Gentrification And Bitcoin Blockspace: Economic Parallels With Real Estate

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In Sep­tem­ber 1943, a char­ac­ter whose name nowa­days cov­ers the news­casts of half the world was put in charge of what would become a bas­tion against the offen­sive tac­tics from the rest of the Euro­pean coun­tries. The Sec­ond World War count­ed tens of mil­lions of dead at that time in Europe and oth­er war sce­nar­ios around the world, lit­tle was known about the Holo­caust but it was prob­a­bly at its peak, after the vic­to­ry at Stal­in­grad com­mu­nism in Rus­sia threat­ened to respond to Hitler and expand its doc­trine through­out East­ern Europe. At that time, in Madrid, the cap­i­tal of Spain, a lit­tle known per­son, perched on a pul­pit, pro­nounced the fol­low­ing words: “Gen­tle­men, we need a big­ger soc­cer field and we are going to get it”. It was San­ti­a­go Bern­abéu, who as soon as he was elect­ed pres­i­dent of Real Madrid soc­cer club, harangued the troops with that phrase that sealed the way for his name to go from refer­ring to a per­son to iden­ti­fy­ing a place of worship. 

By the mid­dle of the 20th cen­tu­ry, soc­cer sta­di­ums were already a com­mon fea­ture of the sky­line of many cities. The peri­od between 1890 and 1910 marked the con­struc­tion of those first sta­di­ums, 50 of them were cre­at­ed in Eng­land in those years, all very close to the cen­ter, main­ly because there was no means of trans­port that would allow a large num­ber of fans to trav­el to the out­skirts eas­i­ly for match­es. And by “large num­ber of fans” I mean a huge crowd, there is evi­dence of a match at Crys­tal Palace Sta­di­um in 1913 which was attend­ed by 120,000 peo­ple, almost 40,000 more peo­ple than enter a major sta­di­um today. Thus, there was a demand to watch soc­cer and this was some­thing that San­ti­a­go Bern­abéu did not fail to notice when he became pres­i­dent of the club. His plan to cre­ate a large sta­di­um was not out of mere mega­lo­ma­nia, but for busi­ness rea­sons: a larg­er sta­di­um would accom­mo­date more peo­ple, sell more tick­ets and with that mon­ey he could sign bet­ter play­ers, the bet­ter play­ers would bring suc­cess in the form of cups and tro­phies, which would attract more peo­ple to the sta­di­um, thus increas­ing the mon­ey raised. He sought, as we can see, to cre­ate a vir­tu­ous circle. 

To start that wheel, he need­ed to find a site to build his new sta­di­um. The con­sid­er­a­tions to take into account when look­ing for a site are size and loca­tion. When the deci­sion was made to look for a new sta­di­um site for Real Madrid, the means of trans­porta­tion had evolved a lot since the begin­ning of the 20th cen­tu­ry, which made it pos­si­ble to choose a loca­tion that, although cen­tral, was not in the his­toric cen­ter of the city, which is usu­al­ly expen­sive and dif­fi­cult to acquire. The size of the sta­di­ums is anoth­er prob­lem, since a medi­um-sized sta­di­um already occu­pies a huge area, some 40,000 square meters, slight­ly less than the Palace of Ver­sailles in Paris, an area that could house a large num­ber of small­er build­ings or struc­tures and which, due to its main func­tion, it is only use­ful for about 2 hours a week, less if we take into account the peri­ods with­out soc­cer. Thus, San­ti­a­go Bern­abeu and his team set out in search of a huge plot of land in an acces­si­ble area of Madrid for which they expect­ed to get a low return com­pared to what could be received from com­mer­cial and res­i­den­tial rental income. With these con­straints, they final­ly set­tled on an area slight­ly south of the Chamartín neigh­bor­hood, which at the time was a large plot of land sur­round­ed by incred­i­ble esplanades (board­walk or plaza) where foot­ball fans could park their car, bus, don­key or bicy­cle, depend­ing on the individual. 

In the USA, for exam­ple, many sta­di­ums have been built in for­mer indus­tri­al or port areas where fac­to­ries, influ­enced to a greater or less­er extent by the posi­tion of the dol­lar as a reserve cur­ren­cy, became less com­pet­i­tive and even­tu­al­ly emp­tied, leav­ing a logis­ti­cal­ly well-sup­plied large plot of land at a good price, ide­al for build­ing sta­di­ums for the exotic

sports prac­ticed there. In Europe, many sta­di­ums were built next to what used to be the city cen­ter, and as it grew, it became com­mon for many of them to end up in the new cen­ter, thus great­ly increas­ing their latent val­ue and the incen­tive to sell that space and build a new, mod­ern sta­di­um on the out­skirts. In the same city of Madrid, this hap­pened recent­ly with a his­toric rival of Real Madrid, the club Atléti­co de Madrid, which in 2019 sold the land of its old sta­di­um and received about 180 mil­lion euros. 

Bern­abéu paid for the land to build Real Madrid’s new sta­di­um for about 18,000 euros in 1943. Today, the aver­age price per square meter of apart­ments for sale in the cen­ter of Madrid is 5,292 euros. Exact­ly 80 years ago, it was paid at 40 cents. This cal­cu­la­tion is inter­est­ing because accord­ing to an extrap­o­la­tion of the con­sumer price index of the Euro­zone, the aver­age infla­tion fig­ure for the peri­od 1943–2023 was 6.8%, how­ev­er here we can see that the aver­age annu­al infla­tion of the price per square meter of real estate has been 8.84%. A devi­a­tion of 2 per­cent­age points may not seem much but, to demon­strate that it is, let’s see what your final cap­i­tal would be if you had invest­ed 1000€ in that same peri­od and obtained those types of returns. In the first case, with a yield of 6.8% you would have 38,200 euros; at 8.84%, it would be more than dou­ble, 80,600 euros. When peo­ple tell you that 2% infla­tion is not that bad, remem­ber this exercise. 

Today, the mon­ey that Real Madrid would get for the sale of its land would be in the hun­dreds of mil­lions, at that price per square meter we are talk­ing specif­i­cal­ly 228 mil­lion, bet­ter than invest­ing in bit­coin for the last 10 years. What has influ­enced this incred­i­ble rise in the price of land? As cities grow, they get dan­ger­ous­ly close to their nat­ur­al lim­its. In Madrid, almost noth­ing remains of those vast forests that con­vinced Philip II to move the cap­i­tal to this ter­ri­to­ry. As space is deplet­ed, the cost of using it ris­es. To solve this prob­lem, sec­ond lay­er solu­tions are being tried, third lay­er, fourth, and as many lay­ers as pos­si­ble. Floors allow for greater occu­pan­cy for the same amount of land space. How­ev­er, the ground does not always sup­port an unlim­it­ed num­ber of upper lay­ers, nor do the logis­tics around the site. For one rea­son or anoth­er, space with­in a city is lim­it­ed and the demand for access to it increas­es as the city offers more pro­fes­sion­al oppor­tu­ni­ties, which usu­al­ly comes with that increased con­cen­tra­tion of peo­ple. Again, a vir­tu­ous cir­cle. The cost of using the lim­it­ed space in the city increas­es as the expect­ed val­ue of the use goes up because peo­ple are will­ing to pay more for the use of the land, this is the so-called gen­tri­fi­ca­tion process that is so dis­liked by the peo­ple who are dis­placed from their life­long neigh­bor­hoods. Peo­ple who are not able to obtain a suf­fi­cient return for their activ­i­ty to cov­er the cost of using that space in the city and are even­tu­al­ly expelled by some­one who is will­ing to pay more for that use because they expect to be able to make it profitable. 

San­ti­a­go Bern­abeu seized the moment and was able to gain access to a space that would even­tu­al­ly be in high demand for a cost that today would be con­sid­ered deriso­ry, while his bid­ding caused the sur­round­ing land to rise in val­ue and no space would ever be sold at such low prices again, giv­ing rise to what we now call gen­tri­fi­ca­tion. Are we wit­ness­ing this same fact in the Bit­coin network? 

The Bit­coin Blockchain until ear­ly 2023 was like the Madrid of 1947, an emp­ty plot of land. Yes, there were pop­u­lat­ed areas where some demand was appar­ent, but by and large the types of uses of space on the Bit­coin blockchain was anec­do­tal. Between Octo­ber 2020 and June 2021, the cost to enter trans­ac­tions on the net­work was about $15, peak­ing at $60 in April ’21 when the price of bit­coin was at a record high. This had been the usu­al pat­tern of the trans­ac­tion cost on the bit­coin net­work, it only went up when the price explod­ed. Between mid-2021 and ear­ly 2023, it was back to the aver­age cost of one dol­lar per trans­ac­tion on the bit­coin net­work. Then, with the bit­coin price still near cycle lows, the cost per trans­ac­tion start­ed to rise, first slow­ly to $3 on aver­age, then eas­ing a bit to $2 again to quick­ly resume the upward path and reach $20 on aver­age with­in a few weeks. 

What has changed? The ter­rain, that is, the Bit­coin space has remained the same. If any­thing, the logis­tics, the access to that space, has changed. Tap­root, so to speak, has brought the street­car to the bit­coin net­work and brought it clos­er to the masses. 

Three bit­coin devel­op­ers, Gre­go­ry Maxwell, Andrew Poel­stra and Pieter Wuille were look­ing for an enhance­ment to the Bit­coin code that would allow for bet­ter pri­va­cy and offer greater abil­i­ty to pro­gram over its net­work. By ear­ly 2021, this enhance­ment, pre­sent­ed as a soft­fork, an update to the code, was ready. As Eric Wall describes, the tim­ing of this was rel­e­vant. Any kind of code upgrade that enables greater capa­bil­i­ty or util­i­ty for the Bit­coin net­work opens the door to new attack vec­tors. The risk was there, but the cryp­to indus­try at that time was com­plete­ly on fire, DeFi pro­to­cols made Ethereum shine while Bit­coin had not been updat­ed for more than 3 years. Tap­root could be that upgrade that showed the world that Bit­coin also adapts, in fact, when the upgrade final­ly took place, it was report­ed as a suc­cess­ful exe­cu­tion by the community. 

Eric Wall explains Tap­root’s effect: “What Bit­coin devel­op­ers Maxwell, Poel­stra and Wuille had assumed was that any suf­fi­cient­ly capa­ble devel­op­er could devise a clever scheme to insert arbi­trary data en masse into Bit­coin, with or with­out Tap­root. What they did­n’t take into account was that with Tap­root, devel­op­ers, from novice to mun­dane, would soon find ways to do it as well. This was the ori­gin of Ordi­nals and Bit­coin reg­is­tra­tions. In their aspi­ra­tion to mar­gin­al­ly advance Bit­coin for the craft devel­op­er, they had also made it sub­stan­tial­ly eas­i­er for a devel­op­er of lim­it­ed inge­nu­ity and tal­ent to turn Bit­coin into a dump.” 

A glance at the bit­coin mem­pool, the space through which all trans­ac­tions pass before being cho­sen to enter a block and become part of the chain, shows a very dif­fer­ent pic­ture in ear­ly May 2023 than it did just a few months ago. What was once a waste­land is now an orchard. Among this num­ber of trans­ac­tions wait­ing to enter the blockchain, some very par­tic­u­lar ones stand out. These are small trans­ac­tions of 546 sats (546 sats is the small­est amount of bit­coin an indi­vid­ual can send on the chain with­out being rec­og­nized as “dust” by the nodes run­ning Bit­coin Core) pay­ing many mul­ti­ples in fees to get the trans­ac­tion con­firmed. Mar­ty Bent did a mon­e­tary analy­sis on this: “At the time of this writ­ing, 546 sats is worth just over $0.15. 546 sats is about as small as a UTXO can be on the bit­coin ledger. Those issu­ing these tokens are cre­at­ing UTX­Os that like­ly can­not be spent in the future and are pay­ing, in this par­tic­u­lar case, 77.2 times more in fees than the val­ue of the UTXO they are cre­at­ing. My guess is that the token issuers are look­ing for the least amount of bit­coin need­ed to embed their token data in the chain and pay­ing to do so in the hope of get­ting it back when they find some­one else dumb enough to buy it from them.” These small trans­ac­tions, there­fore, would be flood­ing the Bit­coin mem­pool, com­pet­ing with oth­er trans­ac­tions to get into the next block and there­by putting upward pres­sure on the cost of get­ting infor­ma­tion into the Bit­coin blockchain. As if overnight, a city street had become extreme­ly pop­u­lar and every­one want­ed to live there.

Behind this phe­nom­e­non is a new pro­to­col cre­at­ed on the Bit­coin net­work. Eric Wall explained that the Tap­root change opened up the net­work to devel­op­ers with the wildest ideas. Well, one of them is this pro­to­col, the so-called BRC-20. In Eric Wal­l’s words: “What this pro­to­col offers is what is called a fair mint. A shit­coin is cre­at­ed over the Bit­coin net­work and its issuance is run over a num­ber of blocks, those who offer to pay the most com­mis­sion for the block space get an allo­ca­tion (a share of the tokens). This proof of com­mis­sions paid is a mech­a­nism that can­ni­bal­izes cheap block space” Thus, Eric con­tin­ues, “The mar­ket for block space will har­mo­nize as, if arbi­trary sys­tems can be run with­in Bit­coin, there is no rea­son why space on its blockchain should be cheap­er than on Ethereum’s.” 

Today, around the San­ti­a­go Bern­abeu sta­di­um, we find tall office build­ings and shop­ping areas, even a super­mar­ket where the infla­tion in food prod­ucts so fash­ion­able today was felt from its very open­ing. How­ev­er, I bet that when the sta­di­um was inau­gu­rat­ed almost 80 years ago, what you found in its sur­round­ings were street food stalls, a few ram­shackle bars, hous­es of ill repute and oth­er activ­i­ties of lit­tle added val­ue. The land on which it was locat­ed was not in demand, which is why it was so cheap to obtain. That is why the activ­i­ties car­ried out in that area were not high­ly prof­itable. If they were, they would move to bet­ter areas of the city, pay­ing what was nec­es­sary to occu­py that space. It was the cre­ation of wealth derived from val­ue-added activ­i­ties that led to an increase in the demand for space in Madrid and the nec­es­sary price increase for using that land. High­er val­ue activ­i­ties began to dis­place those unprof­itable land uses to cre­ate the image of Madrid today. 

What we are see­ing in the bit­coin net­work is an unprof­itable use of space that bit­coin­ers con­sid­er valu­able. We do not con­sid­er those tokens that are cre­at­ed on Bit­coin to be wor­thy of occu­py­ing that space. It is as if we were trans­port­ed back in time to Madrid in 1947 to see the activ­i­ties of lit­tle val­ue tak­ing place in places that are now the nerve cen­ters of the city and crit­i­cized the poor use that is being made of streets and squares that we know offer much more value. 

Faced with this sit­u­a­tion, some peo­ple hope that this pos­si­bil­i­ty is elim­i­nat­ed out­right, that all these peo­ple be removed from there and that Bit­coin is not used for what we do not believe it should be used for. Ask­ing for the bor­del­los to be put some­where else, basi­cal­ly. This option does not seem fea­si­ble. Poel­stra, one of the Tap­root devel­op­ers, explains it this way, “Unfor­tu­nate­ly, as far as I under­stand it, there is no sen­si­ble way to pre­vent peo­ple from stor­ing arbi­trary data on the net­work with­out incen­tiviz­ing even worse behav­ior and/or break­ing legit­i­mate use cas­es. If we ban “use­less data”, then it would be easy to intro­duce it inside “use­ful” data such as fake sig­na­tures or pub­lic keys. Doing so would incur the cost of hav­ing to pay twice as it is twice as much data, but if pay­ing twice as much is enough to dis­in­cen­tivize stor­age, then there is no need to have this dis­cus­sion because they will be forced to stop doing it any­way due to com­pe­ti­tion in the fee mar­ket (And if not, it means there is lit­tle demand for Bit­coin block space, so what is the prob­lem with pay­ing min­ers to fill with data that val­ida­tors don’t even need to per­form real cal­cu­la­tions [for]?). On the oth­er hand, if we were to pro­hib­it “use­ful” data, e.g., by say­ing that a sig­na­ture space can have no more than 20 sig­na­tures, then we are in the same prob­lem we had before Tap­root. We delib­er­ate­ly replaced those lim­its with hav­ing to pay per sig­na­ture. You can argue that this kind of data is tox­ic to the net­work, because even if the mar­ket is will­ing to bear the cost, if peo­ple were stor­ing NFTS and oth­er crap on the blockchain, the Bit­coin mar­ket would become entangled

with pump&dump mar­kets, under­min­ing legit­i­mate use cas­es and poten­tial­ly pre­vent­ing new tech­nolo­gies like LN from tak­ing hold. But from a tech­ni­cal stand­point, I don’t see any way to stop this.” It looks like the bor­del­los will have to stick around until anoth­er use dis­places them. 

On the oth­er hand, voic­es are start­ing to emerge call­ing for increased space to allow more data to enter the Bit­coin net­work, a debate that takes us back to 2017 and the block­size war. This is always the argu­ment of those who are dis­placed by the gen­tri­fi­ca­tion process. If using space, whether on the Bit­coin blockchain or down­town, becomes pro­hib­i­tive­ly expen­sive, there is a demand to expand that space or con­trol prices. Since con­trol­ling prices is not pos­si­ble because Bit­coin is a free and open mar­ket obliv­i­ous to the wet dreams of pop­ulist politi­cians, then there is a call to expand the space. For­tu­nate­ly, this debate has been set­tled in the past and I doubt it will be reopened. 

A city, like the Bit­coin net­work, can go through phas­es where it is more fash­ion­able and phas­es where it is more depressed. What a city expe­ri­ences over decades, in the case of Bit­coin is seen in days. That abil­i­ty to respond to ups and downs in demand is what allows Bit­coin to be so resilient and, at the same time, so dif­fi­cult to pre­dict and take advan­tage of. At a time when min­ers were in over their heads, an increase in fees like this gives them a line to hang on to. A mas­sive invest­ment in cap­i­tal to mon­e­tize it through min­ing risks these ups and downs that can cause the com­pa­ny to go bank­rupt, which favors the decen­tral­iza­tion of this activ­i­ty. At the same time, the increase in fees, such as the demand for land in a city, has moti­vat­ed invest­ment in sec­ond-lay­er solu­tions like Light­ning. On the oth­er hand, an attack on the net­work con­sist­ing of mas­sive use of space would see the cost of the attack increase expo­nen­tial­ly until it gets vir­tu­al­ly unaf­ford­able for any bad actor. Run­ning out of resources to con­tin­ue the attack, the net­work would con­tin­ue with busi­ness as usu­al. Bit­coin’s secu­ri­ty bud­get, the min­i­mum nec­es­sary for it to sur­vive, is not known and can­not be known, because it varies with the cir­cum­stances of each moment. Final­ly, we could high­light from this episode that it is proof that the Bit­coin net­work can be self-suf­fi­cient when the sub­sidy to min­ers runs out. As Gre­go­ry Maxwell said in 2017 when Bit­coin net­work activ­i­ty was such that com­mis­sions were even high­er than today, “I for one am bring­ing out the cham­pagne to cel­e­brate activ­i­ty in the mar­ket that is pro­duc­ing lev­els of com­mis­sions that can pay for secu­ri­ty thus avoid­ing hav­ing to revert to inflation.” 

When San­ti­a­go Bern­abéu decid­ed to go for those plots of land in the vil­lage of Madrid, his vision was not of the impov­er­ished Madrid that lay before him, but of a city that would grow and car­ry the club of his life on its wings. Madrid, like any oth­er city, is not per­fect. Its his­to­ry has been full of ups and downs. Wars have been fought over its land, the last one being the cause of the desire to cre­ate a new sta­di­um. It has very dis­parate areas, ques­tion­able uses of space, but it is a scarce and high­ly demand­ed land for the added val­ue it offers to those who can make use of it. Like­wise, the vision of Bit­coin­ers is not the image of half-emp­ty blocks or a mem­pool full of shit­coins that we see today, but one in which Bit­coin blocks are the basis of the econ­o­my of a dis­parate, imper­fect world, one that sus­tains the cre­ation of wealth for its inhab­i­tants. A vision also, in which not every­one will be able to access the Bit­coin base lay­er, just as not every­one can access Madrid.

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