Working Paper: NBER ID: w25407
Authors: Joseph Abadi; Markus Brunnermeier
Abstract: The fundamental problem in digital record-keeping is to establish consensus on an update to a ledger, e.g., a payment. Consensus must be achieved in the presence of faults—situations in which some computers are offline or fail to function appropriately. Traditional centralized record-keeping systems rely on trust in a single entity to achieve consensus. Blockchains decentralize record-keeping, dispensing with the need for trust in a single entity, but some instead build a consensus based on the wasteful expenditure of computational resources (proof-of-work). An ideal method of consensus would be tolerant to faults, avoid the waste of computational resources, and be capable of implementing all individually rational transfers of value among agents. We prove a Blockchain Trilemma: any method of consensus, be it centralized or decentralized, must give up (i) fault-tolerance, (ii) resource-efficiency, or (iii) full transferability.
Keywords: Blockchain; Consensus Algorithms; Digital Recordkeeping
JEL Codes: D82; E42; G29
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Consensus algorithm (D70) | sacrifice one of three ideal properties (D41) |
| Lack of trust (D83) | necessity of trade-off (D10) |
| Communication protocol with trusted mediator (D82) | achieve all three properties (Z00) |
| Unmediated consensus algorithm (D70) | achieve any two properties (C52) |
| Absence of trusted mediator (D74) | necessity of providing incentives for honest behavior (D82) |
| Giving up fault-tolerance (G33) | detection of dishonest behavior (K42) |
| Relinquishing resource-efficiency (D61) | providing incentives for honesty (M52) |
| Relinquishing full transferability (F16) | providing incentives for honesty (M52) |