The original blockchain trilemma stated that blockchain users should always choose between decentralization, scalability, and security. At best, they could have two out of three. The new trilemma is about products, customers and regulatory approval. Again, pick two.
When it comes to the technological trilemma, at least in the case of Ethereum, the network has long been considered to have strong decentralization and robust security, but seriously limited in terms of capacity. Today, while the tradeoffs between these different priorities have never gone away, blockchains themselves have progressed so much that in all three areas most users consider them “good enough.”
For many, Ethereum’s transition from proof of work (PoW) to Proof of Stake (PoS) and the launch of Layer 2 networks, is seen as a transition point from a time when trade-offs between these options had big impacts. Ethereum continues to offer strong security and decentralization as a base layer, but the numerous Layer 2 networks available also offer massive scalability.
The shift to this new trilemma was triggered earlier this year by the almost simultaneous approval of Bitcoin and Ethereum ETFs in the United States and the start of regulation of crypto asset markets (Mica) which came into force in Europe. Between these two landmark events and a host of other countries implementing regulatory regimes for digital assets, a fundamental shift is underway in the market.
Many of the biggest companies in the digital asset world have products and customers but lack regulatory approval. More than 70% of crypto assets and trading occur overseas, and many native crypto companies have reduced their efforts to license in major markets during the recent downturn. As a result, these companies have an existing customer base and a number of digital asset offerings, but lack the necessary regulatory approvals to relocate their operations and generate new revenue.
A second group of companies that we see a lot of are digital asset native companies in regulated markets. They have products and regulatory approvals but no customers. These companies focused on creating digital assets in a regulated environment. They were ahead of their traditional financial peers and had obtained approvals for their products, but had no historical customer base to sell them to.
Finally, you have the largest and most mature financial institutions. Banks have huge customer bases and mature regulatory compliance processes, but generally do not have digital assets to offer.
Just like the technical trilemma, there is no perfect solution to matching entities and creating the perfect union offering full regulatory approval, a huge product line and a giant customer base. Several obstacles stand in the way of this result.
