Lightning - Eliminating the Tradeoffs of the Blockchain Trilemma

Over the years, cryptocurrencies have attempted to solve problems with our financial system, broad dependence on transactional intermediaries, and a range of centralization risks. But as the industry has proliferated, so too have the growing pains. These ills are typified by tradeoffs between decentralization, network consistency, and scalability. Throughout most of the crypto space's life cycle, these three attributes have been at odds with one another—only two could be achieved at any given time, never all three together.

The DCS (Decentralized-Consistent-Scalable) Triangle, first proposed by researcher and engineer Trent McConaghy in 2016, is a way of visualizing these tradeoffs. It posits that any system must make sacrifices in one area to improve upon the others. The DCS Triangle is a simplified model that visualizes scalability concerns detailed by early Bitcoin developers like Greg Maxwell, Adam Back, and Hal Finney, who argued over the years that the Bitcoin network would have difficulty expanding due to these inherent tradeoffs. They debated over the Bitcoin base layer's inefficiencies, and whether or not there were ways to make Bitcoin more scalable without compromising decentralization or security.

Years later, Vitalik Buterin coined the term "Blockchain Trilemma" in a 2017 blog post, referring to these same tradeoffs between decentralization, security, and scalability.

At NOAH, we prefer to replace "consistent" with "secure" because we believe it more accurately describes what is needed for a system to function without tradeoffs. We also think "secure" is a more tangible quality for users to understand, delineating a system that is protected against outside forces—including those that might seek to take it down, which is something inherently important to the success of cryptocurrencies.

It was thought that tradeoffs within the triangle were an inevitability—but as we're seeing with advancements in layered Bitcoin protocols, tradeoffs may no longer be part of the equation.

With the Lightning Network, Bitcoin can sit at the center of the DCS Triangle, allowing it to be all three things: decentralized, secure, and scalable.

The three components of the triangle are as follows:

1. Decentralized—A system is said to be decentralized when there is no single entity in control. There is no central point of failure, and no one person or group can make decisions on behalf of the whole. In a fully decentralized system, anyone can join the network as a validating node.
2. Secure—A system is secure when it is resistant to attack. The data within the system is safe from tampering or theft, and the network as a whole is resistant to outside interference. This data is secure across the whole system, which precludes double-spending or other types of fraudulent/malicious behaviors.
3. Scalable—A system is scalable when it can handle an increasing amount of users or transactions without compromising on performance. McConaghy described this as a "planetary scale," meaning the system can grow to accommodate usage on a global or enterprise level without running into issues. McConaghy said to achieve planetary scale, a system would need a transaction throughput of 100,000-1,000,000 transactions per second, in addition to a latency of 1 second or less.

Decentralized—Many consider Bitcoin the most decentralized of cryptocurrencies. By expending energy via electricity, Proof-of-Work enables validating power to be spread across multiple entities in the Bitcoin system. Put simply, anyone with sufficient computing power can mine Bitcoin and participate in the network. There is no centralized authority to make decisions on behalf of the system. Bitcoin is quite decentralized. Simple enough.

Secure —Bitcoin is secure by design. Through a combination of cryptography, game theory, and network effects, the Bitcoin protocol makes it incredibly difficult for anyone to tamper with data or interfere with the network. The data stored on the Bitcoin blockchain is immutable, meaning it cannot be tampered with. The data set is distributed across the network, and any changes to this data set (e.g. a new transaction) must be consensus-based, meaning all nodes in the network must agree on the change.

Scalable—This is where things get interesting. The Bitcoin base layer is nowhere near scalable. With a theoretical transaction throughput of 7 tx/s (5 tx/s in practice) and a median transaction latency of 10 minutes, the base layer isn't conducive to planetary scalability. But as we've discussed in previous writing, the Bitcoin base layer is a settlement layer, not a payments layer.

However, Bitcoin development takes the layered architecture approach. To recall, a layered architecture is one where a system is built on several layers of protocols that do different things, not just one that does all. It's like an onion—each layer has a specific function, and the layers work together to form the whole.

That's where Lightning comes in. By taking a load off the base layer, Lightning is a protocol that sits on top of Bitcoin and facilitates fast, cheap transactions. Lightning has a transaction latency of milliseconds to seconds and theoretical transaction throughput of 1,000,000 tx/s.

Decentralized—Lightning is non-custodial, meaning there is no central entity in control of user funds. Users hold the private keys to their Lightning channels, and they can open and close these channels at will. If a user wants to leave the Lightning Network, they can do so without having to go through any centralized entity.

Security—Lightning is based on Bitcoin's blockchain, meaning it's based on the same security features. Lightning channels are trustless, meaning users don't have to worry about the counterparty defaulting on their payments. All Lightning nodes have access to the same blockchain data, and any changes to this data set must be consensus-based. This makes Lightning just as secure as Bitcoin.

Scalable—Lightning is incredibly scalable. As we mentioned earlier, the Bitcoin base layer can only handle around 5 tx/s. But with Lightning, the number of transactions that can be processed per second increases by orders of magnitude. enough to easily handle planetary or enterprise scale.

Let us humor you with a little geometry—Triangles are the most durable of all shapes. They are quite sturdy against forces that try to tip them over, and they can support a great deal of weight. Their strength comes from their three sides, each side working together with the other two to support the whole.

When you've completed all three sides of a triangle, you've laid a solid foundation. When only two strong sides and one fragile side remain, the whole edifice is at risk of crumbling.

The same can be said about the DCS triangle. When all three sides are strong, when something is decentralized, secure, and scalable, it can support a great deal of weight—in this case, the weight of the world's financial system.

That's why at NOAH, we're so passionate about Lightning. We now have a solid third side in the triangle, with Lightning offering a decentralized, secure, and scalable protocol. Now that all three sides of the triangle are in place, Bitcoin will truly live up to its promise as a global, decentralized currency.