Saturday, November 9, 2013

Currency Dilution - A Lesson In Economics

Here is a nice read from Homo Spacien who provide FREE PAINTING AND TEXTURING SERVICE:

A Lesson In Economics

For all intents and purposes, this is an economy that has activity equal to a small city in real life, There’s nothing ‘virtual’ about this world. Although it is no Eve Online with 400,000 members in our active economy system. It still suffers the same economic troubles of a real world economy, Inflation, deflation and even recessions can occur. Having a strong background in economics i find EU very interesting as it allows me to study concepts that rarely occur in real life. What troubles me is that being one of only a few MMO's that offer a real cash economy, MA has not hired an economist to their staff to balance our current problems out. Seeing as others like CCP, Valve, and a few more who do not even use a RCE model have done so.

Over the past few months i have run a very comprehensive study on the EU economy covering things such as currency dilution, labor markets, investor returns, arbitrage, equilibrium and participation. With a ton of data collected, analyzed, re-analyzed, and concluded i have found the following using basic economic principals. Please be fore warned, this is going to be a lengthy read if you chose to continue beyond this point. I will do my best to write this article in non-technical terms so everyone can grasp the concepts and failures.

Section 1: Currency Dilution

Definition: A reduction in the ownership percentage of a share of an item caused by the issuance of new like items.

Scenario:

Suppose MA has issued 5 of a particular item into the virtual world, for this instance we will use the UL CalyTrek BLP rifle from this point forward just referred to as “CalyTrek”. For the basis of this dilution model we will say that each CalyTrek has a value of 20,000 ped. With that we can say that the item, the CalyTrek’s hold an economic value of 100,000 ped. Now let’s assume that MA has a second issuance of CalyTrek’s in which 5 more of them are released into the economy. The increase in supply drops the demand, which lowers the items value. Now your base value of a CalyTrek is only 16,000 ped. It is true that there is now 160,000 ped of the asset in game after the issuance of 5 more of the CalyTrek and after the first sale of each of them MA has earned 160,000 ped into the economy, but on the flip side of that, these items will be sold several times and again diluted. So let’s get to the math. The original 5 owners of the first issued CalyTreks each lose 4,000 ped when they sell their item, so in theory MA just made 20,000 ped and 5 people just got a heck of a deal on a rifle. But now lets consider the effect. The sale of UL weapons and their value is based on the following data points. DPS, Economy, Range, and Tier. For this example we will use a number system, 1,2,3, & 4, 1 being the best gun, and 4 being the worst. The dilution of the value of gun 1 decreases the worth of 2,3,&4, meaning each time the item is bought and sold the amount needed to conduct that transaction is less, the amount of ped needing to be deposited is less, and MA’s returns decrease as a result of currency dilution. Yes they made ped off the initial dilution, but through residual sale of the item, the margin is down. Having a few dozen UL BLP rifles to choose from and all directly corresponding to their DPS, Economy, Range and Tier, by adding only 5 of one particular item to the economy for a quick profit you have essentially removed likely over 1,000,000 ped from the marketplace and can only hope to make it up with frequent use and decay.

The Solution:

Arbitrage, I know I said I wouldn’t use technical terms but there is no other word for it, so please google it if you do not know what it means.

The practice of Arbitrage results 100% of the time in Rational Pricing in the end game. Arbitrage is a fluid state in which can truly only exist for a period in time. At some point between buying low and selling high a rational price is reached, we will use the Herman ARK TT-R as an example. There is an unlimited supply of them in the Entropia Universe. Anybody who travels to Planet Arkadia can pick one up at the same fixed price which is lower than what they are selling for on Planet Calypso, even still the rational price for this item is around 4.5 – 5 ped. Every time a new one is generated from the trade terminal MA makes an additional 2 to 2.5 ped. Its been that way and stable for quite some time now. Granted this is minute amounts of ped, but the same principal applies on higher value items. Lets impose this scenario on the above mentioned CalyTrek, using this model which Eve Online already employs. Make a Blueprint for the CalyTrek, it requires X amount of whatever materials, these materials have X value, in gathering these materials, whether it is hunting for them, mining for them, or walking around trying to find them there is cost incurred, decay, ammo, probes, the chance of success, all stable factors. It does not matter if 1,000 of the item were crafted the bottom line is at some point you are going to reach a rational price somewhere above what it costs to make them, just like the (L) items in the game. With that you sustain stable profit in the use of time/decay/ammo/probes to manufacture this item, and you never have to worry about a diluted currency in game and losing your tail on vanishing in game funds.

The Lesson:

When you create a static item with a set availability, each time you add to the item quantity you dilute its value as well as the value of dozens of other things in relation to the item type, by setting a living economy principal of arbitrage leading to the establishment of rational pricing, your economy becomes stable, residual, and predictable. Even if some tool starts manufacturing them and selling them at a loss, as the platform owner ( MA ) you make some ped of his stupidity and when he goes broke the market re- establishes a rational price.

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