Gentrification And Bitcoin Blockspace: Economic Parallels With Real Estate

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.

19 September 2023 17:23