The impossible triangle is fundamentally a pseudo problem

Author: Billy Gao

Compiled by: Jiahua, ChainCatcher

This is the most powerful cryptographic system in history, yet it cannot keep a single secret.

The most ironic aspect of the encryption industry is that we have built the most powerful cryptographic system in history, filled with more mathematical formulas than anything else, yet the one thing it cannot do is protect the privacy of your funds. Every position you hold, every payment you make, every dollar you transfer is, by default, broadcast to the entire world.

We seem to have accepted this norm.

But this is precisely the biggest reason why tens of trillions of dollars that should have been on-chain have yet to enter the market. So, let’s return to the fundamentals: how did we get here, where are the flaws, and what is the only solution that has finally landed at this moment.

Blockchain is a slow, expensive computer owned by no one

Stripping away the narrative that has surrounded it for fifteen years, blockchain is essentially a shared computer, performing even worse than the laptop you are using to read this article. That is its entire essence.

Going back to the basic principles of 2012, those principles that have been overlooked because they sound too simple. Blockchain is a list of blocks linked by hashes. Each block contains a payload: transactions, state changes, and so on.

Each block cryptographically points to the previous one, so no one can quietly tamper with history without being detected. Anyone can run a verification program to check whether the entire system is valid. The consensus mechanism has changed over time, from proof of work, proof of stake to future new mechanisms, but its core premise has never moved an inch.

It is slower, more expensive, and bulkier than your laptop. Its only unique feature, and the entire reason for its existence, is that no one can stop you from using it, and no one can deceive you about the results. There are no administrators, nor privileged parties you must consult.

But this unique feature comes at a high cost. Every node must rerun your calculations and permanently store your data. Therefore, the only reasonable approach on this machine is to only put those few things that truly require this feature and are worth the cost.

Most things do not need it, and that is perfectly normal. In the following discussion, please keep this test in mind: does this thing really need a computer owned by no one? Because it fundamentally determines everything that follows.

The "trilemma" is a misdrawn triangle

The entire industry has spent a decade wrestling between decentralization, scalability, and security. It has essentially won this battle, only to find that the real key constraints are not even in that triangle.

For years, all discussions have revolved around the "trilemma": decentralization, scalability, security; you can only have two at the same time, and you can never have all three. The Ethereum era has been a long debate surrounding it. Topics like block size, sharding, Rollup, Layer 2 have consumed much of the field for years.

Then, quietly, we have essentially solved it. Nowadays, block space is cheap, throughput is high, and Rollup is operational. The scalability issue that defined the last decade has become a thing of the past at the practical application level.

Next, the real core issue has surfaced. Once scale is no longer a bottleneck, an unsettling fact becomes clear: the constraints that truly keep funds outside this machine are not in that triangle at all. We have spent a decade optimizing the wrong three corners.

To find the right corner, we must set aside the question of "how the machine performs" and ask a more direct and honest question: who is this really serving, and who still cannot use it?

Why only funds can truly flow

Funds are the only thing where "the record on the ledger itself is the asset." Anything else you put on the chain is merely a pointer to something else.

Pushing down its characteristics, what is the use of blockchain? The answer almost reveals itself.

The first is access. Anyone, anywhere, can log into this shared computer and change its state. There are no business hours, and you do not need to ask a privileged entity (bank, broker, exchange) to help you update the ledger. This is immensely valuable for funds. Transferring value becomes as direct as editing a file.

The second is trust. Why did we initially entrust our money to those privileged entities? Because we believed that our money was safe there. Blockchain answers the same question with a different mechanism: not trusting a specific institution, but trusting the numbers. Here, "numbers" has two meanings, both mathematical and quantitative. As long as there are enough honest participants, each in their place under economic incentives, and then using mathematics to verify the entire system. Now, your money is as safe as the network itself, rather than being as safe as a specific entity.

But there is a third point, which almost no one mentions. Funds are the only thing where the ledger record itself is the asset. A dollar on the chain is just a number, and that number is that dollar, nothing more.

This is why finance can take root here, while almost all other attempts have failed. This kind of asset, which exists purely in the form of ledger records, is precisely what the ledger was designed for. The market has already confirmed this: stablecoins now have a market cap of $300 billion, settling about $33 trillion annually, and this growth is no longer driven by retail speculation.

What should go on-chain and what should not

The crypto industry has found its killer application, yet it has only served a very narrow layer of the market. For the institutions above, the risks are too high, while for ordinary people below, it is utterly meaningless. It only serves those who are "relatively well-off," with almost no one else.

Since funds are the natural payload, the next question is: which things related to money truly meet the threshold of "needing a computer owned by no one"? The failures at both ends neatly sandwich the answer in the middle.

At the bottom are those cheap things. You can say anything has value, and thus counts as "finance." But you are always weighing two things: how much the thing itself is worth, and how much it costs to run it on the most expensive computer in history.

Social media, personal data, tokens in AI contexts. These are things that Web2 has done very well, and essentially for free. Moving them on-chain only increases costs without reducing anything. The individual value is too low to support the machine's rationale. Most things that people insisted on putting on-chain in the last cycle failed this test, and the same will happen in the future.

At the top are those large funds that cannot come in. This is the real tragedy. To be frank, when looking at who is actively using cryptocurrencies, that crowd is astonishingly narrow; let’s call them "a relatively well-off group." They have enough money not to worry about survival every day, but not so much that they need to manage large institutional capital. Aside from a few crypto-native funds, that’s about it.

The capital that should have come (family offices, sovereign funds, large institutions, corporate treasuries) looks at this machine and turns away. Not because they do not understand, but because its operational model makes no sense to them.

Their list of objections is long, and honestly, most of them are valid: legal and regulatory uncertainty, custody risks, endless hacking attacks, smart contract risks, MEV, inability to securely self-custody at scale, counterparty risks at every step. Stacking all these up, and comparing them to the meager additional returns, the answer often turns out to be not worth it.

In the eyes of many, the crypto space is a high-volatility, zero-sum arena where everyone is fighting for the same batch of dollars. To be honest, many times they are not wrong.

Thus, the crypto industry is stuck in a narrow band: too strange for the capital above, and too meaningless for the applications below.

But take another look at that list of objections. Most of them are operational issues, and operational issues can be solved with blunt methods: auditing, insurance, regulated custodians, time. Strip those away, and the remaining two points cannot be compensated. Because they are not implementation flaws, but design attributes.

Public chains are permissionless, which precisely places them in a legal gray area. At the same time, public chains are transparent, which exposes you completely.

Legitimacy and privacy. This is the real triangle that the old triangle missed, and it only has two corners. Whether or not you can cross these two corners is the entirety of this game’s victory or defeat, and it ultimately boils down to these two flaws.

Flaw One: Legitimacy

For the past decade, the most honest answer to the question of "Is this thing legal?" has been "Sort of." For anyone managing real money, this is a non-starter. And now, for the first time, this answer is beginning to change.

The first flaw directly stems from the advantage it stands on. Anyone can do anything, which is precisely what gives this machine its value, and also what turns it into a regulatory minefield.

Permissionlessness is a double-edged sword: the characteristic that allows you to transfer funds without seeking anyone's consent also allows others to do things that have led the entire industry to be labeled as a "fraud paradise." For a serious allocator, no matter how good the underlying technology is, this is a dealbreaker.

This flaw cannot be fixed with better cryptography; it needs to be resolved through policy. In July 2025, the "GENIUS Act" officially became law, providing the first real federal framework for stablecoins as core financial payloads. Market structure legislation is also following closely behind. It has not yet become law, but the direction is clear, and the environment for entrepreneurs and allocators is already much friendlier than it was two years ago.

The past dilemma that intertwined governance, decentralization, and legal risks has receded to such an extent that doing a compliant on-chain business is now just an ordinary business decision.

Thus, the corner of legitimacy is gradually, more or less, closing itself off. The other flaw, however, is where the entire industry has truly gone wrong for the past decade.

Flaw Two: Transparency is a tax

On-chain transparency is not an advantage; it is a tax. Every position you hold is public, and the network charges you for "being seen" through MEV and front-running.

This is something everyone has become accustomed to, but it absolutely should not be taken for granted. On public chains, your entire financial life is being broadcast. Every holding, every transaction, every transfer can be seen in real-time by anyone with a block explorer. "This is transparency, this is an advantage," we have heard this for too long, so long that we no longer realize it is actually a leak.

And it is a quantifiable, ongoing tax. The moment your order enters the public mempool, anyone can see it, then reverse trade, front-run, ambush, or wait to liquidate you.

This is not an exaggeration. By mid-2025, the cumulative MEV extracted on Ethereum has exceeded approximately $1.8 billion. This value has been directly extracted from ordinary users' transactions, simply because these transactions were seen before settlement.

Look at who is already spending money to avoid it. Experienced trading desks and funds have long stopped broadcasting to the public mempool. They use private relays and order flow auctions specifically to hide their actions before execution.

Smart money has been buying privacy piece by piece because smart money knows that transparency is costing it money. The rest of everyone else has defaulted to paying this tax.

For retail investors, the situation is even worse: ordinary traders in a trading venue lose profits every time they open a position that the whole world can see.

Transparency is sold as a "fair playing field," but the actual effect is precisely the opposite.

Now, let’s shift our focus to the capital we truly want. No family office, sovereign fund, or large institution would put their balance sheet on a machine that competitors can read in real-time.

Of course, they won’t. Allowing the whole world to watch your treasury operations in real-time makes no sense. They need their own privacy space within this shared computer.

To be honest, everyone needs it. You would never accept a bank posting your bills online, so there is no reason to accept it here.

This is why payments and serious transactions cannot fully move on-chain to this day, and why equating the priority of privacy with "anonymous trading" is actually a bit ridiculous.

The greatest irony of the cryptographic world

Cryptographic communication has become the norm for thirty years. Cryptographic funds, however, have not. This should be somewhat embarrassing in a system built entirely on cryptography.

Taking a step back, this absurdity is hard to ignore. Blockchain is built on cryptographic primitives. Hashes, signatures, commitments, from start to finish, it is all cryptography.

Yet the one thing it has not done is encrypt the actual activities of users. We have built an entire cathedral of cryptography, yet left the front door, which is your financial privacy, wide open.

We solved this problem for communication decades ago. No one finds encrypted communication strange or suspicious; it is the default setting, and the world continues to operate just fine.

Bringing the same thing to funds, the necessary foundation has always been there, and these cryptographic primitives have been quietly improving over the past decade.

What is truly lacking is performance: how to achieve it fast enough and cheap enough to reach production level. This is both a mathematical problem and a hardware problem. Hardware has caught up, with specialized acceleration hardware bringing the cost of these proofs down to levels that can run under real throughput.

The problem has never been "Is this feasible?" but rather "Is it worth paying this cost for it?" Today, for the first time, the answer has become "Yes."

A challenge worth responding to

"But isn’t transparency key? Reserve proof, no hidden leverage, verifiable solvency." If privacy means hiding everything, this statement holds true. But privacy does not have to be that way.

The strongest argument against on-chain privacy deserves a solid response. Transparency is burdensome. It is how you verify whether a stablecoin truly has sufficient reserves backing it, how you confirm whether a protocol is solvent, and how you catch hidden leverage before it blows up.

It is also a tool for law enforcement to track stolen funds and for regulators to combat money laundering. Making everything opaque means you lose half the value of auditability, while inadvertently handing criminals a useful tool.

This is a serious challenge, but it quietly rests on a false dichotomy: as if you only have two options, "completely public" or "completely hidden."

Privacy and compliance have never been enemies

You can prove your solvency, that you have passed KYC, and that you have not exceeded limits without revealing any positions. Prove that fact instead of laying out the data.

This is the real argument, to put it plainly: the opposite of public is not hidden. Modern cryptography allows you to prove a statement is true without having to disclose the underlying data that makes it true.

You can prove that reserves exceed liabilities without disclosing reserve details. Prove that an address has passed KYC without exposing who it is. Prove that a position is within risk limits without having to reveal the position. Prove that a transaction is clean and not money laundering without having to disclose the sender's entire history.

This directly resolves the challenge. Auditors still get their assurances. Regulators still get their compliance checks. Law enforcement still has legitimate disclosure pathways. What disappears is the real-time broadcasting of everyone’s financial lives, along with every lurking predator, to the entire world indiscriminately. You retain every benefit that transparency should bring, while that tax is eliminated.

Privacy and compliance have never been oppositional. They appear to be oppositional only because the privacy tools we have had in the past have been too blunt, such as mixers that hide everything from everyone (including the police).

Compliance privacy with provable disclosure mechanisms is precisely the comprehensive solution that has been missing from this entire debate. It allows regulated entities and private individuals to use the exact same chain, with everyone only revealing what they must, and not a bit more.

A pure upgrade

Today's public chains are essentially like a Google spreadsheet: charging you rent while laying everything about you bare to strangers. The version that can keep your secrets is a pure upgrade, and it is precisely what will finally bring the next trillion dollars on-chain.

Let’s honestly face what most crypto products currently offer. Strip away the consensus mechanism, and a public chain is just a shared Google spreadsheet recording everyone’s transactions, only slower, more expensive, and readable by every competitor and predator on the planet.

Compared to a real Google spreadsheet, the only real added value is decentralized consensus: ensuring that no one can secretly change a row. This guarantee is real and valuable. But today, it is the only value increment.

Every exchange and every DeFi protocol built on mainstream public chains ultimately rents out this feature.

With provable compliance privacy, it is no longer a worse electronic spreadsheet. It becomes something that has no counterpart in the old world: a shared machine that can confirm transactions as true without disclosing transaction content.

We have long accepted this model elsewhere: an encrypted email can prove it was delivered without having to broadcast its content to the entire street. Funds have no reason to be the only exception.

In almost every dimension that serious capital cares about, "default privacy + provable compliance" is a pure upgrade to the status quo. The same consensus, the same settlement, just without that leak.

The common rebuttal here is that the current crypto crowd does not seem to want these; they are trading here, and the current products clearly suit their tastes.

Indeed, this is the key. Early adopters will only ever be those who the current version can serve. They are not the missing market. The missing market (those institutions, those treasuries, those ordinary people who would never publicly disclose their bank statements) is sitting on the other side of these two flaws.

Close these two flaws, and you get the bridge that can ultimately cross the chasm, bringing a financial system worth trillions onto the track it has quietly been designed for from the very beginning.

This most powerful cryptographic system in history will finally learn how to keep a secret. This will change everything.