I’m not sure a human biased economy can actually function on a deflationary standard
There were long stretches of time during which the supply of gold and silver did not keep up with economic growth when gold and silver and currencies backed by gold and silver were the only currencies. Isn't that proof that an economy can function using a deflationary currency?
First off, take a look at some of the numbers:
Will the bitcoin network shut down? No, not unless there's some sort of global disaster. The question is what happens to the hashrate, transaction fees and general guarantees about being able to get transactions included in the blockchain, which affects the lightning network.
Current miner compensation is overwhelmingly the 6.25 BTC block reward. Fees are 2-10% of that. But consider that an average block transacts perhaps 5K BTC. Bumping current fees by 10x is plausible and there's some past precedent. End result is 5$US fee per transaction giving miners about half the original revenue. This would be fine in a scenario where total hashpower drops by 2x or something. Current electricity use is 200M$ per day. Is that actually necessary?
Flat fees might be a problem though. Median transaction value is 300$ whereas average is much much higher. If everyone below $300 balks at a $5 fee then you lose half the fees. The obvious answer is flat+% or some other fee>F(value) requirement(IE:price discrimination). It's a coordination problem under conditions of perfect information between a small number of pools to find a revenue maximizing price discrimination curve. A single large pool moving to flat+% tips things in that direction. Transactions that don't comply with the % fee have their expected delay to first confirm distribution scaled by a factor of (Total_Hashpower/Flat_fee_hashpower) So if a large pool with 1/3rd of global hash power moves to the new fee model, large transactions with small fees see 50% higher time to first confirm. It should be pretty easy to tip the equilibrium in that direction. There will be holdouts but I expect (P=90%) that this will happen in some form.
TL:DR:expect higher fees and especially for large transactions
2.) Will lightning ever work?
To be practical, lightning has to be safe, cause people have to lock their funds into channels to use it. Fallback channel resolution requires miners to honestly prioritise transactions with higher version numbers which they might not do. A single dishonest miner can steal funds (p=fractional hashpower at critical block). Blockchains with turing complete smart contracts can do dispute resolution properly guaranteeing correct resolution even if most miners are censoring transactions.
Bitcoin can't implement that logic (yet) but maybe some development can get something to sort of work. I don't expect to see adoption given current tech. Other blockchains seem like a better option both for their turing complete smart contracts and lower transaction costs.
Watchtowers aren't a problem. The economic model for those is fine. If they don't do their job they lose their reputation and that's easy to test.
3.) Can deflationary money work?
People sell houses right? Bitcoins can't be eaten or lived in and so will eventually be sold. If this is a serious issue that hurts the Value Proposition --> price goes down or rises more slowly --> other assets take market share for value storage --> problem solved. There's definitely transaction volume so it doesn't seem like a problem.