Wed. Jun 12th, 2024
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From an economic perspective, Jevon’s Paradox is arguably the fundamental principle behind the scaling path we have embarked upon for Bitcoin. Shifting tasks off-chain aims to optimize the utilization of blockspace, which is a limited resource, in order to support a significantly more significant number of users than the blockchain can handle independently. 

Understanding the Concept of Jevon’s Paradox With Examples

The concept of Jevon’s Paradox suggests that when the efficiency of using a particular resource improves, and the cost per use decreases, the overall demand for that resource among participants tends to increase.

An often-cited example is the gas mileage of vehicles. If cars were to experience a significant increase in fuel efficiency, it would undoubtedly lead to an increase in travel as the reduced cost of transportation would make it more accessible and appealing to people. As more and more individuals embark on frequent journeys due to the reduced price, the overall demand for fuel can surpass the initial demand for fuel prior to the efficiency improvement. At this juncture, a paradox arises when the overall demand exceeds its previous level due to the achievement of enhanced efficiency in utilizing that particular entity.

This represents the complete economic rationale behind why second layers are a feasible resolution. One of the primary debates among big blockers during the Block Size Wars was that moving off-chain would deprive miners of income and jeopardize the long-term viability of miners relying solely on transaction fees. One crucial aspect that was overlooked entirely during those debates is Jevon’s Paradox, and astonishingly, this dynamic continues to be disregarded by many even now.

The Disagreements and Conflicts

An opposing viewpoint, particularly a valid one, suggests that the resurgence in demand following enhancements in efficiency does not necessarily surpass the overall demand observed prior to those efficiency gains. It bounces back in numerous instances almost to the same level it was at but doesn’t exceed it. It all boils down to the factors that ultimately determine the expenses of creating something.

When it comes to the fuel example, it’s essential to recognize that the price of fuel isn’t the sole determinant of individuals’ ability to travel using their vehicle. The expenses associated with manufacturing the car, such as the workforce, resources, energy consumption, and the final price of the vehicle, all contribute to this equation. These factors typically hinder the recovery in demand, preventing it from surpassing the levels it was at prior to efficiency enhancements.

The Basics of the Bitcoin Concept

Let us explain the concept of Bitcoin to you: the expense of creating a block is the sole determinant of “input costs” in generating blockspace. What’s interesting is that regardless of any fluctuations in the input cost, the average amount of blockspace available remains constant.

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This represents the complete innovation and worth of the difficulty adjustment in Bitcoin. Regardless of fluctuations in price and net hash rate, the network revolves around a central point where the average amount of block space remains constant.

The only way that will be modified is through a consensus adjustment to alter the block size, block interval, or other fundamental variables that will affect the amount of space accessible.

Hence, the sole crucial aspect to ponder upon while applying Jevon’s Paradox to Bitcoin is the level of efficiency with which users can utilize the available blockspace. A single individual possessing a UTXO exclusively and engaging in direct on-chain transactions can be considered a fundamental starting point.

Lightning is a groundbreaking innovation that enables two individuals to collaborate on a single UTXO and carry out a multitude of off-chain transactions before finalizing them on-chain. This represents a significant leap forward in terms of efficiency. Following a lightning strike, an establishment similar to Ark or a production facility would mean the subsequent step towards achieving optimal efficiency.

In all of these instances, there are no additional factors to take into account. If you possess Bitcoin and the cost of utilizing it continues to decrease, you are more inclined to use your Bitcoin for practical purposes. There are no additional obstacles to Bitcoin apart from possessing the cryptocurrency. There is no obligation to purchase an excessively costly hardware device in order to utilize it. While it may be advisable to follow best security practices if you possess a significant amount of money, it is not mandatory.

Ordinals and BRC-20 tokens really demonstrate this point. Inserting JPEGs into the blockchain, which are large chunks of data compared to the blocksize limit, is a highly inefficient utilization of blockspace. BRC-20 tokens, which are small JSON blobs, are efficient compared to jpegs. What factor has significantly contributed to the increased demand for blockspace, resulting in a surge in fees recently? The BRC-20 tokens, not the JPEGs.

Without a Doubt, That Is Going to Take Place

The utilization of blockspace will inevitably become more streamlined, leading to the manifestation of Jevon’s Paradox in the blockspace market, irrespective of any actions we take. If the cost of using blockspace directly becomes too high for users conducting transactions, they will discover methods to simplify that process. They have no requirement for covenants, forks in general, or any of the solutions we are developing on layer twos in order to achieve this.

All they require are custodians. Maximizing blockspace utilization boils down to one crucial factor: individuals collaborating and exchanging their UTXOs. The trust model of how this is done, whether the money can be reclaimed unilaterally without permission, and the individuals involved in the withdrawal process are all utterly irrelevant to the manifestation of Jevon’s paradox.

Finding Rational Ways to Use Bitcoin

If the cost of blockspace becomes too high for individuals, they may choose to discontinue its usage. There will be a decrease in demand, whether it’s overall or specifically for a specific group of users.

If individuals wish to continue utilizing Bitcoin, they will inevitably explore more streamlined methods of using it, regardless of how abstracted these methods may be, as they inherently rely on blockspace. Currently, the most effective and sustainable approach to achieve this in the future is by utilizing custodians.

By avoiding the core issue of how Bitcoin can achieve self-custodial scalability, we are essentially acknowledging that the current economic incentives push individuals towards relying on custodial platforms and mechanisms to utilize their Bitcoin. To refute that is to disregard the fundamental principles that drive the functionality of Bitcoin: the principles of economics and incentives.

There has been a considerable amount of debate surrounding the notion that “spam filtering” is just another manifestation of Jevon’s Paradox. This is entirely unrelated to Jevon’s Paradox in any way. Preventing one use case from directly competing with another does not enhance the effectiveness of the latter. Instead, it merely aims to manipulate and disrupt the market where both use cases vie for the same resource.

The argument in question demonstrates a lack of understanding regarding the true nature of Jevon’s Paradox. It doesn’t discriminate between different use cases or determine which uses are “valid”; it remains impartial towards specific applications of a resource. This concept addresses the various scenarios where a resource becomes more effective. It considers the impact of this efficiency improvement on the overall demand for that resource, specifically in cases where input costs are accounted for.

If our assumptions are correct, this will unfold naturally regardless of our actions. We can only impact the trust model of potential improvements in blockspace utilization; we lack the authority to determine if those enhancements will indeed materialize. 

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Jake Coleman

By Jake Coleman

Jake Coleman, a prominent author and cryptocurrency enthusiast, brings his deep understanding of the blockchain world to Crypto Education Hub. With his insightful articles, Jake empowers readers to navigate the complex world of cryptocurrencies with confidence.

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