This video was made possible by CuriosityStream—when
you sign up for an annual subscription at curiositystream.com/HAI, you’ll also get
access to Nebula, the streaming service that HAI is a part of. Coming to a computer screen near you in eight
years ago, it’s Diablo III: a thrilling new multiplayer gaming experience from Blizzard
Entertainment, where you can go on quests, cast spells, craft armor, earn weapons, and
explore a fantasy world all while fighting against your ultimate enemy: hyperinflation. Wait what? That doesn’t seem right. I thought the villain in Diablo III was Diablo. Or like Diablo the third, who I’m guessing
is Diablo’s grandson? But…nope, the script definitely says hyperinflation. Alright, I guess this is an economics video
now, so we can lose the dramatic filters and bring in some meaningless graphs. Yeah, that’s better. In the simplest terms, inflation is when the
value of a currency goes down, usually because of an increase in the money supply without
a corresponding increase in scarce goods. Think of it this way: pretend you live on
an island, and all that island produces every year is five coconuts. Why were you abandoned on an island that only
produces five coconuts, you ask? Because you’re the type of annoying person
who asks questions like “why am I on a fake island” when I’m just trying to use a
hypothetical to explain something to you, you jerk. Now pretend there are five units of the island’s
currency in circulation—let’s call them Sam Dollars. Get it, like sand dollars, but my name is…
you know, nevermind. So, each of the island’s five coconuts will
probably be worth one Sam dollar. But now let’s say you make more Sam dollars,
and now there are 500 Sam dollars circulating on the island. But still, the island only produces five coconuts. Now, the price of coconuts will go up, as
everyone has more Sam dollars but is trying to use them to buy the same finite number
of coconuts, effectively lowering the value of each Sam dollar. Now let’s talk about Diablo III, 2012’s
highly anticipated sequel to the Nintendo classic Kirby: Squeak Squad. The first thing to understand about video
game economies is the idea of faucets and sinks. Faucets are elements of the game that produce
gold for players—for Diablo III, that mainly came in the form of rewards for defeating
enemies or completing quests. Sinks are elements of the game that remove
gold from the game. But Diablo III had a sink problem, and not
the kind a plumber could fix. The issue? The sinks didn’t suck enough—or, in other
words, they didn’t remove enough gold from the game. The only way to spend significant money was
on buying items from the in-game virtual blacksmith, but it turned out people didn’t do that
very much, because it was easier to buy things from other players, and because the in-game
blacksmith refused to wear a shirt under his apron. Because the faucets produced more gold than
the sinks eliminated, there was a rapid increase in the currency supply, which started to lead
to inflation. The problem then got much worse because of
Diablo III’s Real-Money Auction House. You see, in an effort to prevent the internet
black markets that had cropped up around Diablo II, the Diablo III developers built a function
into the game that allowed players to exchange actual, real-world money for virtual gold,
and virtual gold for actual, real world money. I mean, come on, building an exchange for
virtual currencies, when has that ever gone wrong? So what happened? Well the game had a minimum transaction amount
of $0.25, and you could only sell in “stacks” of 100,000 gold units at a time, which created
an implicit floor, or lower limit, for the possible price of gold, of $0.25 for 100,000
gold units. Once the game was sufficiently flooded with
gold that the sinks weren’t draining, the exchanges neared that floor, and the game
had to adjust before people turned to black market exchanges, so they raised the stack
size to 1,000,000 units, but kept the minimum transaction at $0.25. Now that selling gold at a lower price was
possible, that’s what people did, meaning the price for gold soon hit the new floor—in
other words, in a matter of months, gold had undergone over 1,000% inflation, which in
technical economic terms is referred to as “a complete dumpster fire.” What turns inflation into hyperinflation,
though, isn’t just that there’s far too much currency—it’s that people stop wanting
that currency. In early 2013, the Diablo III players started
to worry about when the exchange rate floor would be lowered again, which would devalue
their gold more. That meant they didn’t want to hold gold
as an asset, so they desperately tried to spend all their gold as soon as possible,
before it lost value, and that’s what creates hyperinflation. Think about it in simple terms of supply and
demand. Supply of currency is going way up, as everyone
is flooding the market with it, trying to get rid of it. Meanwhile, demand for that currency is way
down—people don’t want it, because they believe it will soon lose value. And when anything has high supply and low
demand, its price plummets. Just ask the producers of Cats, a film that
provided a very high supply of terrifying humanoid cat monsters to very low public demand
for terrifying humanoid cat monsters. But things went from bad to full-blown Diablo-saster
on May 7th 2013, when a bug accidentally let players double their gold at will, causing
prices to skyrocket, and though the bug was quickly fixed, the cycle of hyperinflation
had already taken hold—one year after the game’s launch, black market exchanges showed
that Diablo III’s gold had undergone an inflation rate of 1,000,000%. While this might sound like a hilarious video
game incident, hyperinflation is a real phenomenon that affects real economies—it happened
in Weimar Germany in the 1920s, and sort of led to World War II, in Zimbabwe in the late
2000s, ultimately leading them to print bills worth $100 trillion Zimbabwean dollars, and
right now it’s happening in Venezuela, where buying things requires so many bills that
clerks no longer count money, but weigh piles of it. And to think, it all could have been avoided
if dictators just played more video games. Fascinating economic phenomenon in virtual
economies are in no way limited to Diablo III—there are super interesting examples
in games like EVE, EverQuest, and SecondLife—but talking about that would be a longer discussion
that probably wouldn’t perform well on YouTube, which is why I instead put it in an extended
version of this video on Nebula. What’s Nebula, you ask? It’s a streaming platform me and my other
educational-ish Youtuber friends came together to make, where we don’t have to worry about
demonetization, or the algorithm, or video length: all we have to worry about is making
great content. The best way to get access to Nebula is with
the CuriosityStream bundle—for a limited time, for only $15 you get an annual subscription
to CuriosityStream, a streaming service with thousands of top-quality documentaries, and
to Nebula. You can get that bundle by going to curiositystream.com/HAI. But fascinating economic phenomenon in virtual
economies are in no way limited to Diablo III and so, for you fantastic viewers on Nebula,
I’ll ramble on a little longer. So, because video game assets have real-world
monetary value—in other words, I can make a cool piece of video game armor or whatever
and some gamer somewhere in the world will pay me actual US dollars in exchange for it—virtual
economies have, in some ways, become just as real as normal economies, the difference
being that the workers, instead of being exploited by greedy capitalist overlords, are exploited
by their own desire to have cool armor and stuff. Perhaps the most striking example of this
came in 2001, when an economist found that the world’s 77th strongest economy was the
country of Norrath—a fictional land that existed entirely within the video game EverQuest. Each year, players, on average, were producing
armor and equipment and other assets that were worth $2,226 actual dollars, making Norrath’s
GDP per capita $2,226, more than double that of China at the time—and incredibly, the
EverQuest players accomplished it without any communism and hardly any threats to annex
Taiwan. In the video game SecondLife, meanwhile, thousands
of players lost millions of virtual “Linden Dollars” thanks to Ginko Financial, a player-run
investment fund that turned out to be a Ponzi Scheme. When the game later outlawed in-game gambling,
which was how player-run banks invested, there was a massive bank rush, mimicking the events
that led to the US’ Great Depression, just with way more Furries. And finally in 2014, EVE, widely considered
to have the most extensive virtual economy of any video game, had a massive battle that
led to the destruction of virtual assets that were worth $300,000 actual, real dollars,
almost certainly leading to the first generation of children who have to explain that their
college fund was wiped out because their dad’s Megathron got blown up by the Space-monkey
Alliance.
