The original blockchain trilemma suggested that users had to prioritize two aspects among decentralization, scalability, and security. Ethereum was praised for its decentralization and security but faced scalability challenges. Today, advancements in blockchain technology have made all three aspects 'good enough' for most users, marking a transition as Ethereum evolves with Proof of Stake (PoS) and layer 2 solutions to enhance scalability while maintaining security and decentralization.
A new trilemma emerges, focusing on products, customers, and regulatory approval rather than technology. This shift is marked by the approval of Bitcoin and Ethereum ETFs in the U.S. and Europe's implementation of the Markets in Crypto Assets regulation (MiCA). As major digital asset companies have products and customers but lack regulatory approval, 70% of crypto trading occurs offshore. Firms cut back licensing efforts during market downturns, holding back their onshore expansion opportunities.
Conversely, some digital-asset natives operate in regulated environments with products and regulatory compliance but lack a customer base, having pushed ahead of traditional financial firms but struggling to attract customers. Established financial institutions, equipped with broad customer bases and compliance capabilities, often do not have digital asset offerings, highlighting the complexity of aligning products, regulatory approval, and customer bases.
The path to achieving an optimized state where entities offer a wide range of regulated products to vast customer bases is fraught with challenges. Key challenges include regulatory scrutiny, with regulators cautious to distinguish suitable offerings for mass markets versus sophisticated investors, given the inherent risks in digital assets. Cultural differences also pose significant barriers; the agile, entrepreneurial spirit of crypto-native firms starkly contrasts with the established, conservative culture of major banks.
Ultimately, the market is expected to mature, much like the technical trilemma, reaching a compromise that satisfies varying risk appetites. High-risk offerings will exist within regulated ecosystems, albeit not with traditional conservative financial entities. Individual investors will find a safer, more curated access point to digital assets, tailoring opportunities across the risk spectrum. As the digital asset landscape evolves, aligning diverse entities within regulatory boundaries remains a complex but crucial task for broader adoption.
