From an economic point of view, Jevon’s paradox is arguably the foundation of the scaling path we have begun to travel for Bitcoin. Pushing things off-chain is attempting to use the scarce resource that block space is much more efficient at accommodating a materially larger user base than 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 overall demand for that thing thing among the participants will increase.
The typical example given is that of the energy efficiency of cars. If cars suddenly became twice as efficient in terms of gas mileage, people would travel more since the cost of travel would have been cut in half. As people travel more often because the cost to the individual has decreased, the net increase in fuel demand may exceed the initial aggregate demand for fuel before the efficiency gain is realized. This is where the paradox occurs, with overall demand exceeding what it was before effective use of this thing.
It’s all economic thinking that explains why second layers are a viable solution. One of the main arguments of the big blockers during the Block Size Wars was that going off-chain would essentially steal money from miners and undermine the theoretical stability of the game of miners surviving solely on transaction fees in a distant future. The factor they completely ignored in these debates was the Jevon Paradox, and many of them are still completely unaware of this dynamic to this day.
The counterargument, at least the more valid one, is that the demand that rebounds after efficiency improvements does not always exceed the overall demand observed before this efficiency gain. In many cases it still bounces back almost to the point it was at, but doesn’t go past it. It comes down to the inputs that ultimately set a cost to produce something. In the case of the fuel example, the reality is that the cost of fuel is not the only factor that determines people’s ability to travel with their own car. The cost of producing that car, i.e. labor, materials, energy required for production, etc., as well as the final cost of the car itself also come into play of account. These factors generally dampen the rebound in demand, preventing it from rising above the levels it was at before the efficiency increase.
Here’s the problem with Bitcoin though: the cost of producing a block is the only “entry cost” factor in producing block space. THE real The most interesting thing is that no matter what happens to this entry cost, the amount of block space available remains exactly the same on average. That’s the whole novelty and value of difficulty adjustment in Bitcoin, no matter what the price and net hashrate do, the network revolves around that Schelling point of the same average amount of available block space . The only way to change is a consensus change to change the block size, or block interval, or other fundamental variables that will impact the amount of space available.
Therefore, the only real factor to consider when applying the Jevon Paradox to Bitcoin is how efficiently users can utilize existing block space. Someone who owns a UTXO themselves and directly transacts on-chain can be considered a benchmark. Lightning, allowing two people to share a single UTXO and make many transactions off-chain before settling 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 of these cases, there are no extraneous factors to consider. If you own Bitcoin and the ability to use it becomes cheaper and cheaper, you are more likely to actually use that Bitcoin. There are no additional barriers to Bitcoin other than having Bitcoin. You don’t have to buy a very expensive hardware device to use it, it can be a good security practice if you have a large amount of money, but it’s not necessary.
In my opinion, BRC-20 ordinals and tokens kind of prove this point. Inserting JPEG files into the blockchain, which are quite large data compared to the block size limit, is a very inefficient use of block space. BRC-20 tokens, which are simply tiny JSON blobs, are relatively efficient compared to jpegs. Which of these things has actually driven demand for blockspace, driving up fees lately? BRC-20 tokens, not jpegs.
It’s going to happen anyway
The harsh reality, in my opinion, is that the use of block space will become more efficient, and we will see the Jevon Paradox manifest with respect to the market for this block space, regardless of anything we let’s do. If using blockspace directly becomes prohibitive for users transacting, they will find ways to eliminate it. They don’t need covenants, or forks in general, or anything that we build on layer two to do this.
All they need are guards. Using block space more efficiently comes down to one thing: people sharing their UTXOs with each other. The trust model of how they do this, whether they can get their money back unilaterally without permission, who they have to interact with to get their money out, all of these things have absolutely nothing to do with the Jevon Paradox.
If blockspace becomes too expensive for people, they will stop using it. Demand will decrease, if not overall, at least for a category of users. Unless they want to stop using Bitcoin altogether, they will look for more efficient ways to use Bitcoin (which inherently requires the use of block space, no matter how abstract that use is). Currently, the only truly scalable way to achieve this in the long term is through custodians.
This means that without actually addressing the problem of “what does Bitcoin need to evolve in a self-conservative manner”, we are essentially implicitly admitting that the economic incentives of running this system inherently force people to resort to platforms and custody mechanisms to use their Bitcoin. To deny this is to deny the realities of what makes Bitcoin work: economics and incentives.
Much has been argued recently that “spam filtering” is just another way of causing Jevon’s paradox. This is not the case, and it has nothing to do with Jevon’s paradox. Preventing a particular use case from competing with another does not increase the effectiveness of the other use case, it simply amounts to trying to distort and manipulate both competitors’ market for the same resource. This argument fails to understand what Jevon’s paradox actually is. It doesn’t care about one use case versus another, nor does it care about “legitimate” uses; it is completely independent of the specific use cases of a resource. It simply speaks to any of them case of use of a resource becoming more efficient, and in the absence of unaccounted input costs, what will be the results of this gain in efficiency on the overall demand for the use of this resource by this specific use case.
If we are right, it will run its course no matter what we do. The only influence we have on all of this is the trust model of any efficiency gains in block space usage, we have no control over whether or not these efficiencies are realized.