Jevons Paradox: What It Really Means for Bitcoin

From an economic perspective, Jevon’s Paradox is arguably the foundation of the expanding road we have begun to walk down for Bitcoin. Pushing off-chain is an attempt to make blockspaces use scarce resources much more efficiently to accommodate a substantially larger user base than the blockspaces can facilitate on their own. Jevon’s Paradox states that when the demand for something is elastic, when the efficiency of use of that thing increases, i.e. the cost per use decreases, the total demand for that thing among participants will increase.

A representative example is the fuel efficiency of a car. If cars were suddenly twice as efficient at using gasoline, the cost of travel would be halved and people would travel more. As costs to individuals fall and people travel more frequently, the net increase in fuel demand may exceed the original aggregate demand for fuel before efficiency gains are realized. This is where the paradox arises, where aggregate demand exceeds the level before realized efficiency in the use of that thing.

This is the whole economic thinking behind why a second layer is a viable solution. One of the big blockers’ biggest arguments during the block size wars was that off-chain was essentially stealing money from miners and undermining the game-theoretic stability of miners surviving purely on transaction fees in the distant future. A factor they completely ignored during their debate was Jevon’s Paradox, and to this day many people still completely ignore this dynamic.

arguement

At least a valid counterargument is that the rebound in demand after efficiency improvements does not always exceed total demand before efficiency improvements. It still rebounds in many cases almost to its previous point, but not beyond it. This ultimately comes down to inputs that set the cost of producing something. For the fuel example, the reality is that fuel cost is not the only factor in people’s ability to travel with their own cars. The costs of labor, materials, production energy, etc. required to produce a car, as well as the ultimate cost of the car itself, also affect this. These factors typically dampen the demand rebound, preventing it from exceeding levels seen before efficiency increases.

But here’s the thing about Bitcoin: The cost of creating a block is the only component of the “input cost” of creating block space. that much really The important point is that no matter what happens to the input costs, the amount of block space available is On average it stays exactly the same.. No matter what the price and net hash rate are, the network will revolve around a Schelling point with the same average amount of block space. The only way it changes is a consensus change that changes the block size, block spacing, or other key variables that affect the amount of space available.

Therefore, the only real factor to consider when applying Jevon’s Paradox to Bitcoin is how efficiently users can use the existing block space. It can be seen as a basis for a person to own UTXO and trade it directly on-chain. Lightning greatly improves efficiency by allowing two people to share a single UTXO and perform numerous transactions off-chain before settling on-chain. After Lightning, something like Ark or Channel Factory will be the next level of efficiency gains. In all these cases, there are no external factors to consider. If you hold Bitcoin and the ability to spend that Bitcoin becomes cheaper and cheaper, you are more likely to actually use that Bitcoin. There are no additional barriers to Bitcoin other than holding it. You don’t have to buy an incredibly expensive hardware device to use it. If you have a lot of money, it may be the best security option, but it doesn’t have to be.

In my opinion, Ordinal and BRC-20 tokens prove this point. Putting JPEGs, which are quite large pieces of data relative to the block size limit, onto the blockchain is a very inefficient use of block space. BRC-20 tokens, which are simply small chunks of JSON, are relatively efficient compared to jpegs. Which of the following has recently caused demand for blockspace to increase fees? This is a BRC-20 token, not a JPEG.

It’s going to happen anyway

I think the harsh reality is that the use of block space will become more efficient and no matter what we do, we will see Jevon’s paradox emerge for that block space market. If using Blockspace directly would make it prohibitively expensive for users to transact, we would find a way to abstract this away. They don’t need a commitment, a regular fork, or anything else you’re building on layer 2 to do so.

concierge.

All they need is a caretaker. Using block space more efficiently comes down to one thing: This means that people share UTXOs with each other. The trust model for how they do so, whether they can recover money unilaterally without permission, who they have to interact with to withdraw money, all these have absolutely nothing to do with how Jevon’s paradox unfolds.

If Blockspace becomes too expensive for people, they will stop using it. There will be a decline in demand for specific user classes, though not overall demand. Unless they stop using Bitcoin entirely, they will look for more efficient ways to use Bitcoin (which inherently require the use of blockspace, no matter how abstracted that use may be). Currently, the only truly scalable way to do this over the long term is through a custodian.

That is, without actually solving the question of “What does it take for Bitcoin to scale in a self-governed way?” we are essentially assuming that the economic incentives for how this system works are to drive people into a governance platform and a governance platform for using Bitcoin. This essentially means implicitly acknowledging that it is enforced by a mechanism. To deny this is to deny the reality of what makes Bitcoin work: the economics and incentives.

Recently, many claims have been made that “spam filtering” is just another way that Jevon’s paradox occurs. It’s not, and has absolutely nothing to do with Jevon’s Paradox. Preventing one use case from competing with another does not make the other use case more efficient, but simply seeks to distort and manipulate the market for both use cases competing for the same resources. That argument fails to understand what Jevon’s paradox actually is. It doesn’t matter whether one use case is different from another or which use is “legal.” It is completely agnostic about the specific use case of the resource. it simply says any If there are use cases for which a resource becomes more efficient, and the input costs are not accounted for, how will the results of that efficiency increase affect the aggregate demand for using that resource in that particular use case?

If we’re right, this will work no matter what we do. The only influence we can have on this is the trust model for efficiency gains in block space usage, and we have no control over whether these efficiency gains will occur or not.