From an economic point of view, Jevon's paradox It is possibly the basis of the scaling path we have begun to travel for bitcoin. Taking things off-chain is trying to make the use of the scarce resource that is blockchain space much more efficient to accommodate a materially larger user base than the blockchain can facilitate on its own. Jevon's paradox states that in the presence of elastic demand for something, when the efficiency of using that thing increases, that is, the cost per use decreases, the aggregate demand for that thing among the participants will increase.
The typical example given is the fuel efficiency of automobiles. If cars suddenly become twice as fuel efficient, people will travel more because the cost of travel will have been cut in half. As people travel more frequently because the cost to the individual has fallen, the net increase in fuel demand may exceed the original aggregate demand for fuel before the efficiency gain was achieved. This is the point where the paradox occurs: aggregate demand exceeds what it was before efficiency in using that thing was achieved.
This is all the economic thinking behind why second layers are a viable solution. One of the big arguments of the big blockers during the Block Size Wars was that going off-chain will essentially steal money from miners and undermine the game-theoretic stability of miners surviving exclusively on transaction fees into the distant future. . The factor they completely ignored during those debates is the Jevon Paradox, and many of them still to this day completely ignore this dynamic.
The disputes
The counterargument, at least the valid one, is that the rebound in demand after efficiency gains does not always exceed the aggregate demand observed before that efficiency gain. It still bounces in many cases almost to the point it was at, but it doesn't surpass it. This comes down to the inputs that ultimately set the cost of producing something. In the case of the fuel example, the reality is that the cost of fuel is not the only factor that influences people's ability to travel with their own car. The cost of producing that car, i.e. labor, materials, energy for production, etc. and the final cost of the car itself also influence this. These factors generally slow the rebound in demand, preventing it from exceeding the levels it had before efficiency increased.
However, here's the thing about bitcoin: the cost of producing a block is the only factor of “input costs” in the production of block space. He real The interesting thing is that no matter what happens to the cost of inputs, the available amount of block space stays exactly the same on average. This is the whole novelty and value of difficulty adjustment in bitcoin, no matter what the price and net hashrate do, the network revolves around this Schelling point with the same average amount of available block space. The only way that will change is a consensus change to alter the block size, or block interval, or other core variables that will have an impact on the amount of space available.
Therefore, the only real factor to consider when applying Jevon's paradox to bitcoin is the efficiency with which users can make use of that existing block space. A person who owns a UTXO on his own and transacts directly on the chain can be considered as a reference point. Lightning, which allows two people to share a single UTXO and perform numerous transactions off-chain before performing them on-chain, is the first major efficiency gain. After Lightning, something like Ark or a channel factory would be the next level of efficiency gain. In all these cases, there are no extraneous factors to consider. If you have bitcoin and the ability to use it becomes cheaper and cheaper, you are more likely to put that bitcoin to real use. There are no additional barriers to bitcoin other than owning bitcoin. You don't HAVE to buy a very expensive hardware device to use it; It might be good security practice to do so if you have a large sum of money, but it is not necessary.
In my opinion, the ordinals and BRC-20 tokens prove this point. Pushing JPEG files into the blockchain, which are quite large pieces of data relative to the block size limit, is a highly inefficient use of block space. BRC-20 tokens, which are simply small JSON blobs, are relatively efficient relative to JPEG files. Which of these things really drove demand for block space and increased rates lately? The BRC-20 tokens, not the jpegs.
It's going to happen anyway
In my opinion, the cold hard reality is that the use of block space will become more efficient, and we will see Jevon's paradox play out regarding the market for that block space, regardless of what we do. If directly using block space becomes prohibitively expensive for transacting users, they will find ways to abstract it away. They don't need pacts, or forks in general, or anything we're building in layer two to achieve this.
Custodians.
All they need are custodians. Using blockspace more efficiently comes down to one thing: people share their UTXOs with each other. The trust model of how they do it, whether they can unilaterally claim your money without permission, who they have to interact with to withdraw your money, all of these things are completely and utterly irrelevant to Jevon's paradox.
If block space becomes too expensive for people, they will stop using it. Demand will decline, if not in aggregate, at least for a class of users. Unless they want to stop using bitcoin entirely, they will look for more efficient ways to use bitcoin (which inherently requires the use of block space, no matter how abstract that use may be). The only truly scalable way to do this long-term right now is through custodians.
That means that without actually addressing the problem of “what does bitcoin need to scale in a self-custodial manner”, we are essentially implicitly admitting that the economic incentives of how this system works inherently force people to turn to platforms and custody mechanisms to make use of your bitcoin. To deny that is to deny the realities that make bitcoin work: economics and incentives.
There has been a lot of argument recently that “spam filtering” is simply another way in which Jevon's paradox occurs. It is not, and it has no relation to Jevon's paradox. Preventing one particular use case from competing with another is not increasing the efficiency of the other use case, it is simply attempting to distort and manipulate the market in which both compete for the same resource. That argument fails to understand what Jevon's paradox really is. You don't care about one use case versus another, or which uses are “legitimate”; It is completely independent of the specific use cases of a resource. He just talks to him any use case of a resource that becomes more efficient, and in the absence of unaccounted input costs, what will be the results of that efficiency gain in the aggregate demand for the use of that resource for that specific use case.
If we are right, this will continue no matter what we do. The only influence we have on all this is what the confidence model is for any efficiency gains in the use of block space; we have no control over whether those efficiency gains will occur.
