Despite their numerous advantages, decentralized networks such as blockchains share a common challenge due to their unique design. The Blockchain Trilemma refers to a situation in which only two of the three properties of decentralization, security, and scalability can be satisfied. Some variation of this challenge exists in all systems using PoS, PoW, or other consensus mechanisms which seek to balance the three properties according to the vision of the development team and the intended purpose of the network.
Ethereum currently holds a firm position as the blockchain with the most large-scale and active applications, as well as the largest developer community. As a result, Ethereum has been established as the de-facto standard network for DeFi and other innovations. Ethereum’s core value lies in a solid consensus mechanism and wide adoption that ensures security.
The problem that comes with more adoption – as any Ethereum user will know – is the trade-off of scalability. As it currently stands, the Ethereum network (gas) fees are pricing small-time retail investors out of the market who struggle to justify spending up to hundreds of dollars worth of ETH on transaction fees for each and every interaction with the network.
Without having to leave the Ethereum network completely, users can choose to move their assets to platforms built on top of the Layer-1 blockchain. These Layer-2 solutions allow users to enjoy greater scalability through faster transaction speeds and, most importantly, much lower gas fees. Additionally, Layer-2 projects built on top of Ethereum such as Polygon, Arbitrum, and Immutable-X leverage the consensus mechanism of the original Layer-1 network and are therefore considered relatively secure against network-wide attacks.
Rollups are essentially transaction bridges between Layer-2 and Layer-1 networks in which data from numerous transactions is bundled together and submitted as a single transaction to reduce network congestion and price per transaction. Rollups are considered an important part of scaling the Ethereum network as applications built on top using rollups will increase accessibility to the network.
Currently, the two types of rollups in popular use are ZK-rollups and optimistic rollups. ZK-rollups, such as zkSync and Loopring, utilize zk-SNARKs proofs to ensure data validity whilst also maintaining data privacy. Optimistic rollups such as Optimism, however, only publish the bare minimum of data to the blockchain and maintain an assumption that the vast majority of validators on the Layer-1 are honest. In both cases, users are still required to pay fees but are largely subsidized by other users submitting data within the same transaction.
Despite these benefits, however, these solutions only limit gas fees on Layer-1, but users must still pay high fees to transfer their initial assets from Layer-1 to Layer-2 so the solution is far from complete.
As the industry innovates to resolve the issue of gas prices, some projects are turning to more centralized solutions to provide both scalability and security. DeFi protocols running on top of Ethereum, such as Balancer, offer free signature trades and up to 90% gas fee refunds in native tokens as a way to incentivize users to use their applications and increase capital efficiency.
These integrated solutions utilize large capital pools to create sufficient liquidity levels and essentially allow users to trade within the network. Often, these refunds can also be given in the form of airdrops from early-stage projects looking to boost user retention numbers and grow the depth of their protocol’s liquidity pools.
Although reducing gas fees by transacting on Layer-2’s is increasingly becoming the industry norm, it still leaves the initial challenge of moving assets from Layer-1 to Layer-2. To address this, many innovative project teams such as ZKSpace are developing cross-centralized/decentralized architectural solutions to subsidize the initial costs of moving onto a Layer 2.
In this example, the protocol supplies a pool of assets and a corresponding address for users to send their assets. Once received, the sender address is reimbursed for the full amount on the Layer-2 protocol, minus a small fee (in the instance of ZKSpace, $2 worth). This solution works because completing a simple Layer-1 to Layer-1 transaction requires a substantially smaller gas fee – up to 70% – than would originally be needed to deposit directly onto Layer-2.
Although containing elements of centralization, this solution is providing a genuine solution to a pain point that is limiting the usability of Layer-2s by reducing initial costs and onboarding and smoothing the onboarding process.
The Blockchain Trilemma is a unique challenge to the entire industry and has inspired a wave of innovation aimed at solving (or at least partially resolving) the problem. As it stands, key solutions include a combination of Layer-2 networks leveraging the strong consensus of the Ethereum Layer-1 blockchain with other more centralized solutions that use incentives to attract users and grow their own liquidity pools.
Without a clear winner, people wanting to use these systems without paying a fortune on fees must first understand the implications of the solutions available, realize the compromises they are making, and trial and error to see what is most appropriate and effective.