Law of diminishing marginal utility
In this article you will learn how the law of diminishing return works, and what fungibility on digital assets is.
Some people still think, due to some spikes seen on XRPcharts, there exists a private XRP ledger. They do not only like to eat ham and eggs, they also think an XRP from the private ledger can jump to the public ledger, hence the price spike.
Let's hold the thought and think about this a moment.
Are you familiar with the “law of diminishing marginal utility”? Some call it the law of diminishing (marginal) return.
This law, or the explanation thereof, is the proof why this private XRP ledger XRPs jumping to the public XRP ledger and creating price spikes is total bollocks.
Let me introduce you to the law of diminishing return with an illustration.
Let's assume you're walking in the desert. You run out of water 2 days ago. All of a sudden, like magic, a man shows up, with 2 choices for you, both at a price of 1000$. You can only have one! A diamond (worth 10 million dollars) or a bottle of water.
You know to the next place where you can find water it is another 3 days of walk. Luckily you do have three 1000$ bills in your pocket.
What's your choice? Do you choose the diamond or the bottle of water?
We all know the answer. You give him one 1000$ bill for the bottle of water, cause you are already dehydrated and risk losing your life altogether, so what's more worth: your life or a bottle of water at 1000$?
We could also look at this situation the other way around: the diamond gives you right now zero utility/return. It will not help save your life. The water will though, hence you are willing to pay an extraordinary high amount for it, the alternative being you die.
All clear? I hope. Bare with me!
So in this first step you saw already. The return of the diamond was zero, the return of the water is you continue to live or “you'd pay anything for that water right now!”
So you give the bill and receive the water and drink it. You then continue. You hold strong 2 days until thirst strikes you again hard.
Boom (Kudos to JackTheRippler)! Again a man shows up, same scenario. He offers you 2 choices each for 1000$. A diamond and a bottle of water.
What's your choice? Do you choose the diamond or the bottle of water?
This time the answer is not so clear. You start thinking. Only 1 more day to the city where water is plentiful. But will you reach the city without water? Difficult.
You decide to be on the save side and go for the water, again.
A bit annoyed you give him the 1000$ and go your way, drinking from the delicious water. You are annoyed cause the diamond already seems to get some value, not as much as the bottle of water yet though.
After another half a day further stomping through the desert:
Boom (Kudos to JackTheRippler)! Again a man shows up, same scenario. He offers you 2 choices each for 1000$. A diamond and a bottle of water.
What's your choice? Do you choose the diamond or the bottle of water?
Well easy, right? Your second bottle of water still has some water in it, the city is only half a day away.
Surely you chose the diamond! We all would.
Do you realize what happened here? All of a sudden the additional return water could bring you drains to zero. The city is so close, now you need not fearing not surviving anymore.
Finally arriving in the city, you book a nice hotel room for the last 1000$ and enjoy your wealthiness with the diamond you bought at a very cheap price.
What did we learn here?
That goods, all kinds of goods, have a value. That value depends on various factors, one being ample supply of the goods.
The higher the supply, the lower the value for you.
The same thing would happen with the XRP jumping from the private ledger to the public ledger. It would immediately be in an environment where he would immediately have the same value as any other XRP on the public ledger.
So this is the very logic explanation why this theory is bollocks.
But there is another, not so intuitive, explanation, many will not quite easily get their heads around: an XRP has no consciousness about its own value. The XRP exists and does not even know it exists, how should it know it has a value. How should a particular XRP know there are people who pay a certain amount of money to be the owner of that XRP. The XRP is just numbers and other figures on a ledger. The value of it is what we, the investors, see in him.
I personally would not see a higher value in an XRP who jumped from the private ledger to the public ledger. Hey there's roughly 100 billion more like that one, why should that one which jumped over to here have another value.
If I bought that XRP who jumped over say at 1000x the price of the rest of the XRP have, cause he had that value on the private XRP ledger, who would buy it from me?
No one! Cause I could NOT prof which one of all the XRP I own is the XRP coming from the private ledger. XRP are fungible!
ETH has a ERC-721 protocol. ETH tokens which comply to that protocol are non-fungible, hence the “kitten game” evolved on ETH.
Were XRP non-fungible, then I could prof that it is exactly the XRP with serial number xyz which has a higher value. And this would (maybe) make this XRP special. But would you anyway pay 1000x more than for every other XRP you can buy at the normal price?