The New Blockchain Trilemma Is Here, and It’s Not About Technology

In the technology trilemma debate for Ethereum, the network was historically praised for its robust decentralization and security, but its capacity was a significant limitation. However, as blockchain technology has evolved significantly over time, most users now find that all three aspects – decentralization, security, and capacity – are generally satisfactory, even though the balancing act between these priorities remains challenging.

Many people view Ethereum’s shift from Proof of Work (PoW) to Proof of Stake (PoS), along with the introduction of layer 2 networks, as a significant turning point, where decisions between these options had substantial consequences. Now, Ethereum still provides robust security and decentralization as its foundational layer. However, numerous layer 2 networks available offer unprecedented scalability.

This year saw an acceleration towards a significant change in the current situation, primarily due to the concurrent approval of Bitcoin and Ethereum Exchange-Traded Funds (ETFs) in the U.S. and the launch of the Markets in Crypto Assets regulation (MiCA), effective in Europe. These key milestones, along with numerous other countries adopting digital asset regulatory frameworks, are sparking a fundamental transformation in the marketplace.

Many prominent global digital asset companies hold products and clientele, yet they’re missing the necessary regulatory clearance. In fact, over 70% of crypto transactions and trading occur outside of regulated jurisdictions. Due to the recent market slump, several crypto-centric businesses have scaled back their attempts to secure licenses in major markets. Consequently, these firms boast a pre-existing customer base and numerous digital asset solutions, but they’re still awaiting regulatory approval that would enable them to bring their operations onshore and pursue fresh revenue streams.

A group of firms that are commonly observed are those that specialize in digital assets within regulated markets. These companies have developed products and obtained regulatory approval, yet they do not have a customer base. Instead, their primary focus has been on creating digital assets within a regulated setting. They were pioneers in this field compared to traditional financial institutions, having secured approvals for their products, but lack an established customer base with which to market them.

Ultimately, you find the largest and most established financial entities – banks. These institutions boast vast clientele and sophisticated regulatory adherence systems, however, they typically lack digital assets to provide.

Similar to the technical trilemma, achieving a harmonious combination that provides full regulatory compliance, extensive product variety, and a vast user base is challenging due to its elusive perfection. Multiple hurdles prevent us from realizing such an ideal scenario.

Primarily, the main hurdle in providing services to all consumers lies with the regulators themselves, and it’s understandable why this is the case. In my discussions with these regulatory bodies, they consistently differentiate between the types of offerings they consider appropriate and secure for mainstream customers, versus those that are suitable for experienced investors. Cryptocurrencies and digital assets, due to their high risk and volatility, aren’t advisable for individuals who are financially struggling from paycheck to paycheck.

A significant challenge lies in the distinct cultures of these various entities. An offshore crypto native, no matter how legitimate, audited, and efficiently run, is fundamentally unlike traditional banking giants. These are individuals who dared to establish businesses despite their peers doubting the legitimacy of cryptocurrency. It’s unlikely that they would thrive in a conventional banking culture.

Eventually, my belief is that, similar to the technical trilemma, the market will evolve to a stage where all kinds of customers and services will provide offerings that are satisfactory for most. Those seeking higher risks can find it within a regulated environment, but they won’t find it with the most conventional financial institutions. Meanwhile, individual users will discover a carefully selected, lower-risk entry point into the digital assets sector.

It’s important to note that the opinions expressed in this article are those of the author and may not align with the views of CoinDesk, Inc., its stakeholders, or the global EY organization and its affiliates.