The Crypto Trilemma, by The Conversable Economist

I’ve said it before, and I’ll say it again, please subscribe to his blog.

This will be a very short post, for two reasons. One, the more I read about cryptocurrencies and related topics, the more confused I get. Two, given my very limited understanding, there isn’t much more to add to Timothy Taylor‘s post.

But the reason I wanted to write a post is because I found the idea of the crypto trilemma really useful (and hopefully you will too), and writing about it helps make the idea clearer in my head.

My most important takeaway from his post was this diagram. The point is that the crypto trilemma means that any currency can be any two things at any given point of time, but all three at the same time are simply not going to be possible.

  1. Traditional currencies, such as the rupee notes in your pocket are secure and scalable, which means that the rupee system can’t be ‘hacked’ and the system can grow large in terms of transactions per second without any difficulty. But it is not, of course, decentralized.
  2. Bitcoin and Ethereum (and possibly others, but I think these two are by far and away the biggest cryptocurrencies) are secure, and by definition decentralized, but they simply can’t scale. Navin Kabra, who is my guru in these matters (and many others!), tells me that Bitcoin can support 7-10 transactions per second, while Ethereum can do about 30. Even if they implement ‘sharding‘, Navin says they’ll go up to 30 transactions per second. Both the link I’ve given here and Timothy Taylor’s blog explain more about sharding, if you’re interested.
    Visa, on the other hand, can do twenty-four thousand transactions per second.
    TL;DR? Not scalable.
    As with everything in life, it’s more complicated than that. Here are three additional links shared by Navin: Visa’s claims | Bitcoin’s Refutation | An academic paper on the topic (bonus: a helpful table)
  3. And as we’re all discovering over the past few days, the newer cryptocurrencies ain’t quite that secure.

As I said, a useful framework to keep in mind when thinking about crypticurrencies.