Jevons Paradox Slaps Crypto Investors With a Reality Check

When efficiency gains backfire—why your blockchain scaling play might be fueling demand instead of suppressing it.

Subheader: The 19th-century economic theory that explains Ethereum’s gas fee rollercoaster

Jevons Paradox cuts through crypto’s scalability hype: cheaper transactions attract more users until the network clogs again. Layer-2 solutions? They’re just kicking the can down the road while VCs collect fees.

Subheader: How Bitcoin maximalists weaponized this against altcoins

Proof-of-work defenders smirk as ’energy-efficient’ chains discover their own version of the paradox—decentralization tradeoffs come home to roost. Meanwhile, Wall Street still can’t tell a memecoin from a security.

Cynical closer: The only true scalability solution? When the SEC finally burns enough retail investors to thin the herd.

That looks like a highly investable chart and the Jevons paradox-related numbers are even better: Since 1970, the real cost of air travel has fallen by 1.7% per year, on average, while the underlying rate of air traffic has grown 4.4% per year.

Anyone who had those numbers in advance would likely have started an airline or at least invested in airline stocks — but they’d have come to regret it: Warren Buffett calls airlines the “worst sort of business” and airline stocks a “deathtrap for investors.”

Similarly, lots of people who correctly predicted the explosion of internet traffic in the 1990s — or underpredicted it even — lost money buying stock in the companies that hosted that traffic. 

Internet traffic grew 127% per year between 1997 and 2003 — at the end of which period investors in the likes of Level 3 Communications, Global Crossing and WorldCom were more or less wiped out.

Now consider crypto.

Much of crypto investing is predicated on the assumption that more efficient, lower-cost blockspace will lead to an exponential increase in demand for that blockspace. 

The results have been mixed so far.

Cheaper blockspace has led to an explosion of activity on blockchains like Solana and Ethereum layer-2s like Base.

But that’s mostly been thanks to memecoin trading, which is presumably not a decades-long growth story — it’s hard to imagine that even cheaper blockspace will lead to even more memecoin trading.

(Let’s hope not, at least.) 

For what the elasticity of blockspace demand looks like without memecoins, we might only have to look at Ethereum.

Early hopes that moving execution off-chain would lead to Ethereum collecting more fees in settlement and data availability than it lost in execution have been disappointed.

On Ethereum itself, the cost of transacting has fallen over 90% from its 2021 peak — but, per data from Blockworks Research, the number of transactions is close to unchanged. 

Worse still, the combined fees paid on all Ethereum-aligned layer-2 blockchains does not offset the loss of fees on layer-1 Ethereum — so the ecosystem as a whole does not appear to be an instance of the Jevons paradox.

That does not mean that it’s headed for failure. 

The airline and telecommunication industries have been extremely useful to the world, providing positive externalities for society far in excess of the negative internalities that shareholders have suffered.

But that is a lesson to be learned: You can be right about the Jevons paradox and still lose money investing in it.

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