The discovery of blockchain technology laid the foundation for the formation of a complex ecosystem where participants can convert ETH to BTC, conduct other transactions and create assets within a decentralized network. Three key concepts – decentralization, security and scalability – set the direction for modern advances in the field of cryptocurrencies. Thanks to this innovative technology, we are able to explore various options for transacting, creating and monetizing funds using the blockchain. However, optimizing all blockchain capabilities at once is challenging.
Blockchain technology faces a paradox that is preventing it from reaching its full potential. Let’s analyze what this blockchain problem is and whether it is possible to overcome it.
What is the essence of the blockchain trilemma?
Blockchain promotes the idea that applications and transactions can be carried out without the need for third party approval, avoiding a central authority that stores private and confidential information.
This concept requires blockchain platforms to optimize security, decentralization and scalability. However, today the challenge is to simultaneously optimize all three aspects at a high level, which Vitalik Buterin, co-founder of Ethereum, called the “blockchain trilemma.”
A trilemma is a situation where a decision must be made in the face of three alternatives. In this case, the challenge is to optimize decentralization, scalability and security at one level, since for now the development of one of the aspects occurs at the expense of others. For example, increasing network scalability can compromise security, which is contrary to the fundamentals of blockchain from a conceptual point of view.
What does the blockchain trilemma look like in practice?
Exploring the blockchain trilemma, discovering a way to overcome the limitations – convert ETH to BTC as one of the key solutions to this cryptocurrency conundrum. The main focus of blockchain development today is on scalability, making these networks usable by a large number of users across different chains and networks while maintaining consistency.
However, networks face the challenge of being unable to effectively handle the massive increase in transactions, which can cause severe congestion and compromise the stability and security of the blockchain.
Increasing blockchain scalability also involves increasing the number of validating nodes to meet the growing demand for transactions. However, this creates the need to ensure the security of each node, since one malicious node can have a serious impact on the operation of the entire network by triggering erroneous orders for the BUSD to ETH exchange.
Security is critical to blockchain and should not be compromised, even when seeking greater scalability or decentralization. Therefore, the main challenge is to achieve an optimal balance between scalability, decentralization and security, since strengthening one of these elements is often accompanied by weakening the other.
Possible solutions to the blockchain trilemma
There is no single solution to overcome this problem now, otherwise this problem would have already been eliminated. However, there are several attempts and updates aimed at solving this difficult problem.
Sharding is a method of breaking a blockchain into smaller pieces and giving each sub-blockchain the ability to manage transactions and data independently. Ultimately, each sub-blockchain processes transactions according to its own ledger. These smaller blockchains, or shards, are then connected through the main network.
This process takes the load off the central blockchain by dividing information into smaller chunks, each designed to be processed by its own shard that operates autonomously.
This solution allows the blockchain to scale while minimizing risks to its security, since each shard operates independently. It also speeds up the processing of transactions on the blockchain because multiple mini-transactions are executed in parallel rather than waiting in line on the main chain.
The developers claim that introducing a second layer on top of the main blockchain network can significantly simplify the transaction process. The introduction of a second level, built above the main chain, contributes to faster and more efficient information processing.
The second-level chain, or sidechain, is connected to the main network and allows information to flow between the two chains. The sidechain operates according to its own rules and has the power to complete transactions without requiring them to be displayed on the main network.
Smart contracts are used to ensure interaction between users. Although somewhat similar to the concept of sharding, Layer 2 is about adding an additional network layer on top of the main blockchain, while sharding involves splitting the main chain into smaller pieces and changing the structure of the network.
Many blockchains are moving away from the traditional proof-of-work (PoW) protocol in favor of a proof-of-stake (PoS) protocol. PoS requires validating nodes to freeze their tokens before participating in the consensus mechanism.
Unlike the classic PoW protocol, which required miners to use powerful machines to execute complex algorithms and verify transactions, PoS reduces labor costs and energy consumption.
Adding more nodes to the verification process becomes a better option as it ensures that nodes act in good faith by locking and staking their tokens.