An Impossible Trinity in Blockchain-based Transactions: Decentralization, Privacy, and Lower Transaction Costs

Abstract

Decentralized blockchain-based transactions benefit users through their openness, transparency, and immutability, which may come at the expense of privacy concerns. This paper shows that if there is a dilemma between decentralization and privacy protection, such that a more decentralized system increases the risks of data leakage, allowing additional privacy protection within the blockchain network at a cost, such as hiring mixers, does not resolve the initial dichotomy. However, if non-protected users benefit from positive externalities from the additional protection provided to protected users, such that all users enjoy less privacy concerns with double protection, the dilemma of decentralization and privacy risks can be resolved, despite the higher transaction costs required. Thus, double privacy protection at a cost transforms the problem with a dilemma into one with a trilemma. Given the trilemma, blockchain-based services, such as payment gateways, need to have effective privacy protections for consumers at a sufficiently low cost, which results in a less serious initial effort for stable and large-scale adoption.