability<\/span><\/i>. It\u2019s what transforms the impossible triangle into the possible triangle.<\/span><\/p>\n

     <\/p>\n

    \n
    \n<\/div>\n

    Our aim is to create a platform that offers users the most enjoyable trading experience. If you have any feedback, please reach out to us at\u00a0feedback@btse.com or on Twitter @BTSE_Official.<\/em><\/p>\n

    Note: BTSE Blog contents are intended solely to provide varying insights and perspectives. Unless otherwise noted, they do not represent the views of BTSE and should in no way be treated as investment advice. Markets are volatile, and trading brings rewards and risks. Trade with caution.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

    Many may know about the dilemma that blockchains face, but some may not know what to do with the information. So why does it matter? This article, the first in a three-part series, answers that question and more.\u00a0 You\u2019d be surprised by how much this dilemma dictates virtually every decision made by today\u2019s companies trying […]<\/p>\n","protected":false},"author":1,"featured_media":5411,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[10],"tags":[],"class_list":["post-2968","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-opinion"],"yoast_head":"\nBlockchain Dilemma: The Impossible Triangle — BTSE Blog<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.btse.com\/blog\/blockchain-dilemma-part-1-of-3-the-impossible-triangle\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Blockchain Dilemma: The Impossible Triangle\" \/>\n<meta property=\"og:description\" content=\"Many may know about the dilemma that blockchains face, but some may not know what to do with the information. 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