Introduction
When assessing Blockchain projects, it is important to not base the assessment on hype or ever-changing narratives. Especially in the light of recent events, it becomes more & more obvious that fundamental and metrics-based decision-making is key for a profound project assessment.
But the question is: What key metrics and fundamentals should one be looking for when evaluating Layer 1 projects? This is difficult considering the vast amount of potential growth variables. esp. for smart contract networks. To approach this question, the components of the so-called Blockchain Trilemma can be used as a framework.
This article is about why understanding the Blockchain Trilemma is fundamental to better understand the true value of L1 Blockchains and how Cardano tackles every dimension of the Trilemma.
What is the Blockchain Trilemma?
The Blockchain Trilemma, also known as the “blockchain scalability trilemma” or the “blockchain scalability problem”, is a concept introduced by Ethereum co-founder Vitalik Buterin. It states that in a blockchain network, it is impossible to achieve all three of the following characteristics simultaneously.
Hence, blockchains can only be:
- Scalable & Secure, but not Decentralized
- Secure & Decentralized, but not Scalable
- Scalable & Decentralized, but not Secure
These three features are often seen as mutually exclusive, and it is difficult for blockchains to excel in all three areas at once.
For example, increasing scalability (the number of transactions a blockchain can process) often comes at the cost of reducing decentralization (the number of nodes that participate in the network).
Therefore, it is necessary to make trade-offs and compromise on one or more of these dimensions in order to achieve the others. That’s why so many different protocols exist, with different trade-offs being made depending on the priorities of the creators.
Let’s look at each of them.
Decentralization
Decentralization is a key characteristic of blockchains and refers to the distribution of power and control among the network’s participants. There is no single point of control or failure in a decentralized blockchain network. Instead, transactions are verified by a consensus of the network’s participants, and anyone can validate transactions or maintain the ledger by running a node.
Decentralization is important for ensuring that a blockchain is resistant to censorship and control by any single entity or group. It also allows for a more democratic and transparent system, where all participants have an equal say in the functioning of the network.
However, the trade-off of pure decentralization is speed. As more entities secure the network through consensus, transaction speeds may drop, which is considered a hurdle to widespread adoption and scalability. This is the Tr(D)ilemma, and it highlights the importance of evaluating projects based on decentralization, as it is one of the most important metrics to consider when assessing the potential of a crypto project.
Many assume blockchains are decentralized by default, but decentralization is a spectrum, and some platforms are more decentralized than others.
Terraluna serves as an example, as it was considered the most centralized protocol out there and crashed in May 2022, wiping out $400 billion of crypto market cap along with it. This event illustrates the importance of decentralization in crypto projects and the importance of evaluating them based on this metric.
Security
Security is a crucial characteristic within the blockchain trilemma, as it refers to a blockchain’s ability to protect itself against malicious actors and hacking attempts. The security of a blockchain system is paramount as it ensures the integrity and immutability of the blockchain’s ledger.
One issue that can arise in a blockchain network is the susceptibility to 51% attacks. These attacks are likely to happen when consensus is achieved on an open network with limited nodal distribution. The reason is simple – decentralized technology is open-source. As the code is publicly available, anyone can read it and figure out ways to exploit it. An example is an attack on the ETC Blockchain in 08/2020, which suffered 3 51% attacks that reorganized over 4,000 blocks.
It is important to keep in mind that security is an ongoing process, and as a result, many projects are constantly seeking new solutions to strengthen their security measures.
Scalability
Scalability is a characteristic of a blockchain network that refers to its ability to handle a large number of transactions per second (TPS) without experiencing delays or congestion. It defines how well the blockchain can operate when more people start using it.
Blockchains offer an immutable, decentralized, distributed peer-to-peer ledger for transactions, but in a world of 1000s of TPS, the 7 of BTC or 20 of ETH are simply not enough.
Hence, security and scalability are means of achieving conflicting goals: security aims to maintain stability and functionality, while scalability allows blockchain networks to expand.
The Blockchain Trilemma highlights the challenge of achieving scalability, security, and decentralization simultaneously on a blockchain network.
Here are some examples of the Blockchain Trilemma:
- While Bitcoin is decentralized and secure, it is only able to process approximately 7 TPS.
- Enterprise blockchains like Hyperledger Fabric are secure and can handle a high number of TPS, but they are centralized, with a limited number of consensus-achieving nodes.
Achieving scalability while remaining secure and decentralized is a problem with no easy solutions. Some solutions focus on Layer 1, specifically on improving consensus algorithms. Others are Layer 2 solutions or separate networks abutting to Layer 1.
How is Cardano tackling the Blockchain Trilemma?
Cardano’s Degree of Decentralization:
One way to assess Cardano’s decentralization is by looking at three metrics:
- The number of stake pools
- The initial token distribution and
- The number of individual staked wallets.
So what do those numbers indicate?
As of January 23. 2023, Cardano’s number of stake pools or validator nodes indicates a high amount of network distribution, with over 3000 machines running and validating transactions. This shows a high amount of network distribution. To avoid unlimited expansion and centralization, rewards for stake pools will stop increasing once the stakeholders or tokens in a pool exceed a certain threshold.
Cardano had a fair coin distribution from the very beginning, with only 17% of the token being held by project insiders. This set the tone early for the decentralization of Cardano, which is a rare feat when we look at the current public blockchain landscape.
The number of individual staked wallets: Additionally, Cardano has over a million staked wallets with a staking ratio of 71.2%, which reflects a high degree of decentralization.
Overall, these metrics show that Cardano has a relatively high degree of decentralization.
Even in comparison to other Layer 1 Blockchain, one can say that taking those metrics into consideration Cardano is the most decentralized network.
Cardano’s Degree of Security
The overall security of Cardano’s blockchain can be evaluated by looking at the absence of flaws, issues, or 51% attacks since its main net went live in 2018. For an attacker to control 51% of the Cardano network, it would cost over USD 9 billion, not factoring in the price appreciation that would occur with a buyer trying to purchase that much ADA.
The fact that Cardano has been operating without any significant security breaches since its launch, it indicates an overall relatively high degree of security.
Additionally, Cardano uses a proof-of-stake consensus mechanism which helps to secure the network by incentivizing validators to act in the best interest of the network. Cardano also has a built-in formal verification process that allows for a more secure smart contract development, which helps further secure the network.
Overall, the fact that Cardano has not experienced any significant security breaches since its launch, along with its proof-of-stake consensus mechanism and formal verification process, suggests that it has a relatively high degree of security.
Cardano’s Degree of Scalability
The degree of Cardano’s blockchain scalability can be evaluated, amongst other metrics, by looking at its ability to handle a large number of transactions per second (TPS) without experiencing delays or congestion.
Cardano has a low TPS of 20-30, but it recently had a performance upgrade with the Vasil Hard Fork and its effective TPS is much higher due to the eUTXO ledger model allowing for multiple transactions per transaction with multiple assets per transaction.
For decentralization and security, Cardano already provides a robust technological basis. To tackle the scalability component of the trilemma, Cardano has an 11-point agenda aiming at increasing capacity and throughput to keep up with the growth of DApps.
However, as Cardano is a relatively new blockchain, its scalability has not been fully tested yet. but it is expected to increase as the network grows and more solutions are implemented. Additionally, Cardano’s team is actively working on improving the scalability of the network and its solutions are still in the development phase. (here is an article on how Cardano plans to scale using layer 1 solutions)
Therefore, the degree of Cardano’s blockchain scalability can be considered as a work in progress, but with a solid plan and active development it is expected to improve in the future.
Conclusion
In conclusion, the Blockchain Trilemma is a significant challenge that many blockchain projects are facing. Finding an effective balance between security, decentralization, and scalability is crucial for the success of any blockchain network.
Cardano is a decentralized and secure blockchain that is actively working on solving the scalability puzzle. The goal is to create a network that is at once distributed, secure, and scalable. Despite the challenges, emerging solutions may solve the Blockchain Trilemma, and Cardano is on a great path toward achieving this goal.
References
https://datastudio.google.com/u/0/reporting/3136c55b-635e-4f46-8e4b-b8ab54f2d460/page/ngPAC
https://iohk.io/en/blog/posts/2022/01/14/how-we-re-scaling-cardano-in-2022/
