Diablo 3: A Case Of Virtual Hyperinflation

Tyler Durden's picture

Submitted by Peter C. Earle via the Ludwig von Mises Institute,

As virtual fantasy worlds go, Blizzard Entertainment’s Diablo 3 is particularly foreboding. In this multiplayer online game played by millions, witch doctors, demon hunters, and other character types duke it out in a war between angels and demons in a dark world called Sanctuary. The world is reminiscent of Judeo-Christian notions of hell: fire and brimstone, with the added fantasy elements of supernatural combat waged with magic and divine weaponry. And within a fairly straightforward gaming framework, virtual “gold” is used as currency for purchasing weapons and repairing battle damage. Over time, virtual gold can be used to purchase ever-more resources for confronting ever-more dangerous foes.

But in the last few months, various outposts in that world — Silver City and New Tristram, to name two — have borne more in common with real world places like Harare, Zimbabwe in 2007 or Berlin in 1923 than with Dante’s Inferno. A culmination of a series of unanticipated circumstances — and, finally, a most unfortunate programming bug — has over the last few weeks produced a new and unforeseen dimension of hellishness within Diablo 3: hyperinflation.

 

Austrian Economics and Inflation

In casual use, the term “inflation” is used in conjunction with price increases. From the perspective of the Austrian School of economics, though, that phenomenon is a secondary effect of increases in the money supply. As Henry Hazlitt wrote,

When the supply of money increase[s], people have more money to offer for goods. … Each individual dollar becomes less valuable because there are more dollars. Therefore more of them will be offered against, say, a pair of shoes or a hundred bushels of wheat than before. A “price” is an exchange ratio between a dollar and a unit of goods. When people have more dollars … [goods] rise in price, not because [they] are scarcer than before, but because dollars are more abundant.[1]

Furthermore, inflation is not simply an increase in the supply of money within an economy; it is the increase in that portion (if any) not backed by a commensurate increase in specie: most common in history, market commodities like gold or silver. Thus fiat currencies are, unless tightly controlled as to the amounts being created versus being destroyed (with the latter typically only occurring due to wear), notably susceptible to inflation.

As virtual currencies are digitally-created and not commodity-backed — therefore, not particularly dissimilar from real world currencies in this day and age — those such as Diablo 3’s gold are de facto fiat currencies.

Sinks, Faucets, and Inflation

In virtual economies, the primary instruments used to control the money supply are “faucets” and “sinks.” Faucets are ways through which game currency is injected into the game. This generally involve players receiving currency from the game system itself, as opposed to other players. In such situations, the received currency is created anew. Sinks are ways through which game currency is removed from the game. This generally involve players paying currency into the game system itself, as opposed to other players. In such situations, the paid currency is destroyed.[2] Examples of faucets and sinks in Diablo 3 are included below:

Faucets

  • Drops — When a player defeats a foe, they often receive a reward of virtual gold or a good saleable into virtual gold;

  • Rewards — The game involves the player undertaking “Acts,” and within each act are a number of “quests.” For completing these, players are typically awarded virtual gold;

  • Buyers — Players can sell items to “in-game” (computerized, non-human) buyers, receiving virtual gold.

Sinks

  • Repairs — Over time, a player’s equipment will become damaged in combat and suffers wear-and-tear, requiring periodic restoration from an in-game craftsman in exchange for virtual gold;

  • Forging — Players pay virtual gold to an in-game blacksmith for weapons;

  • Rakes — Using the gold auction house costs players both a listing fee and a transaction fee, removing virtual gold from the economy;

  • Consumables — Players can purchase potions, scrolls, and other items from vendors for virtual gold.

Diablo 3 was rolled out in May 2012, and there seem to have been early concerns among players that gold sinks within the game were insufficient. One site noted,

[M]ost of us (probably including Blizzard) assumed that the Blacksmith would be widely used — he was, after all, the only major gold sink in the game … but dropped items alone selling in the [auction house] have been enough to satiate the appetite [of players] and crafting is … a waste of [gold] when one could easily buy an optimal item from the [auction house] rather than pumping 50 to 170K of gold into [a Blacksmith-crafted weapon.][3]

The establishment by Blizzard of a real money auction house (“RMAH”) alongside a virtual gold auction house in the game provided players with an incentive to both farm the game for real world profits and to pursue arbitrage opportunities. The RMAH was also created, at least in part, to disincentivize players from patronizing third party markets outside the game. Nevertheless, bots — automated game participants whose sole purpose is to farm the game world for items to sell — quickly emerged.

Although its anonymity may make it subject to skepticism, several weeks after the game’s debut a source claimed that there were at least 1,000 bots active 24/7 in the Diablo 3 game world, allegedly “harvesting” (producing) 4 million virtual gold per hour.[4] Most of the gold generated by the ruthlessly productive, rapidly adapting bots found its way to third party vendors in a black market which undercut the prices in the sanctioned, in-game auction houses.

The combined effect of heavy bot activity and insufficient sinks immediately impacted the gold markets, and inflationary pressures were soon apparent. An exasperated player complained in August 2012:

I purchased most of my gear for around 5 mil [gold] early on. I’ve been farming for awhile [and] have saved around 30 million gold [but now] I can’t upgrade the gear I have ... Where is all this money coming from? Why is everything so expensive?[5]

And as in real world economies, the price effects of money inflation often arise unevenly. With gold prices falling, prices began spiking in certain goods. Another player noted with curiosity:

[Y]esterday Fiery Brimstone was 150K, now almost 300K. Each time I hit refresh it seems to be going up a bit[.][6]

Gold Floors vs. Black Markets

The RMAH had minimum and maximum dollar amounts for in-game gold transactions: $0.25 minimum, $250 maximum. Market participants were also limited to dealing in increments of a certain size, called a “stack.” The “stack” was initially set to 100K gold. But as gold prices fell owing to rapidly building supply, the stack size was changed in August 2012 to 1 million. This practice, known as redenomination, is a fairly standard (if cosmetic) method of addressing inflation, but was viewed by some players as tacit devaluation.[7]

If you’re changing the [price] of gold from 0.25 per 100,000 to .25 per 1,000,000 I would like to cancel my gold auctions before you do that. You’re completely shifting the market in less than a day, and those of us that have auctions listed that will be affected by this change cannot cancel them until after the patch hits, which is potentially too late.[8]

To be clear, at the time at which the redenomination was introduced, gold was still trading above the floor rate. But being artificial, caps and floors not only prevent markets from clearing, but give black markets a target to undercut, to say nothing of offering players an opportunity to avoid the 15 percent fee — another intended gold sink — levied upon transactions within the auction house. Another player predicted,

[T]his [change] will likely have 2 effects … [it] could kill the private 3rd party market for gold and hopefully discourage botting … [but] because the real money price of gold is decreasing on the RMAH … [g]old will become cheaper as botters flood the market in an attempt to unload their massive surplus of gold before it becomes absolutely worthless. … This decision will further destabilize the economy [as in the gold auction house] prices shoot from 100,000 gold to 1,000,000 gold … [or] 10,000,000 gold to 100,000,000 gold. … The same would happen if the [Federal Reserve] decided to suddenly release a flood of currency into the U.S. economy[.][9]

By early 2013, the gold price had fallen to the exchange floor set by the game managers — $0.25/million — and players began to show signs of concern. One asked,

[Are] there any plans of lowering the floor of gold[?] … It has been at .25 for about 2 weeks now … should I sell my gold now before it gets lowered?[10]

A Delirium of Stacks

Hyperinflation is the economist’s equivalent of an astrophysicist’s quasar cluster or a marine biologist’s dolphin “stampede”: a rare exhibition of a unique set of circumstances which arise infrequently and are closely studied when they materialize. Such events are exotic enough that they become legendary: many individuals knowing little about monetary policy are aware of the recent outbreak in Zimbabwe, or familiar with the defining instance in the post-WWI Weimar Republic.

Economically, the tipping point in the transformation of inflation into hyperinflation is characterized by a profound drop in the outstanding demand for money: when holders of money expect the supply of money to increase — particularly without any sense of timing, bounds, or other guidance — monetary demand in the present drops in favor of surrendering money for vendibles.

The focus of possessors of money, therefore, devolves into an effort to capture known, present purchasing power against the likelihood of its decline in the near future. Saving, in any event, delaying consumption, is chastened; and if a cycle of declining purchasing power and rapidly rising prices ensues, ultimately the propensity to hold money declines precipitously and may fundamentally disappear.

This was demonstrated when, in a message board entry prefaced by stating “Sell Equipment before Patch 1.0.5 Hits!” (a patch is a piece of software added to an operational program or application as bugs are found, changes desired, or ways of improving performance discovered), a player warned that,

Blizzard just announced that the drop rates for [certain] items are going to be doubled … if you haven’t already, you should consider converting your current gear to cash … since real $ [are] the best hedge against gold devaluation[.][11]

If historical cases of hyperinflation — real, and now virtual — have one thing in common, it is the instinct among its victims to blame the symptoms rather than the disease. The Austrian economist Hans Sennholz noted that during the German hyperinflation, “intrigue and artifice” were believed to be at work.[12] Similarly, a handful of Diablo 3 players, frustrated about the decimation of their purchasing power, expressed increasing suspicion of manipulation and conspiracy theories.

[W]hy [are] certain items priced [s]o astronomically high? Many of them are not even that good yet cost 100’s of millions of gold. … I have about 45,000,000 gold saved up [and] check every few days to see if I can get any upgrades that are worth the gold, but … everything is vastly overpriced … clearly controlled by the gold sellers.[13]

And, predictably, any number of baleful remedies were proposed.[14]

While RMAH prices for virtual gold rallied occasionally, the prevailing direction of black market prices for virtual gold was inexorably lower as third party sellers undercut the in-game gold floor. In February 2013, Patch 1.0.7 was rolled out, introducing a range of new gold sinks intended to sop up ever-increasing virtual gold; they included new weapons and items not eligible for sale on the RMAH. One month later, with gold prices continuing to decline, a player made the following diagnosis:

[A]dditional gold sinks [are] unfortunately comparable to spitting on a fire ... [they] do nothing to limit the core issue which is that players are earning gold faster than they [want] to spend it. Repairing is not a … good gold sink as it works best [for] players who are [dying]. … Crafting is the same, works well on players who can get the items to craft with … but leaves players with limited gold supply out of the picture. … The amount of gold that drops … needs to be nerfed, and not softly.[15]

The effort appears to have been futile, as the growth of the virtual gold supply continued to grow.

Several competing definitions for hyperinflation exist, with the strictest — an increase of 50 percent in one month — defined by economist Philip Cagan in his 1956 book The Monetary Dynamics of Hyperinflation. By his definition, the Diablo 3 economy appears to have entered hyperinflation between February and March of 2013, when the black market price of gold fell from $0.20/million to $0.05/million — a decline of over 75 percent in a few weeks. At around that time, a player commented that he was

watching the markets collapse and gold become worthless. … So you feel rich that you have a billion or two in gold[?] … [W]ell guess what, you aren’t … there is nothing you can invest in to hold value. The only thing worth anything has become $$$.

With a sardonic irony that markets sometimes display, real world currencies had assumed the role of commodity gold, and virtual gold had gone the way of all flesh and fiat currencies.

This, however, was still only the penultimate stage. On May 7th 8th, 2013, Blizzard rolled out Patch 1.0.8, which contained the seeds of the last, hyperbolic surge of gold superabundance. One change was the altering of the gold stack size from 1 million to 10 million per $0.25: a simultaneous redenomination and 90 percent devaluation (sitting, as the price was, at the RMAH floor) of virtual gold, targeting black market rates of roughly 4 cents per 10 million. In addition, a bug within the patch allowed users to cancel transactions in the auction house before completion, essentially allowing them to double their gold on demand.

In just a few hours, the already gold-swamped economy saw trillions more created: a mammoth deluge of, by then, worthless virtual gold chasing finite goods, driving prices upward in leaps and bounds. It was, at last, the hyperbolic blow-off characteristic of real world hyperinflationary episodes. Some of the price increases (in Diablo 3 gold) are shown below:

  2013 avg price 1-6 May avg price 7-8 May price
radiant star amethyst 17.4M 41.2M 85.8M
radiant square ruby 187K 260K 337K
flawless square topaz 491 5,170 8,700
star emerald 764K 1.1M 1.6M
tome of jewelcrafting 694 3,400 3,100

And in a noteworthy departure from real world hyperinflation, rather than resorting to barter (which frequently takes the form of food for skilled labor), as runaway inflation became hyperinflation, many chat channels — through which some measure of trade was consummated — seem to have fallen empty: without a need to eat or clothe oneself in the virtual world, some players simply appear to have turned away

Aftermath

Blizzard quickly closed the in-game auction houses and audited transactions which took place during the blowout, banning players who took advantage of the bug and donating the proceeds of certain sales to charity. The gold stack size was also moved back from 10M to 1M. One week later, on May 15th, the above-cited items were quoted at the following, approximate virtual gold prices: radiant star amethyst, 26.1M; radiant square ruby, 375K; flawless square topaz, 8,600; star emerald, 797K; tome of jewelcrafting, 1,350.

In May of 2012, the price of virtual gold was approximately $30/100,000 or $0.0003/gold. As this article was completed — and bearing in mind that these prices may be erroneous, stale, or merely indications of interest — one site showed Diablo 3 gold being offered by four third party sellers at an average price of $1.09/20M, or $0.0000000545/gold: one ten-thousandth its market price one year earlier.In the RMAH, virtual gold was priced at $0.39/1M.

Remembering that game economies are private and players are voluntary members, there’s no explicit mandate to ensure rigid inflation control as one often sees (however rarely pursued) in public economies. That said, knowing that gaming experiences can be upended by economic missteps, there is a clear business interest for gaming firms in keeping virtual currencies and the greater economies as a whole stable.

Frequently, hyperinflationary episodes have ended by substituting a currency outside the political and central banking control of a nation for the sovereign currency. During the early 1990s, during Serbia’s hyperinflation,

[t]he authorities could not print enough cash to keep up. On Jan 6th, 1994, the dinar officially collapsed. The government declared the German mark legal tender … [which] end[ed] the hyperinflation.

Two obvious solutions for managers of virtual economies include more vigilant bot restrictions and close — indeed, real-time — monitoring of faucet output, sink absorption, prices, and user behaviors. More critically, though, whether structured as auctions or exchanges, markets must be allowed to operate freely, without caps, floors, or other artificialities. Unrestricted (real) cash auctions would for the most part preempt and obviate black markets.

One also surmises, considering the level of planning that goes into designing and maintaining virtual gaming environments, that some measure of statistical monitoring and/or econometric modeling must have been applied to Diablo 3’s game world. The Austrian School has long warned of the arrogance and naïveté intrinsic to applying rigid, quantitative measures to the deductive study of human actions. Indeed; if a small, straightforward economy generating detailed, timely economic data for its managers can careen so completely aslant in a matter of months, should anyone be surprised when the performance of central banks consistently breeds results which are either ineffective or destabilizing?

By no means does this analysis intend to equate the actions of virtual gaming firms with the policies of governments or central banks, or to malign their indisputably talented managers, designers, and programmers. While their actions may ultimately generate similar outcomes, central planners seek and wield power whereas the actions of commercial gaming interests are undertaken to compete with other online entertainment providers by delicately balancing opportunities for newer players with the need to continually challenge experienced players.

By all accounts Diablo 3 is a great game; one hopes that with this episode passed, it will reacquire its former glory. But while decision-makers at online gaming firms can and should be forgiven for not anticipating the perilous and unpredictable torsions of rapidly expanding money supplies, the events of the last week provide a stark reminder of the power and inescapability of the laws of economics.

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Tinky's picture

I'm afraid that my Pac Man experience failed to prepare me for this article.

ACP's picture

"Test your worth in fierce Central Banker versus Central Banker gladiatorial arenas, and sell and trade the currency you print in the CME auction house."

knukles's picture

Shades of Reamde and the Trilogy by Neal Stephenson.  :)

ACP's picture

I still think Fallout 3 is the most likely end result, either by nucular war or some other catastrophic event.

Because you actually have to, you know, work for bottle caps. And if you don't work, you die from radiation poisoning. Fair, no?

GMadScientist's picture

A Libertarian wonderland.

Ignatius's picture

I'm working on my own, real version. 

I call it: Survival 101/Near Future

The organic garden of death.  Fruit trees in the dark food forrest.  Laying hens from hell.

SMG's picture

I really hope you are wrong about that nuclear war thing, cause I have kids and I really don't want to see them suffer like that, even though they might get a PIP-boy.

Why don't we hang the Elite now, before they start WWIII?

ACP's picture

Same here, but I sure would like that V.A.T.S. system...

toxic8's picture

I'm here to kick ass and chew bubblegum, and I'm all outta gum... ;-)

jimmytorpedo's picture

I'm always impressed by Neal Stephenson's prescience.

Cryptonomicon is a perfect harbinger for the gold/bitcoin/facist central bankers reality unfolding today.

The new William Gibson.

Herd Redirection Committee's picture

I'm actually about 300 pages into Cryptonomicon right now.  Read the Quicksilver, The Confusion, and the  System of the World, in the last couple years.

Silver Bug's picture

WOW I can't believe I read that whole thing. That was surprisingly very interesting and just shows you how central planning can basically mess up any economy.

 

http://ericsprott.blogspot.ca/

Buck O Five's picture

Then definitely dont contemplate EvE Online then...

FWIW EvE has had a relatively stable economy for over 10 years, could be due to its chaotic nature and as close to a free market you are ever going to get in a game...

Panafrican Funktron Robot's picture

MMO's really are a useful lab for determining "real world" behavior.  Eve really does have the best economic system I've seen regardless of whether you're talking virtual or real.  

For those unfamiliar:  

They have a small "starting area" where there is zero risk and very limited reward, and you have to work just as hard as anyone else for that reward.  

As you move away from the "zero risk" zones, your rewards increase more or less in line with the risk of loss you take on.  

There is a small fee on transactions if you decide to use the global auction market, otherwise trading between players is free of any external charges.  

You are allowed to associate with player guilds, which provide their own resources/advantages in exchange for fees determined by those guilds.  If you decide you don't like that guild, you are free to associate with another one.

 

MachoMan's picture

Star Wars Galaxies had the best player economy I've seen in a game (although EVE has had far greater longevity and ultimately proved more broad)...  It lasted a few years after launch and then SOE killed the whole damn game...  The equipment and fuel costs for mining and manufacturing as well as quick item decay (and player created items) ensured that inflation was low...  I still say it was the best game ever for the first year to two years...  Way ahead of its time.  Now every game is carebear friendly and allows everyone to be whoever they want, carry whatever they want, craft/fight...  they all tend to be grind fests now...  and less time sinks tend to ruin immersion.

Voicefather's picture

EvE does have a great economic system, but it is too bad the pvp combat is lame and routinely leaves you with blueballs. I wish they had done faction play only and never made playable dreads and titans.

Warcraft had a fairly stable auction/crafting market til they started tinkering with drop rates and new items. That ruined player activities that had previously been profitable and took enormous effort (a year or more) to skill up to. That's how I learned to hate government intervention in markets.

Agstacker's picture

Get back into gaming with Star Wars, The Old Republic-its free

 

https://account.swtor.com/play-free

tarsubil's picture

More thought is required to play Pac Man than any of the Diablo games.

Matt's picture

Memorizing the movements of all the ghosts for 254 levels is good memory work, but other than that, there isn't really anything else to think about. 

Mr. Poon's picture

Diablo 3?  Go back to Diablo 2.  The gold supply was so overwhelming that it literally became worthless.  Players had to barter to exchange anything of value.

 

If Blizzard hadn't shut down the Auction House and wiped out a big chunk of the gold generated after the fiasco of the last patch, D3 would be right back to the barter system that dominated D2.  The only reason gold has any value in game right now is because Blizzard intervened and took extraordinary, unpopular measures to support its currency.  I wonder if other decision-makers in the not-so-virtual world would have the courage to do the same in the face of rampant inflation.

MeMadMax's picture

On the question of if what Blizzard did would happen in the real world.

It has happened before, and they WILL do it again.

Unfortunately, we are in uncharted territory now, anything goes.

DoChenRollingBearing's picture

Hmm, I wonder if automtive spare parts made of precious 52100 steel (real or virtual) would suffer a similar fate?  Can you export from Diablo 3?

 

http://tinyurl.com/n4ldyzg

The Shootist's picture

You'd think the developers would consider a medium of exchange whose supply only grows about 2% a year, like that shiny yellow metal.

NoDebt's picture

Poon?  What kind of name is Poon?

Comanche Indian.

 

Mr. Poon's picture

"I'm sorry, who are you again?"

"I'm Frieda's boss."

"Who's Frieda?"

"She's my secretary."

monkeyboy's picture

Dr. Rosenpenis

Dr.Who?

Dr. Rosenrosen

What's that name again?

Dr. Rosen.

 

http://www.anyclip.com/movies/fletch/dr-rosenpenis/

Panafrican Funktron Robot's picture

Going off on a bit of a tangent here, it is worth noting that the traditional game currencies are as follows (from least to most valuable):

Copper

Silver

Gold

Platinum

I would suggest that a copper or brass coin would solve the "discrete denomination" problem often cited as a reason not to go back to a metallic currency standard.  Copper is of sufficiently low value to appropriately handle very small denomination trading of goods.  

 

espirit's picture

Whadayouknow, gamers are going to be our "new" eCONomists.

Acet's picture

This kind of thing has happened in other online economies like the one in World of Warcraft, where typically everytime a new expansion comes out (which allow for reaching higher character levels, which get higher rewards from beating monsters and completing quests) the value of it's virtual gold drops as the economy is swamped with new money. If I remember it correctly, Blizzard had a near hyperinflationary episode in the early days of WoW.

That said, this one is in Diablo 3 is pretty extreme.

The funny bit is that, having kept World of Warcraft going for many years now, Blizzard should've had the in-house knowhow to spot the trouble in Diablo 3.

debtandtaxes's picture

"The funny bit is that, having kept World of Warcraft going for many years now, Blizzard should've had the in-house knowhow to spot the trouble in Diablo 3."

Sure

Like our glorious leaders should have spotted the trouble. Everyone acts like they are inventing the wheel when it"s all been seen and done before. Not teaching history and economics ensures that the peasants have no idea what is happening as they are fleeced.

We must home school our kids history and economics if there is to be any hope for this planet!

Herd Redirection Committee's picture

If you look into it in detail, I wouldn't be surprised if the problem originates with (Activision)Blizzard, trying to monetize the process for their own benefit.  For e.g. you can buy virtual gold with USD.  Now, if you buy say $20m virtual gold, for $20 USD, whose bid gets accepted?  The fellow player, who is trying to sell his gold to you, or Blizzard, who will create $20m more virtual gold out of thin air?

That could only be offset if Blizzard was then willing to do the reverse as well.  That is, buy virtual gold out of the game's economy, for USD, and retire that virtual gold.

Stopped playing months ago, and never spent a cent in the RMAH.

FreeMktFisherMN's picture

Wow the Mises folks continues to amaze. Enjoyed reading this; very comprehensive and in  the end just another demonstration of how hyperinflation takes off quickly.

Matt's picture

It also shows how the system was flawed to begin with, and the inflation was clearly seen way in advance, for those willing to see.

gimli's picture

They are coming out with a new version of Monopoly, no board, just an endless supply of cash and Get Out of Jail Free cards.

lesamourai's picture

And houses and hotels.  No need for streets to put them on because no one ever lives in them, they just 'invest' in them and flip them.

gimli's picture

...but this new version has much more transparency and a strict dress code:

http://ymarksthespot.files.wordpress.com/2010/08/monopoly-stripper.jpg

Major Major Major's picture

Why didn't Blizzard just add a Ben Bernank profile to manipulate the market forever?

resurger's picture

Kito and his Jewish clique is already negotiating with blizzard to open D3 Wallstreet in the heart of the Sanctuary... his objective is to keep the monetray policy in check.

Also i heard he's establishing a central bank and few banks in there... they will have DIEBOR rates as well.

JK Kito.

lol

lolmao500's picture

Some guy made 373 trillion in gold in a few days due to an exploit...  Probably Bernanke in his spare time. Rehearsing for what he's gonna do to the US.

resurger's picture

damn, this guy is too stronk

GMadScientist's picture

Gresham's Law in full effect.

NoDebt's picture

Daaaaaaayum.  Glad I misseed that blow-out.

Do they have virtual hookers-n-blow I could have bought with that virtual gold?

NoDebt's picture

Really??

So, um, it's late.  Do they, um, like, DELIVER to my actual house?  This game might be worth playing after all.

Nue's picture

They would have all turned out to be dudes playing female characters anyway.