The Scalability Trilemma
Decentralization, Scalability, or Security: Pick two.
Networks in general, and distributed systems in particular, suffer a fatal flaw: The larger it gets, the less it can trust itself. The larger the size of any network, the greater the degrees of separation between its members and therefore the lower the overall level of trust.
This problem can only be averted by either a) making it harder to join the network, reducing scalability; or b) delegating the responsibility (and associated privileges) of overseeing the network’s activities to a handful of specialized nodes, sacrificing the inherent appeal of decentralization.
A secure and scalable system relies on some form of central authority. A secure and decentralized system grows to a ceiling, and a decentralized and scalable system is not trustworthy.
In any instance, it’s impossible not to give up one of the three.
While not widely known outside of programming circles, the Scalability Trilemma is regarded as a hard law of computer science. It has been understandably absent from public awareness, but the advent of blockchain, and the ensuing investment craze that emerged from it, have made the Trilemma impossible to ignore.
The most important thing to note about blockchain is that it is a supply-side technology. This is to say that its value will be driven in the long-term by the rate at which the providers, not consumers, of goods, services, assets, securities, etc., choose to adopt it. Thus, a good investor must think like a producer: “Which blockchain network best suits the business/enterprise I’m pursuing, and why?”
These three features of a blockchain are all desirable within certain contexts. It is highly likely that, when this space reaches full maturity, multiple platforms will exist, with features that different industries prefer over others.
Decentralization is by far the most controversial value-add of blockchain technology, and it can be argued that most of blockchain’s use cases arise from the core fact that it can be completely absent of central governance. Much like a free and open Internet has done for information, a decentralized blockchain invites creators, entrepreneurs and freelancers to connect and transact value without impediment and, potentially, without oversight.
On the one hand, a blockchain that boasts total decentralization—such as Bitcoin, or Ethereum—can be a problem for regulatory bodies. If there is no way to compel any users to adhere to any rules, then all attempts at even basic accounting will be symbolic at best. Even a basic law that says, for example, that all Bitcoin users in the US register their wallets with the IRS for tax reasons, would be completely unenforceable, because anyone could still make an undeclared wallet and keep it a well-kept secret.
On the other hand, the world is teeming with seemingly infinite programmers, sellers, and entrepreneurs who see decentralization as an opportunity to rewrite the rules of economics. On a decentralized blockchain, it becomes possible to create an innovative app or produce controversial creative content without answering to a company or service provider, and to transact real-world goods, services, commodities and even securities directly with anyone in the world, bypassing international law altogether.
While scalability and security are important from an economic perspective, decentralization invites a brand new class of global economic activity, specifically, that which can only exist beyond the bounds of what companies, governments, and middlemen allow. A blockchain designed for 100% decentralization would potentially have a monopoly on this entire emerging class of economic activity–provided, of course, that it is also sufficiently secure, and sufficiently scalable.
Therein lies the challenge for decentralized blockchain developers, and the opportunity for centralized blockchain developers to capitalize enormously on their inherent ability to be both trustworthy and scalable from day one.
Centralization: Security and Scalability
A blockchain provides the benefits of security like no other technology yet invented. By distributing the verification of all inputs across all nodes, the database guarantees the truth of its contents implicitly.
A blockchain network also makes it remarkably easy to scale a business, through automated administrative and accounting functions, and allowing organizations to bring on new members easily.
Eventually, however, one becomes an impediment to the other: Too many new members could lead to fragmented interests within the organization, and a steady erosion of trust. Putting automated checks in place to ensure cooperation could work in the short term, but would sacrifice some of the network’s efficiency, and this effect would compound at scale.
In a decentralized network, trust is an obstacle to growth, and growth is an obstacle to trust.
There are obvious instances where one is preferable over the other. An energy microgrid, operating in a fixed grid size, would opt for security over scalability; a social network, in which user data is implicitly private and trust is a non-factor, would optimize scalability over security.
There are open-ended cases, however, in which competition for growth depends on user trust, and neither can afford to be sacrificed. When both security and scalability are necessary, how important is decentralization?
A centralized network puts this issue to rest. The fastest, most secure and most rapidly growing blockchain networks available for building DApps today are all centralized. They will likely see an explosion in use in the short and medium terms from big businesses and nationally funded operations for whom centralization is an advantage, not a disadvantage.
But, no matter how big, this influx of economic activity will not create nearly as much growth potential as the potential activity of independent developers, startups, and small businesses seeking to try new things outside the scope of existing regulatory frameworks. Make no mistake: That will only be possible in a decentralized network.
In summary: Any business venture that doesn’t mind operating within the existing social contract—between buyers and sellers adhering to a set of rules on one side, and middlemen with the power to change those rules at will on the other—will find scalability and security to be more important features than decentralization. Any venture that values the ability to write its own rules of conduct, and to trust that those rules will never be changed, will find decentralization indispensable and will gladly sacrifice one of the other two. Maybe a decentralized blockchain platform will finally solve the Trilemma for good.
Until then… Pick two.