Although the phenomenon of Induced Demand is critical to effort to scale Bitcoin, it has not often been cited in public discussion. I refer to the following article, from Wired magazine, that discusses the issue in layman's terms:
https://www.wired.com/2014/06/wuwt-traffic-induced-demand/
If we make an analogy between an urban public road network and the public Bitcoin network, then the analogues are:
- road capacity is block capacity
- individual commuters represent transaction outputs (UTXOs)
- each vehicle represents an actual bitcoin transaction
So, a regular P2PKH transaction is like a vehicle transporting two people - who represent two outputs: the actual send amount and the change amount.
Every vehicle must pay a toll (mining fee) to travel from A to B through the road network. Unlike a usual flat-fee road toll, this road network allows users to bid for access to the road. So, as congestion increases, users will pay higher and higher fees in order to drive on the road network.
In the case where there is more or less permanent congestion, fees will be permanently high. The self-evident solution is to simply add one or two lanes to the road network in order to increase capacity and relieve the congestion. However, as the linked article discusses, road planners have found, over the years, that increased road capacity (increased supply) almost always leads to increased demand, and the congestion soon returns.
Induced Demand and its impact on large public networks warns us that simply increasing block space will not necessarily have the expected outcome of lowering tx congestion and high fees.
Typical roadway solutions include reducing the number of private vehicles on the road by incentivising people to travel via buses or a transit system. A bus can hold 50 people and uses less road space than their 50 (or, say, 25) individual vehicles combined. A monorail, built above the highway, can transport 200 people in one trip, and commuters might disembark at stations along the road network from where they take bus routes to their destination.
The monorail and bus routes represent the Lightning Network. The road capacity remains unchanged but it is used more efficiently - reducing congestion and reducing fees.
Note that the congestion and fee relief is neither constant nor permanent, but the solution is smarter and more manageable than simply increasing block space. It is always possible to add additional monorails (protocol layers) and buses, whereas simple block size increases run into the problems implied by Induced Demand, and soon require another block size increase. Bitcoin security (decentralization) is systematically degraded by larger and larger blocks, so this is a critical drawback of applying on-chain scaling only.
