From an economic point of view, Jevon's Paradox is arguably the foundation of the scaling path we are on with Bitcoin. Pushing things off-chain is trying to take advantage of scarce resources whose block space is 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 use of that thing increases, i.e., the cost of use decreases, the total demand for that thing among participants will increase.
A typical example given is the fuel efficiency of cars. If cars suddenly became more efficient at using gasoline, people would travel more as the cost of travel would be cut in half. As people travel more often due to lower per capita costs, the net increase in fuel demand can exceed the original total fuel demand before gains in efficiency are achieved. This is where the paradox occurs, where total demand exceeds what it was before efficiency in using that thing was achieved.
This is the entire economic thinking behind why second tiers are a viable solution. One of the huge claims made by major blockers during the block size wars was that going off-chain would essentially steal money from miners and undermine the game-theoretical stability of miners who survive solely on transaction fees far into the future. The factor they completely ignored during those debates was Jevon's paradox, and many still to this day completely ignore this dynamic.
Disagreements
The counterargument, at least the correct one, is that the recovery in demand after efficiency improvements does not always exceed the aggregate demand seen before the efficiency increase. In many cases it still recovers to about what it was, but not beyond it. This is due to the inputs that ultimately determine 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 in people's ability to travel in their own cars. The cost of producing that car, i.e. the labor, materials, energy required for production, etc. and the final cost of the car itself factor into this as well. These factors generally dampen the recovery in demand, preventing it from exceeding the levels it was at before increased efficiency.
Here's the thing about Bitcoin: the cost of producing a block is the only “input cost” factor in producing block space. the TRUE What's important is that no matter what happens to this input cost, the amount of block space is available It stays exactly the same on average. This is the whole novelty and difficulty adjustment value of Bitcoin, no matter what the price and pure hash rate do, the network circles around this Schelling point with the same average amount of available block space. The only way it will change is by an agreed-upon change to change the block size, block interval, or other underlying 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 how efficiently users are utilizing existing block space. One person who owns UTXO alone and transacts directly on the chain can be considered the baseline. Lightning, which allows two people to share a single UTXO and conduct multiple off-chain transactions before they are settled on-chain, is the first big efficiency gain. After Lightning, something like Ark or a channel factory would be the next level of efficiency increase. In all these cases, there are no external factors to take into account. If you have Bitcoin, and the ability to use Bitcoin becomes cheaper and cheaper, you will likely put that Bitcoin to actual use. There are no additional barriers to Bitcoin other than owning Bitcoin. You don't have to buy an expensive device to use it, it may be a security best practice to do so if you have a large amount of money, but it's not necessary.
The ordinal numbers and BRC-20 tokens prove this point in my opinion. Pushing jpeg files onto the blockchain, which are very large pieces of data compared to the block size limit, is a very inefficient use of block space. BRC-20 codes, which are just very small JSON blobs, are relatively efficient compared to jpegs. Which of these things has actually increased demand for block space causing fees to rise recently? BRC-20 codes, not jpeg files.
It will happen anyway
The hard truth in my opinion is that the use of block space will become more efficient, and we will see Jevon's paradox play out in terms of the market for that block space, no matter what we do. If using block space directly becomes too expensive for users to perform transactions, they will find ways to strip that away. They don't need covenants, forks in general, or anything we build on layer 2 to do this.
Guardians.
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 unilaterally get their money back without permission, and who they have to interact with to withdraw their money, all of these things have absolutely nothing to do with Jevon's Paradox.
If block space becomes too expensive for people, they will stop using it. Demand will decline, if not overall, then for a category of users. Unless they want to stop using Bitcoin completely, 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 really scalable way to do this long term at the moment is through custodians.
This means that without actually addressing the problem of “what does Bitcoin need to scale in a self-custodial way” we are essentially implicitly admitting that the economic incentives of how this system works inherently force people to use platforms and custodial mechanisms to profit from their Bitcoin. To deny this is to deny the facts that make Bitcoin successful: economics and incentives.
It has been often said recently that “spam filtering” is simply another way for Jevon's paradox to occur. It's not, and it has nothing to do with Jevon's paradox at all. Preventing one use case from competing with another does not make the other use case more efficient, it is simply trying to distort and manipulate the market as they both compete 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, or what uses are “legitimate”; He doesn't fully know the specific use cases for the resource. He simply speaks to any A use case for a resource that becomes more efficient, and in the absence of unaccounted input costs, what are the consequences of those efficiency gains on the total demand for use of that resource by that specific use case.
If we are right, this will take its course no matter what we do. The only influence we have on any of this is the trust model for any efficiency gains in using block space, and we have no control over whether those efficiency gains will happen.
