What is a blockchain? 

A blockchain is a decentralized record that gets its name from how it processes and stores data. Once committed transaction data reaches a certain size, it forms a "block.” The “chain” part of a blockchain is a series of consecutive blocks linked together, forming an immortal and immutable ledger storing all of that committed data.

In order to validate a block of data, a series of nodes in a network (typically computers and servers) need to come to an agreement at roughly the same time, using what are known as “consensus mechanisms.” These take a variety of forms, depending on the priorities of the blockchains’ creators and stewards, and they are typically the main factor determining how a chain and its users navigate the blockchain trilemma.

Blockchain consensus mechanisms

Proof of Work

Proof-of-work blockchains require extreme computation (the eponymous “work”) from a wide network of nodes, who use these high requirements to keep bad actors from injecting erroneous data into the blockchain. The individual contributors to proof-of-work blockchains are commonly referred to as miners who race against each other to solve incredibly complex math problems generated by an algorithm.

Whenever someone solves the math and other miners agree to the solution, the blockchain will record the transaction data and store it forever. The winning miner is generally awarded a fee paid for by the blockchain’s users. When more people submit transactions to the chain, the fees tend to increase accordingly.

The most famous example of a proof-of-work blockchain is Bitcoin. This kind of blockchain tends to do well in terms of decentralization and security because they enable nearly anyone with the technical know-how to mine and the consensus algorithm often scales the difficulty of the math problems with the number of miners. In turn, these blockchains often struggle with scalability because the increasing difficulty of mining both increases the energy costs for processing transactions and slows down how quickly the transactions can get processed. Harder math means longer computation time, which means transactions can sit for extended periods of time (and rack up higher gas fees) before getting picked up by a miner and committed to the chain.

Proof of Stake

In a proof-of-stake blockchain, validators take on the task of approving the data that gets committed on-chain. They’re usually chosen at random to propose a block and their submissions are validated by a committee of other validators for each new block.

Some proof-of-stake blockchains require potential validators to stake some of the blockchain’s  native cryptocurrency token and lock it into a smart contract as collateral. If a validator provides incorrect information, they may face penalties including having their staked tokens confiscated by the network.

One example of a proof-of-stake blockchain is Ethereum. Ethereum previously used the proof-of-work method, but as of September 15, 2022, switched on its proof-of-stake mechanism. According to Ethereum.org, the chain made this change “because it is more secure, less energy-intensive, and better for implementing new scaling solutions compared to the previous proof-of-work architecture.” 

Proof-of-stake blockchains scale well because validators are chosen based on the amount of cryptocurrency they stake rather than computing power. This allows for faster throughput and confirmation times, which means more transactions can be processed simultaneously. However, proof-of-stake chains sacrifice some security and decentralization to achieve this scalability. For example, in proof-of-stake, bad actors can technically stake very large amounts of cryptocurrency to gain control of the network (though it would take a lot), which weakens security and makes the network more susceptible to control from a central authority such as a government or large corporation.

Proof of Authority

A proof-of-authority consensus mechanism relies on pre-approving network participants to validate blocks on the chain, which increases efficiency. Typically the validation process is fully automated since the node operators have been vetted in some way to operate reliably and in good faith. These validators usually need to verify their identity formally with the network, should be provably trustworthy, and able and willing to invest their resources and reputation in maintaining the blockchain.

Given that there are fewer validators participating, proof-of-authority blockchains tend to perform better on scalability with some dimension of risk to security and a steep tradeoff on decentralization. Transactions need to pass through far fewer validators than other consensus mechanisms typically require, meaning the blockchain’s data integrity is heavily dependent on the integrity of the chosen validators. There isn’t a “wisdom of the masses” to benefit from as seen with proof-of-work and proof-of-stake in which virtually any person and any amount of persons can participate, so those few validators must maintain high security at the individual level to protect the network.

VeChain is an example of a proof-of-authority blockchain.

Proof of History

Created by the founder of Solana Labs, the proof-of-history method focuses on the sequence of on-chain events to protect the network’s integrity. The consensus algorithm generates a “verifiable delay function” to generate timestamps for every block getting processed, creating an immutable record of the order that transactions occurred that cannot be undone.

Proof-of-history is often combined with other consensus mechanisms because proof-of-history doesn’t provide the necessary incentive structures that keep validators supporting a network. However, this consensus mechanism significantly reduces the storage and bandwidth requirements for the network, enhancing the blockchain’s scalability at a slight tradeoff with security and decentralization. Solana is the best-known example of a proof-of-history blockchain (combined with a delegated proof-of-stake approach), while Arweave and Chainlink are integrating the approach too.

Delegation in consensus mechanisms

Although uncommon, some blockchains employ a delegation mechanism to improve their scalability. The delegation method appoints members among themselves as delegates to take on the responsibility of approving transactions.

Given the smaller number of people involved, delegated blockchains scale much better than others, but have to make big compromises on security and decentralization. One example of delegated blockchains is Steem.

What is decentralization for blockchains?

One of the value propositions of blockchains is decentralization which is enacted when participants drive the validation of transaction data and protect the network’s integrity. The consensus mechanism is the primary factor that determines how decentralized a blockchain actually is. There are several approaches to consensus mechanisms and some blockchains are inherently more decentralized than others.

The way the blockchain is upgraded and maintained and whether the chain is public or private also influence decentralization.

Some blockchain upgrades are entirely driven by a community of developers and participants, such as Bitcoin, and are therefore extremely decentralized. Others, like Ethereum, are culturally led by a foundation that heavily leans on community input and enjoy a relatively high degree of decentralization. On the other end of the spectrum, some blockchains like Solana and Mythos are largely controlled by a corporation and are much less decentralized by comparison.

Blockchains like Bitcoin and Ethereum are public and open, meaning their data is widely available for consumption and usage, which tends to engender a broad ecosystem of applications and products leveraging that data and allow anyone to see transactions. Further, these public blockchains tend to be completely open source, allowing anyone to copy and interact with the source code, which is how Polygon launched so quickly based on Ethereum’s code.

Some other chains such as Hyperledger Fabric and Aleo are built to be private, where access to read the information is guarded by some entity, typically a company or community. Without access to this information, it becomes harder to understand what’s happening on-chain and evaluate the health of the ecosystem and is less decentralized than a public network.

Decentralization is a key part of the trilemma because the way in which it’s implemented influences the blockchain’s security and scalability. Blockchains that require universal consensus like Bitcoin have hard limits on how many transactions can pass through over any time interval, driving up the costs of participating. Meanwhile, some blockchains that use a less decentralized consensus mechanism like proof-of-authority risk their security since there are fewer targets that need to be compromised to harm network integrity.

Decentralized blockchains need to operate across a large number of validators to prevent what’s known as a “51% attack,” wherein malicious actors can take over a network by simply accruing a majority of validation nodes and passing whatever data they decide, whether through hacking current participants or bringing on new ones under their auspices. While 51% attacks are technically possible, they are extremely rare and difficult to accomplish as networks either build their own failsafes to protect the data’s integrity or the network validators will respond during the attackers’ buildup to required majority threshold.

What is blockchain scalability?

Blockchains need to be able to process transactions accurately, affordably, and in a timely manner. This is known as scalability: how much demand can a blockchain sustain and process efficiently.

Most blockchains employ gas fees as a means to support the network by compensating validators, but also as a tool to reduce demand in periods of high utilization. In the same way people drive their vehicles less when gasoline prices rise, blockchain users tend to reduce their transactions in periods of high gas fees, which are usually determined by an algorithm that looks at the volume of incoming transaction data and presents it to prospective users. Blockchains that frequently require high gas fees run into a scaling issue if the builders and community expect widespread adoption.

The higher the demand on the network, typically the slower the transactions as the consensus algorithm will prioritize the participants offering the highest gas fees. In moments of intense demand, this can cause transactions to extend from a few seconds to several minutes. This can even temporarily shut down a blockchain’s operating capacity.

If blockchain users are stuck waiting for their transactions to process, they may reject the chain altogether and resort to alternative networks or even different methods of completing the desired transactions. Blockchain communities that hope to attract and retain users need to ensure there is sufficient scalability to satisfy the regular demand on the network.

In order to ensure scalability, blockchains might reduce the requirements for validation, such as switching to a simpler or less computationally intensive consensus mechanism, thereby reducing the security of the network. They may also seek to reduce the number of validators required to process blocks, reducing decentralization as scalability hopefully improves.

What is blockchain security?

Blockchains employ sophisticated cryptography to process and store transaction data for their users, making them a secure choice for all kinds of purposes. In order to maintain a sterling reputation, blockchains must employ rigorous security measures that can often run into conflict with how decentralized or secure they are.

The security goal for blockchains is to prevent bad actors from processing inaccurate transaction data that harms other network users. To do this, they employ strategies that rely on technology and incentive structures to minimize this risk. Proof-of-work blockchains require computers to perform incredibly difficult math problems, which in turn requires very expensive hardware. Proof-of-stake blockchains employ a punishment that confiscates staked tokens from bad actors attempting to validate inaccurate data.

More decentralization typically means better security as there would theoretically be too many targets for malicious actors, but those same participants could also collude and manipulate a network if they were so motivated and there wasn’t a failsafe for a blockchain’s creators or a community segment to roll back false transaction data, which isn’t a very decentralized tactic.

Conversely, stricter security requirements tend to reduce scalability. In proof-of-work blockchains, the intensive computations needed to process blocks sharply raises costs and slows the network throughput, making it overall more difficult and expensive to participate.

How do blockchains balance the trilemma?

Finding a good balance in the blockchain trilemma can be a struggle, with many chains opting to prioritize two of the three elements.That said, there are strategies blockchains can and do employ to improve their balance between decentralization, scalability, and security.

Build for a niche

If a blockchain is more interested in serving a specific use case rather than appealing to a broad market, then its builders can better optimize for the trilemma.

A consumer-focused gaming blockchain will likely need to process thousands or even millions of transactions per second, so it would need to focus more on scalability than decentralization, while a business-to-business blockchain serving something like cross-border settlements likely won’t need to serve millions of transactions simultaneously, thus enabling it to focus more on transaction security. For example, Klaytn is a blockchain that combines proof-of-work and proof-of-stake to process a theoretical 4,000 transactions per second, making it useful for gaming and metaverse dApps.

With fewer users and lower overall demand, niche networks can drill down into the best practices for decentralization and security that match what their communities require without needing to sacrifice scalability in ways that harm their value.

Embrace new layers

If a mass-market blockchain is unable to change rapidly enough to meet demand conditions, it might instead opt to inspire and embrace a whole different class of blockchains commonly known as “Layer 2” blockchains, which function independently and typically record some shorter version of their transaction history to the “Layer 1” blockchain.

The best example of this is Ethereum’s embrace of a vibrant L2 ecosystem featuring chains like Polygon, Arbirtrum, Optimism, and Loopring. These blockchains often employ different consensus mechanisms and technical solutions like zero-knowledge proofs in order to vastly improve their scalability to offer lower gas fees and lower the barriers to accessing the Ethereum ecosystem. For instance, Polygon only allows 100 validators concurrently on its proof-of-stake chain to ensure its chosen balance between scalability and decentralization.

There are also L2s outside of Ethereum, such as Fuel or the Lightning Network that sit on top of Bitcoin’s infrastructure as  instant payments protocols.

Improve the technology

Blockchains can also change how they work at the technical level.

The biggest example of this was Ethereum’s transition from proof-of-work to proof-of-stake in September 2022, what was commonly referred to as “the Merge” and successfully executed without losing any transaction data in the change period. This change cut Ethereum’s energy consumption by 99.988 percent and drastically changed the structure of its ecosystem: miners were immediately replaced by validators and staking pools, decentralizing validation access to a wider and different range of participants and enhancing scalability.

Another technical innovation in blockchain is sharding. The biggest blockchain currently employing sharding is NEAR Protocol, in which transactions are validated by a fraction of the total nodes at any given point rather than requiring every node to approve every transaction. By requiring synchrony across fewer computers, a blockchain’s scalability can vastly improve, but at a substantial risk to security if a coordinated attack were to occur. Any blockchain employing sharding needs to be very thoughtful about its sharding design to account for such vulnerabilities.

The blockchain trilemma isn’t going anywhere anytime soon; it simply needs to be navigated wisely and all participants should educate themselves about the risks and tradeoffs they’re making with any blockchain ecosystem they choose for their transactions.