Introduction

Blockchain as a whole has many tradeoffs. These tradeoffs include, but are not limited to:

1. Decentralization Tradeoffs
2. Scalability Tradeoffs
3. Security Tradeoffs
4. Cost Tradeoffs
5. Risk Tradeoffs
6. Investment/Hype Tradeoffs
7. Innvoation Tradeoffs

These categories can overlap: decentralization and scalability go hand-in-hand, security and cost regularly interact with each other, and there are many tradeoffs between innovation, getting investment, and risk. In reality, these categories will almost always overlap - it is hard to imagine any of these factors not overlapping with cost or risk. In this section, we will look into some of these tradeoffs in greater detail.

Decentralization & Regulation Tradeoff

On the other hand, there have been many attempts to bring decentralized technologies to compliance with regulatory bodies. In many cases, this results in a devaluation or counteracting of many guaruntees that the projects claim to offer. These shortcomings include security vulnerabilities in the case of the DAO (discussed below under "Security vs Cost: Risk"). However, this can also include solutions that retain control over key parts of the system, similar to traditional centralized systems with admin privileges, that simply do not offer the benefits of decentralization that they claim to.

We want to avoid naming any specific projects as examples for lost guaruntees; we encourage readers to explore whitepapers for themselves to determine how the centralization of any given project might reduce its guarantees.

Decentralization & Scalability Tradeoffs

Throughput vs Latency: many of a blockchain’s benefits relate to having an immutable, trustless record of data. However, that record of data can only be trustless if you adhere to certain standards. For Bitcoin, those standards amount to the proof-of-work protocol and a blockchain that is open to the public. As throughput increases, you begin to limit the network’s ability to be open to the public, introducing new requirements to participation (being able to stay in sync with large, regular data updates that are primarily coming from the US or China - latency). By increasing latency, you begin to exclude smaller and more remote nodes from the network, thereby decreasing the trustless security guarantees that we could originally assume.

Public vs private: This trade-off between throughput and latency is a sort of fundamental truth within blockchain, but that is not to say that there are not ways to ensure both. In a public blockchain, there has been an emphasis around using blockchain’s benefits in a very strong form - allow anyone to work with data, smart contracts, and cryptocurrency.

On the other hand, private, or permissioned blockchains in particular tend to circumvent this issue by allowing many trusted actors to participate in the network, and typically trying to practice good regulatory compliance. This approach allows you to place requirements on the member nodes of your network, which can significantly reduce decentralization, public usability, or trustless nature of the system, but can introduce similar benefits within the network that you establish.

For example, Ripple has one of the largest market caps, and has a permissioned network setup in which a few nodes run as “validator nodes”, which are more trusted and run the blockchain (add new blocks), while “stock servers” observe new blocks and help keep track of the blockchain. This allows them to ensure that the nodes which need to stay up-to-date with the blockchain can have certain requirements (namely bandwidth, geolocation, and being a trusted actor), enabling those nodes to process larger amounts of data (increase in throughput).

Security vs Cost: Risk

The following categories heavily overlap with tradeoffs for risk. Computer security where Blockchain is involved is a costly, slow, and nacent process. Many vulnerabilities are impossible to know until someone loses a lot of money from them, and others are simply slow and difficult to fix even once detected.

Further Tradeoff Concerns

We may cover these tradeoffs in more detail in the future, given appropriate interest.

1. Security vs Cost: Smart Contract Gas. More complex security authentication requires more gas, or whatever decentralized application costs for the Blockchain virtual machines.

2. Security vs Cost: Blockchain Development. Auditing Blockchain code is expensive. Limited automated security tools exist for Blockchain, and few developers are even experienced enough with the industry to understand how to audit Blockchain systems.

3. Risk Tradeoffs: Compliance vs Innovation. Bitcoin itself is a good example of this, and this is largely related to the category above "Decentralization & Regulation Tradeoff", with one specific difference: this tradeoff is not focused on specific intention or creating some ability to avoid regulation. Instead, it is focused on innovation in a space where regulations do not currently exist. Cryptocurrency, over a decade after being created, still has little in the way of clear, codified tax code or legal definition in general. This is a clear risk to anyone looking to create or use Blockchain systems, but by waiting for legislation, it is easy to miss innovation opportunities.

4. Risk Tradeoffs: Compliance vs Investment/Hype. Similar to the risk above, waiting for compliance can also miss out on significant opportunities to capitalize on a market trend. For example, while traditional organizations have largely waited to get involved in Blockchain, new companies such as Coinbase have grown to a multibillion dollar market cap by embracing the technology.

5. Tradeoffs in Blockchain Involvement from Industry. Companies have to weigh all these kinds of tradeoffs to determine how, if at all, they get involved in Blockchain. Libra is a clear example of this - they were able to get many other companies to sign onto their consortium model early on, but as regulation and compliance risk made itself more apparent, many of those members withdrew from the partnership. On the other hand, some other organizations (such as Ripple) have been able to counterbalance these risks by creating systems that are partially centralized by nature, and do not seek to work in areas where they would risk facing insurmountable compliance risk.

Conclusion: There are MANY trade-offs in Blockchain