How do you prevent inflation in a virtual economy?

This started off as a simple answer to the question in the title, but ballooned into something way bigger than I originally planned, so I decided to post it here so that I could share it.

To solve a problem, you must first understand the problem. So let's talk about and define the problem.

Inflation is an increase in the money supply.

Deflation is a decrease in the money supply.

The money supply is the total amount of money available in the world.

Money is not necessarily a currency. Money is really whatever thing is easiest to trade; IE the most liquid asset. These definitions hold true in any economy, real or virtual.

Rising prices over all things is a symptom of inflation, it is not inflation itself. The reason inflation causes a rise in prices is because as the amount of money available increases, the demand for an individual unit of money decreases, thus, its' value goes down and therefore it takes more of said money to purchase something.

The opposite is true. Decreasing prices over all things are a symptom of deflation. If the amount of money available goes down, the demand for an individual unit of money increases, thus, its' value goes up and therefore it takes less of said money to purchase something.

In a game, the money supply increases ANYTIME something from the game gives money to a player, any player. Completed a quest and got a monetary reward? Inflation! Sold that trash item to an NPC? Inflation! The total amount of money available to players goes up.

In a game, the money supply decreases ANYTIME something from the game takes money from a player. This causes the money to vanish from the players' collective hands. Bought an item from an NPC? Deflation! Paid that NPC to repair your items? Deflation! No player will ever have access to that money ever again.

Player to player transactions do not affect the money supply at all. It just shifts part of the big pile around; it does not add or subtract from it. It changes the individuals' in question money supplies, but not the total amount of money available to all players. The player that received money in the transaction could then trade that money to another player.

Inflation and deflation are problems because it changes the way the players interact with the game. The game has points where the money interactions are fixed. Inflation can trivialize these interactions, and deflation can monumentalize these interactions.

Inflation can also cause problems for newer players. They typically enter the game with no money. Inflation causes their financial interactions with NPC's to be less valuable than when the game was new. This requires the new player to have more positive NPC financial transactions to purchase something of worth from another player because the other players value the money less than the NPC's do. Player's need more money in order to interact financially with other players than they would if they interacted with the NPC's.

To counter inflation and deflation the money supply must remain as fixed as possible.

One way to do this is to have money going into the supply be equal to money coming out of the supply. If someone receives X amount of money from an NPC, someone somewhere else gives an NPC X amount of money. X came in and then X went out. This has problems in that you cannot insure that events going on in the game over time will balance the equation.  It could be that players are selling more items to NPC's than they are buying and they are not utilizing the NPC services enough. Thus, you have gradual inflation.

Another way is to have a fixed amount of money possible. All funds going out of the system to players comes from a large pool in the system. If the money runs out then the system cannot inject more money into the supply available to players. This has problems because you cannot insure that the system won't run out of money. It also raises the question, what does the game do when the NPC's have run out of money? Make more money and do the transaction anyways? It carries the same problems as above; there is no way to guarantee long term ( I prefer infinite) stability. If players are selling to NPC's more than they are buying, then eventually the NPC's will run out of money. Then you end up with lots of annoyed players with heaps of trash items and no recourse other than to trash the trash. This is a waste of player and system resources at this point. A good design should work for infinity.

Well, we could have the NPC's adjust their prices and offers based on the amount in question. If the amount of money available to NPC's is low, then they will offer less money when buying things and demand more money when selling things. This still doesn't guarantee the system won't break. It is still possible for the system to run out of money. It would just take a longer time to do so. If the overall trend is players selling to NPC's, it WILL run out of money.


If the NPC supply of money is very low, NPC's will be buying things from players for very low amounts of money and be selling them for very high amounts of money. The money couldn't be divided any lower than the smallest unit of currency, so eventually everything sold to NPC's would get the player 1 unit of currency, no matter if it were a grain of sand or the mightiest, most epic item in the game. And it would eventually run out of money still.

If the NPC supply of money is very high, NPC's will then be buying things from players for very high prices and be selling them for very low prices. Wait.... what? This clearly isn't going to work. In this situation, all players would clearly flock to the nearest NPC vendor, buy something, and then sell it back, over and over until the price equalized.

Instead of having the relation be inversed, why not just have it be that as the amount of money in the game goes up this causes NPC's to offer more money AND demand more money. This solves the problem of newer players combating inflation and it adjusts the prices of things from NPC's so that the financial scale of them remains as the developer intended. However, this also doesn't work because it causes the inflation gains to exponentially increase.

As the amount of money in the game increases, NPC's increase the amount of money they give out so that the value of what they give out is the same over time, and they also ask for more money as the money supply increases to cause a larger decrease in the larger money supply. However, the problem still remains of what if the player's are selling more than they are buying. If this is the case (which it is out of necessity in any game, I'll get to that), then this solution only causes the eventual inflation to come faster because as the inflation grows, so does the rate at which it grows. This will cause a break in the game as you can only have a number be so big in a computer system before the system says, nope, no more, and crashes, or flips itself into the maximum negative value (assuming that the data is signed, but why would you do that anyways).

Inflation is, however, a necessary evil in a game world where the number of players present in the world can grow. If there were no inflation, then eventually the game would be destroyed by deflation. If the amount of money were fixed, then as the number of players increases, the value of the money would also increase in the eyes of each individual player. Each player would have less of the total supply. Well, what happens if the amount of money available isn't enough to support the number of players you have? Remember, you can't subdivide your smallest unit of currency, there IS a minimum. You would get to the point that each player would have 1 unit of currency, or very close to it, without inflation. This means that all items would be valued at or very close to 1 unit of currency. Your rusted knife carries the same value with another player as the epic sword of doom. In effect, the economy would come to a grinding halt as no one is able to effectively transact. All value gets tossed out of the window. This isn't a problem in the real world because we are always making newer, more valuable things and making less valuable things more valuable through improvements. This is a lot harder for the players to do in a game environment without causing other problems in the game.

I will now identify the real problem.

NPC's.

This  is the source of all woes. NPC's. The reason these guys are to blame is because they are stupid. They cannot make any decisions for themselves. They are static. Players are dynamic. You can't have a dynamic system influenced by a static system and treat them as separate systems. If one system is altered by another system, they are necessarily part of the same system. The static system will break the dynamic system or the dynamic system will break the static system.

In the above section, where I talked about improving items, it is again NPC's and their static nature that causes trouble. If there were no static NPC and players interacted with only other players, allowing player's the ability to enhance items sufficiently to make them more valuable would be OK since all players would have the ability to utilize the improved items. This article assumes there are NPC's.

NPC's are necessarily static because they can't make decisions for themselves. They can make pseudo decisions based on what they are told is valuable. They can even decide to change their values based on logic they are given. The one thing they can't do however is make their own logic. There is a name for a computer system that make its own logic and that is true AI (cue The Terminator theme song). That's the real difference between a person and a computer. We can change our logic whenever we feel like, a compute can only change its' logic when it's told to.

You could program some good AI that could stretch you game's economic life for a very long time, but if it is carried out infinitely, it will break because of NPC's. 

It's not this directly though. This static nature forces the programmer to have a predictable method of financial interaction with the players, who by their nature as a living being is unpredictable. You can make reasonable assumptions, but you cannot ever say with 100% certainty what someone will do for any given circumstance.

The need for a predictable nature of interaction because of the nature of programming a computer forces the developers to create a static, knowable medium of exchange between the NPC's and the players, a hard coded currency. THAT is the real culprit.


What do we do about this? Remove NPC's? That's one solution and I've come up with an idea for a MMO that does just that in my spare time for fun. The answer is, follow the money. It's ALWAYS about the money!

Players need the NPC's in normal games because they start, usually, with nothing. Zip, nada, zilch. Nothing but moths in their pockets. A necessary thing to otherwise players could just get rich by making new characters and giving the new characters money to their desired character, ad infinitum.
Since no one starts with money, then the only way to get money is by getting it from the system, NPC's. Not just the guys in the store either, enemies count too.

Players could use items they get from enemies they kill as money, trading items that drop off enemies for other items that also dropped off enemies, and that would work. But if there is any sort of limit (and there is) this could get messy. This is what will have to happen, players using resources they get from the world to trade with (cause hey, guess what, that's how it works in real life as well). Let's talk about money for a moment, and what makes a money good.

First, anything can be money. However, society will gravitate towards certain things being money naturally, as long as something like government doesn't dictate what will be money (This is actually exactly the real world analogue of the virtual world. The programers dictate what is to be money and have sole control over its creation. Governments tend to dictate what is to be money and have sole control over its creation. And in both instances, they will eventually break the economy because of it.)

The characteristics of good money are as follows:

• It is easily portable
• It has a high value density
• It is easily divisible
• It is relatively scarce
• It is useful in and of itself beyond facilitating financial transactions 

I'll use two real world examples. One of a good money, and another of a bad money.

In most prisons, or at least how most people think of prisons, cigarettes are money.  They are a good money at that. 

• They are easy to carry
• Their value is high relative to their size
• You can easily divide them. A single cigarette could be cut in half or what have you
• Not everyone has access to cigarettes or can easily make them
• You can smoke a cigarette.

It is the above reasons that made cigarettes money in prison. Plenty of people want them since a lot of people in prison smoke apparently. Even a non-smoker would want them because they know they could use it to get something from the smokers.

Now, lets look at an example of bad money. The good ol' U.S. dollar. A terrible money. It is bad money because of the last reason. Their only purpose is to facilitate financial transaction. They don't have any value beyond that. Their value lies in the fact that (for now at least) you can reasonably expect someone else to accept the dollar so you accept it in exchange. However, if people stop accepting it in exchanges, what can do with it? I'll show you:

And even then, toilet paper would get the job done better and without clogging your toilet.
In the cigarette example, if prisoners stopped accepting cigarettes you could still do something valuable with it, like smoke it.

The currency in games falls victim to this same failing; it has no value outside of facilitating exchange.

So, to recap so far (this is a lot longer than I originally thought it would be, but such is the subject matter!). Economies in games break because of the nature of the NPC's.It is the static nature and the need to have a known, predictable means of interaction with NPC's that creates the need for an environment that is going to inflate itself until it breaks. So what do we do about it?

Get rid of the financial interactions with NPC's. This will put the power of money creation in the hands of the players. If one money turns bad, they will be able to adopt another one.

Sounds extreme, but that's what needs to be done to make an economic system that will not break.

Firstly, treat money as an item no different than a suit of armor or a sword or a gun. In reality, it isn't different. Money is a thing that can be traded no differently than a piece of armor or a sword in the real world. It is treating money as something different that causes the break to begin with.

Coinage is a good money. It has a high value density (lots of value without having to carry a lot of it around). Coinage doesn't have to be money. Money could also be jewels or jewelry for the same reason. It's not as easily divisible as coinage, but it has a good value density.

However, coinage itself would not be money, but rather the type of coin. A copper coin would not (and should not) have a fixed exchange against the silver and gold coin. A player would not automatically convert a silver coin into a gold coin just because he got 100 silver coins. Each type of coin would maintain their own inventory space. The player could have 853 copper coins, 245 silver coins, and 103 gold coins. Their exchange rate would depend on the value of copper, silver, and gold in the total market place. This would depend on some concrete things as well as some abstract things.

For instance, how many gold coins does it take to make a gold bar? What is the value of the things that can be made out of a gold bar? How do these compare to the same aspects of silver and copper? The programmers only need to worry about the concrete things. The players are the ones that need to worry about the abstract things.

Thus, it is important that as many things as possible in the game can be reverted back into their respective components, when it makes sense. For instance, if I have a magical ring, it would make sense for me to be able to take out the gems and melt the metal down. I could then trade the gems and the resulting metal for something else, or use them to make something else. This allows for the fluidity needed to facilitate the dynamic nature of this economic model. It allows the players to self regulate the valuation of things in the economy. When a coin's value drops to the point that the bar is worth more than the coins it could make, the players could turn the coins back into a bar and sell the bar. This could occur because something that you need a bar to make wouldn't let you use coins to make it. The coins would need to be turned into a bar and then the bar turned into the new item.


But, are we trading monetary inflation for price inflation? Perhaps. As something goes down in value, players will make less of it or harvest less of it. One item that goes down in value can get turned into something of higher value. It will be necessary for items to be consumed in some manner, such as breaking from use or just being outright consumed, such as ingredients when making a potion or doing an enchantment. There could also be inefficiencies involved in transformations and creation to represent waste. And other items will not be able to be transformed at all. Some items would also not be able to be traded.

NPC's  should also not give monetary rewards, because it's impossible for it to know what the current money is. Instead, it should give generic items out in its place or experience, or anything else other than a monetary award, or anything that resembles a monetary award. Instead of gold coins, give out a gold nugget or a gold bar.

Gone also are NPC's vendors. Instead, players would be the suppliers of everything.  NPC's vendors would instead act as brokers. They would be a list of players trying to sell and buy things. A player could list something as being for sale and what they want in exchange. Potential buyers could try to offer something else for the item. The seller would then have the option of accepting or denying the offer. It could, for the sake of ease, have an automatic message and the player could respond to the offer remotely without having to go visit the broker NPC. You could have an auction for the item and players bid in units of whatever the seller is looking for. This will most often be whatever is being used for money. It could sometimes be something else, but most of the time it will be the current money of the world, that's why there is money! Money exists to facilitate exchange. It's bartering but one side of the barters are always the same thing, MONEY! You might have a pig and need a cow, but you can't find anyone that wants a pig and is willing to give you a cow. I bet you could find someone willing to give you money for your pig and someone willing to give you a cow for money. What the money is doesn't matter.

NPC offering services, such as armor repair, could instead be made into extensions of players with those skills, and players could offer those services directly. The game could provide a player with the ability to turn themselves into an automated repair vendor by setting a rate of X amount of effort for Y units of Z item.

This system has some problems of its own, namely that it increases complexity and possibly makes some things less convenient. However, I think the bonuses of having a truly dynamic economy and the extra robustness and options for players in the crafting/industry sector of the game it would force developers to make far greatly outweigh those things.

So how do you prevent inflation in virtual economies? You decouple as much as possible the dynamic players from the static system. Give ALL economic power to the players. It must exist solely in the hand of the player's collective hands for long term stability.