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Securing Digital Rights for Communities (Game Theory and Governance of Scalable Blockchains for Use in Digital Network States)

Chapter 14. Balancing Scalability and Censorship Resistance (Disproving the “Scalability Trilemma”)

How to Achieve High Throughput Without Sacrificing Security or Decentralisation

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Introduction

The so-called “Scalability Trilemma” asserts that a blockchain must compromise on either security, decentralisation, or scalability, it seemingly cannot excel in all three. This idea, widely attributed to certain high-profile developers, has shaped much of the industry’s design choices, often leading to high fees, heavy Layer-1 “smart contracts,” or reliance on centralised second layers. However, the Trilemma itself is based on flawed assumptions. By distinguishing data availability from computation, optimizing for truly low-fee base layers, and ensuring fair token distribution, we can build systems that are both highly scalable and censorship resistant without sacrificing security.

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14.1. Why the “Scalability Trilemma” Is Misleading

14.1.1 Security and Decentralisation Are the Same Goal

A core claim of the Trilemma is that security, decentralisation, and scalability are three separate pillars that a blockchain must juggle. Yet, in reality:

• Security in a censorship-resistant
  blockchain derives from decentralisation.
• If a network can be censored, it is not secure.
• Hence, these two “pillars” are really just one: a network’s degree of decentralisation determines its censorship resistance, which determines its security.

Any framework that treats security and decentralisation as separate categories is already conflating the same property in two forms. This conceptual redundancy leads many projects astray.

14.1.2 Mixing Computation With Data Availability

Many protocols that attempt to handle everything including smart contract computation and data storage at the base layer end up with:

• High fees, because on-chain computation is both expensive and socialized.
• Unpredictable throughput, any popular app (such as “CryptoKitties”, an early meme ecosystem that bloated all Ethereum transaction fees when it attempted to scale with its popularity) can clog the network, driving fees sky-high for everyone else.

These symptoms are not inevitable but arise if you force every node to perform all heavy computations on every block. By separating the roles leaving text-based data availability to the base layer, while pushing complex computations to Layer-2 systems blockchains can avoid the trade-offs that the Trilemma insists upon.

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14.2. Rethinking Scalability

“Scalability” often means the network can handle many transactions per second (TPS), but ironically, many “scalable” chains impose high base layer fees or complex Layer 1 logic that undermines widespread usage and results in fat nodes that are uneconomic to operate without passing excessive costs onto the user base.

14.2.1 lightweight Base Layer for True Layer-2’s

A truly scalable Layer 1 should focus almost exclusively on being a data availability layer with near-feeless (or staked-resource) transactions. Layer-2 solutions, which rely on that base-layer security, can then run intensive computations or store large non-text based data off-chain, referencing the base chain for its immutability requirements. If the base Layer 1 is too expensive to write to, then any purported Layer-2 will become centralised because it cannot afford to commit its data or proofs back on-chain on a regular enough basis without having to "trust" the Layer-2 system. This undermines the "trustlessness" that blockchain technology was supposed to minimise.

Example

• Bitcoin’s lightning Network: Channels are expensive to open/close, so users rely on a few large node operators which form transaction hubs, through which much of the network's traffic passes. Decentralisation suffers as a result. Lightning effectively forms a small cluster of well-funded custodians. Lightning nodes are not forced to process all transactions and therefore there is a level of censorship capability built in, without having to risk losing mining rewards from the Bitcoin Layer 1.
• High-Fee Smart-Contract Chains: When “Layer-2” operators cannot frequently submit data on-chain due to high Layer 1 transaction costs, they must store it off-chain, losing the guaranteed immutability from the Layer 1. They turn into "trusted", centralised services as a result.

14.2.2 Resource Credits vs. Fee Auctions

Standard blockchains often rely on fee auctions: users outbid each other, so the chain always “chooses” the highest-paying transactions first. This leads to:

• Spikes in fees whenever demand surges (the “CryptoKitties problem”).
• Poor user experience and unpredictability, making it impossible for typical apps to guarantee stable transaction costs to their user bases.

By contrast, a resource-credit or stake-based model requires:

• Users or applications to stake tokens to gain an allotment of daily transactions (credits).
• No one else’s willingness to pay can “steal” your bandwidth; as long as you hold enough stake, you can transact or store text data at minimal cost.
• This approach remains stable even during high usage because your right to transact is locked in by your stake, not by ephemeral, variable fees which always increase in times of high demand, when the user needs to transact the most.

Result: By applying a fee-less, resource credit model, you get a chain that can handle large volumes of traffic without punishing normal users with unpredictable fee changes.

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14.3. Censorship Resistance = Security

If a project claims to solve “the Trilemma” by scaling up yet remains easily censorable, it fails on security. Real security means no single entity can freeze accounts or remove data. This is only feasible if:

1. Token Distribution is broad enough that no whale, foundation, venture capital firm or centralised exchange can unilaterally dictate governance.
2. Block Production is parameterised so a fixed amount of top, independent validators, each accountable to the community and replaceable by stake weighted election, remain spread worldwide.
3. Low Fees or staked resources ensure that usage doesn’t centralise around large corporate infrastructure.

14.3.1 Un-Parameterised Proof of Stake vs. Parameterised Coin Voting

Proof of Stake systems without guardrails (“Un-Parameterised Coin Voting”) often devolve into a handful of (2-4) large staking pools (e.g., lido Finance) controlling consensus. Unless carefully designed, this leads to:

• High centralisation, where the votes of one or two large pools overshadow smaller validators.
• Easy regulatory targeting, since large staking services become choke points for governments or corporations.

A better approach, especially for social and highly nuanced community governance is Parameterised Coin Voting (e.g., Delegated Proof of Stake with a fixed number of validators and mandatory stake lock-ups). This ensures:

• No single entity can spin up infinite validators and manage to have them all simultaneously elected into the consensus by the community's votes.
• Full transparency if anyone attempts to buy excessive influence.
• Time-locked stakes for governance voting create real accountability; people can’t just vote maliciously and dump.

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14.4. Governance and Stake Distribution: The Most Difficult and Most Crucial Element

A Proof of Stake (PoS) or Delegated Proof of Stake (DPoS) blockchain can only be censorship resistant if its tokens are meaningfully and widely distributed. If a small group of venture capitalists, founders, or pre-miners holds the majority of tokens, they can override governance or be legally pressured into compliance that ultimately represents a take over of a community causing it to operate against its own best interests. Achieving broad distribution typically requires:

1. No Pre-mines, No ICO's: Nothing seeds an imbalance and centralisation more than giving a few insiders large shares at launch.
2. Low Barriers to Entry and to Earning: Anyone, anywhere should be able to earn tokens by providing value, running infrastructure, creating content, building apps, or other socially beneficial actions.
3. Long-Term Engagement: Communities that improve everyday life (e.g., enabling people in countries where their currencies experience high levels of inflationary devaluation to save in a currency which is pegged to a stable value) attract organic users who value and hold the token, forging deeper loyalty and distribution and as a result, increased security for the community's economy and governance.

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14.5. Zero Knowledge Roll-ups for Scaling and Privacy

Scaling blockchain networks for mainstream use has been challenging due to network congestion and high transaction costs on layer 1's. Zero-knowledge (ZK) roll-ups, a layer-2 solution, address these issues by moving computation off the Layer 1 chain and validating transactions with compact proofs on layer 1, reducing congestion and costs.

ZK proofs work, essentially by allowing someone to prove that they have access to information without actually showing that information to the party asking for proof. For example, if the information that they posses allows them to correctly solve a complex mathematical problem over numerous iterations and adjustments in input variables so that expected outputs are received in return, then after a number of repeated correct responses in a row, the party asking for the proof can be satisfied that the party with the information actually has it, even though they do not know what the information is and do not need to reveal it.

A simple example of a ZK Proof is where you ask a friend to tweet out a word from a Twitter account that they say they control. They oblige and a few minutes later you see the Twitter account in question has posted the word you requested. There is now a good chance that your friend is proven to be the owner of this account, but to be sure you ask them to repeat the process several times, each time posting a different word that you have specified. After several correct tweets, you have enough evidence to be convinced that your friend controls the password to that twitter account. Your friend does not need to reveal to you the password to their Twitter account to prove to you that they do in fact have the keys to that account. This is a Zero Knowledge Proof.

The process of ZK roll-ups is where the computation to carry out and verify transactions is not done on the blockchain Layer 1, but on a ZK capable Layer 2. ZK Roll-ups on such a Layer 2 can batch or roll up many thousands of transactions. Then a ZK Proof can be published to the Layer 1 for final clearing and security, verifying the correctness of the transactions in the process.

The important thing to note here is that these ZK proofs are far smaller than complete Layer 1 transaction data making the Layer 1 far less congested when it uses ZK Proofs to scale while not adding to the cost of transactions.

Because of their Zero Knowledge nature, these proofs can be adapted to enable Layer 1 block producers to validate Layer 2 transactions without needing the transaction information itself. This makes the transactions private, obscuring information from both the Layer 1 block producers, third party observers and even the person receiving the transaction.

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14.6. Real-World Example: Community Forks

The evolution of certain DPoS systems shows how distribution often arises from unexpected events such as hostile takeovers or forks rather than neat, planned “token sales.” When a community must set aside its internal differences and unify to fork out a malicious actor’s stake, distribution can become more organic:

• Many previously inactive holders in voting become active voters to defend the chain - like an immune system kicking in, it increases the inherent security of the chain by reducing apathetic voters.
• Founder stakes or investor stakes get nullified if they attack the community.
• The result is a large class of committed stakeholders who align around genuine and continued decentralisation.
• (See chapter 13.4.2 for more information on forking away from an abusive whale stake)

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Conclusion

The so-called “Scalability Trilemma” posits that a chain must sacrifice security (decentralisation) for scalability or vice versa. In practice, this trilemma stems from conflating data availability with computation and ignoring the power of Parameterised Coin Voting combined with a widely distributed token.

Key Lessons

1. Separate Computation from the Base Layer

   • Keep Layer-1 minimal: text data availability and lightweight transactions.
   • Push heavy smart-contract logic, large media storage, or advanced computations to Layer-2.
   • This allows near fee-less base layer transactions, crucial for censorship resistant usage.

2. Resource-Credit or Staking Models

   • Eliminate high, unpredictable base layer fees so layer-2 solutions and normal users can reliably store data or do basic transfers.
   • Guarantee that the success of one application doesn’t undermine the cost of transactions on others through universal “fee auctions.”

3. Ensure No Single Entity Can Dominate

   • Avoid pre-mines, large ICO's, or central staking pools that accumulate majority control.
   • Parameterised consensus (e.g., a fixed set of elected, replaceable block producers) and lock-up stakes for governance. (For more information on Pre-Mines and ICO’s see Chapter 15. “Censorship and the Morality of Pre-Mines”).

4. True Security = Decentralisation

   • “Security” is not separate from “decentralisation.” A chain is only secure if no single party can impose censorship or freeze assets.

5. Broad Distribution Is Non-Negotiable

   • Let anyone earn the token from real value-added activities such as building, content creation, infrastructure support.
   • Community forks or “freak events” often achieve fair distribution more effectively and organically than any top-down design.

By following these principles, a blockchain can deliver robust throughput and maintain censorship resistance disproving the notion that one must compromise “security vs. decentralisation vs. scalability.” Properly built systems show these are not mutually exclusive trade-offs but rather aspects of a carefully designed, parameterised network where no single dimension has to be sacrificed.