In economics, utility refers to the satisfaction or benefit that an individual derives from consuming a good or service. It is a subjective measure of the level of satisfaction or happiness that a consumer experiences when they consume a particular product or service.
Utility is typically measured using a hypothetical unit called a “utils.” One utils represents the level of satisfaction or happiness that an individual derives from consuming a particular unit of a good or service. Because utility is subjective, it cannot be directly measured, but it can be inferred from the observable choices and behaviors of consumers.
Economists use several methods to measure utility, including:
Overall, utility is a crucial concept in economics, as it helps to explain consumer behavior and the choices individuals make in the marketplace. By understanding how consumers derive utility from different goods and services, economists can develop models to predict consumer behavior and inform public policy decisions
The law of diminishing marginal utility states that as consumers consume more of a good or service, the additional satisfaction or benefit they derive from each additional unit consumed decreases. This means that consumers are willing to pay less for each additional unit consumed, and they will eventually stop consuming the good or service altogether when the marginal utility becomes negative. This principle has a significant impact on consumer decision-making, as consumers will choose to allocate their limited resources toward goods and services that provide the highest marginal utility
In economics, there are four main types of utility that a consumer can derive from consuming a good or service:
These four types of utility are important concepts for marketers to understand because they can influence consumer behavior and demand for a product or service. By identifying which types of utility are most important to their target customers, marketers can better position their products or services to meet the needs and preferences of consumers.
The four main characteristics of utility in economics are:
Total utility and marginal utility are two concepts used in economics to explain how consumers derive satisfaction or utility from consuming goods and services. By examining changes in marginal utility and total utility, economists can predict how changes in price, income, or other factors will affect consumer behavior and the demand for goods and services.
Total utility refers to the overall level of satisfaction or happiness that a consumer derives from consuming a certain quantity of a good or service. Marginal utility, on the other hand, refers to the additional satisfaction or benefit that a consumer receives from consuming one additional unit of a good or service – because the additional benefit or satisfaction from each unit consumed tends to diminish.
Total Utility (TU) = U1 + U2 + U3 + … + Un
Marginal Utility (MU) = ΔTotal Utility / ΔQuantity
Marginal Utility (MU) = TU(n) – TU(n-1)
The key difference between total utility and marginal utility is that total utility measures the overall level of satisfaction or happiness that a consumer derives from consuming a particular quantity of a good or service, while marginal utility measures the change in satisfaction or happiness that results from consuming one additional unit of the good or service.
Economic utility and tokenomics unite in the captivating realm of digital assets, forging a new frontier for businesses and consumers alike. Tokenomics, or token economics, directs the creation, distribution, and management of digital tokens, while economic utility signifies the satisfaction or benefit obtained from consuming goods or services. By integrating these concepts, businesses can leverage the power of utility tokens to enhance their operations, incentivize user engagement, and fuel growth in a dynamic, decentralized ecosystem.
Tokenomics, or token economics, examines the rules and principles that govern the creation, distribution, and management of digital tokens. These tokens can represent various assets, such as utility tokens, which grant users access to specific products or services within a blockchain network or ecosystem.
Tokenomics, like the Tectum tokenomics, presents a unique opportunity to enhance user experiences and offer incentives for active engagement within a business or platform. Businesses that integrate utility tokens into their operations facilitate access to their offerings, bolster user engagement, and cultivate a dedicated customer base.
For instance, a gaming platform that employs utility tokens for purchasing in-game items or unlocking certain levels or features can elevate player engagement and retention. Using tokens as in-game currency also fosters a secondary market for the tokens, drawing more users and investors.
Similarly, a social media platform can use utility tokens to reward proactive users for generating and curating content. Incentivizing engagement amplifies user-generated content, attracts a broader audience, and lures more advertisers, ultimately boosting revenue.
Moreover, tokenomics enables the establishment of decentralized autonomous organizations (DAOs), superior white-labeled exchanges, and token-curated registries (TCRs) based on token incentives and decentralized governance. Such systems enable community-led decision-making, potentially leading to more efficient and transparent management of projects or organizations.
Choosing the right tokenomics model is essential for any business’s success. Consider these popular models:
The deflationary model, the most common tokenomics model, sets a hard cap on the number of tokens created. For example, the Tectum token (TET) has a hard cap of 10 million. Over time, as the availability of new tokens decreases, demand increases relative to supply. This increase in demand boosts the token’s value and price. However, limited supply may also encourage people to hoard tokens, reducing their utility and value and ultimately hurting the token’s price.
Tectum’s deflationary model
The inflationary model, resembling the fiat currency economics model, has no limit on token supply. Some startups may limit token creation annually, while others may circulate tokens based on demand. Unlike the deflationary model, no hard cap exists on the number of tokens created. Ethereum is an example of this model.
The dual-token model, or “two token model,” involves a project with two tokens: one for utility and another for security. The security token complies with official regulations while raising funds for the project. The utility token allows users to interact with and use the project’s services.
The dual-token model enhances the project’s usability and overall incentivization. Two tokens provide more potential for offering upgrades and features. For example, the blockchain game Axie Infinity uses this model, with Small Love Potion (SLP) as the utility token and their native token AXS as the security token. Players use SLP to purchase in-game assets and complete tasks, while AXS enables voting, trading, and staking.
Despite its benefits, having two tokens can confuse users, making it challenging to differentiate the tokens’ use cases and manage both.
In the asset-backed model, the token is an asset-backed security, with its value determined by an underlying real-world asset with tangible value. For example, Tether claims to be backed by USD.
This model can also be used to sell tangible assets like gold and real estate in the form of tokens. Similar to security tokens, investors gain legal ownership of these assets by purchasing the asset-backed tokens. Due to its connection to the real world, this model is less volatile than others. However, questions about transparency have arisen, as projects claiming to be backed by prestigious assets can be dubious.
Note: When deciding on your tokenomics model, also consider the consensus mechanism you want to implement.
In summary, tokenomics offers a potent instrument for augmenting user experiences and promoting active involvement in a business or platform. Businesses incorporating utility tokens into their operations foster a devoted customer base and heighten user engagement. With thoughtful implementation, tokenomics can unlock new avenues for user engagement and growth opportunities across various industries.
