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Endogenous currency formation in an online environment: The case of Diablo II

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Abstract

This paper presents a case study of the emergence of currency from a barter economy in an online game community. We use this case study to attempt to shed light on the relative importance of various types of frictions that lead to the emergence of money in search-theoretic models of currency formation. In particular, our study highlights the importance of exchange frictions relative to epistemic frictions. Using the records of an online message board dedicated to facilitating trades within the game, we document the emergence of currency and its stability over time.

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Notes

  1. Diablo II, along with its expansion, Diablo II: Lord of Destruction, was released by Blizzard Entertainment in 2000 and 2001 respectively. Both games received tremendous critical acclaim and still have an active playing community to this day.

  2. A phenomenon very common in Diablo II as well, but not the topic under investigation here.

  3. See Castronova (2004), the symposium in the Southern Economic Journal on Second Life (Vol 78(1)), or that industry leader Valve Software has hired an academic economist to handle the interactions of their virtual currencies (see http://blogs.valvesoftware.com/economics/it-all-began-with-a-strange-email/)

  4. Diablo II had both a single-player mode and a multiplayer, online mode. Upon logging in to the multiplayer mode, they would be placed into a series of chat rooms which formed the online interface, from which they could create an instance of the game environment itself which up to seven other characters could join.

  5. Each character had access to a maximum of 96 total ‘squares’ of inventory space for items and equipment not currently being used. (Images of the inventory located below, see appendix A)

  6. Along with player to player exchange, there was also player-to-environment exchange handled through commerce between players and randomly generated merchant inventories, using the in-game currency of “gold”. Gold however was hyper-abundant compared to desirable items and equipment, and had virtually no role in the player-to-player economy. In general, exchanges in gold are uncommon, and 250,000 gold is considered equivalent to one Perfect Gem, normally the lowest denomination of currency. At that exchange rate, a character carrying the maximum amount of gold possible (3.49 million) could exchange for almost 14 Perfect Gems. In comparison, the ‘Pul’ rune, considered a highly saleable rune and a common currency in exchange, was normally exchanged for 40 Perfect Gems.

  7. The Stone of Jordan in the early versions of Diablo II shares many of the properties of the runes and gems: it is a ring, a class of equipment with the minimum storage cost, properties that were totally fixed (minimal heterogeneity), and useful for any conceivable character.

  8. In our example, it is the public recording of bid-ask prices that serves as a record-keeping device, rather individuals’ money balances per se as in Kocherlakota (2002) or Kocherlakota and Wallace (1998). See also Araujo, and Camargo (2008, 2010). For a more extensive discussion of the role of the forum institution itself in facilitating certain kinds of exchange, see Stein (forthcoming)

  9. http://diablo.incgamers.com/forums/forumdisplay.php?161. Our dataset begins in late January 2004 before when a server error has made messages inaccessible, and last until the end of 2008 when the ‘archival’ forum’s records end, subsequent exchanges being conducted in the (still active) current USEast trade forum.

  10. Similar in form to the game-naming conventions for simple exchanges: http://diablo.incgamers.com/forums/showthread.php?130352 is a representative thread of this kind of simple barter request. The thread’s title (what would be seen while scrolling through the list of message board posts before examining any particular post in detail) is “[L] FT: Tals Full Set ISO: Vex” The [L] indicates that the items are being traded on the Ladder. “Tals Full Set” is a Set of high-level equipment, which this player is offering for a ‘Vex’ rune, one of the high-value runes. The body of the message is: “Well just as the title states, Tals Set for Vex Rune”, followed by his in-game and forum contact information.

  11. http://diablo.incgamers.com/forums/showthread.php?127186 is typical of these warehouse-type postings, as well as being illustrative of the sheer number of accounts and mules required to store significant inventories of large items.

  12. Mainly, 1-square charms with desirable properties such as bonuses to acquired item quality or large amounts of bonus poison damage, which were considered another unit of currency besides Stones of Jordan in the non-ladder economy during this time, documented in various attempts at compiling price lists such as those here: http://diablo.incgamers.com/forums/showthread.php?126925.

  13. The following formulation of an In Search Of list is representative:

  14. Over all the threads created in the dataset, 1,831 posts explicitly use either ‘tradeable’ or the most common alternate spelling, ‘tradable’. 1,029 of these are in the year 2004. In contrast, ‘currency’ is explicitly mentioned by 4,339 posts over the entire dataset, only 396 of which are in 2004. While compared to the total number of messages in the sample (100,141), these may be small numbers, they are indicative of the terms that would’ve been familiar to the expected audience. Most posts instead mention by item type at least one or more items that would be considered tradeable or a currency item rather than refer to them in the general form. Runes and perfect-grade gems (referred to as pgems), are far more common, especially runes, which appear in one of four common permutations in 45,851 of the messages.

  15. http://diablo.incgamers.com/forums/showthread.php?128950

  16. http://diablo.incgamers.com/forums/forumdisplay.php?25

  17. http://diablo.incgamers.com/forums/showthread.php?382411

  18. Since currency was heterogeneous and indivisible, divisibility was added into the system by items of currency of different values serving as different denominations: Perfect Gems functioned as the smallest denomination, with runes of various rarity and marketability functioning as bills of various sizes.

  19. Such as the introduction to http://diablo.incgamers.com/forums/showthread.php?254626: “I don’t do much (read: any) trading, so I’m only going off of the price guide and hoping most of that is still current“

  20. One early price list explains the observational nature of updating as follows: “Suggesting Price Guide Changes: If you leave me a post along the lines of “Hey Nolo, you should include Sureshrill Frost” I’ll most likely ignore it; If you leave me a post along the lines of “Hey Nolo, you should include Sureshrill Frost - I just paid 25 points for one” I’ll consider it, and I’ll put it in if I can verify that there is a prevailing price. If you leave me a post along the lines of “Hey Nolo, you should include Sureshrill Frost - I just paid 25 points for one, and there are 2 or 3 others that have traded for about that much on the Forum over the past week or two” I’ll look for the corroborating trades on the forum, and put the Shurshrill in the PG with no questions asked.” (http://diablo.incgamers.com/forums/showthread.php?376016)

    Another Price Guide Closed as follows:

    “If you have suggestions, criticisms, or a price for an item not listed, please either post them in this thread or PM [Private Message] me. Links to relevant trade threads (if applicable) would also be appreciated.” (http://diablo.incgamers.com/forums/showthread.php?288879)

  21. http://diablo.incgamers.com/forums/showthread.php?605667

  22. Since the relative values of the various currency units differed between players (and the lack of any single individual or institution able to dictate relative exchange rates between currency units) providing a complete list was crucial.

  23. http://diablo.incgamers.com/forums/showthread.php?471376 is a typical post of this type.

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Authors and Affiliations

  1. Department of Economics, Berry College, 2277 Martha Berry Hwy NW, Mount Berry, GA, 30149, USA

    Alexander William Salter

  2. Department of Economics, George Mason University, MSN 3G4, Fairfax, VA, 22030, USA

    Solomon Stein

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  1. Alexander William Salter
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Correspondence to Alexander William Salter.

Appendix A: some screenshots of the Diablo II interface

Appendix A: some screenshots of the Diablo II interface

figure a

The online interface: Left is the current chat channel (note the various advertisements), right is the join game interface (“Brng Free Runes” is another example of the game name as a communication medium). The bottom bar of characters represents the characters currently in the active chat channel.

figure b

The inventory itself, with some charms (the 3x4 collection of objects), the Horadric Cube and Tomes (leftmost 2 columns) and random items.

figure c

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Salter, A.W., Stein, S. Endogenous currency formation in an online environment: The case of Diablo II. Rev Austrian Econ 29, 53–66 (2016). https://doi.org/10.1007/s11138-014-0289-1

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