Wednesday, May 28, 2014

PLEX is Money

The formidable mynnna, a guy who knows a bit about economics, has an article up at TMC entitled The Great PLEX Bubble.  As you can tell from the title, his argument is that PLEX are a bubble.
Given the context [a fact-filled discussion of the supply and demand for PLEX], the conclusion is obvious: people buying PLEX off the market are tending to hoard them, rather than use or resell them.
I'll repeat here what I wrote there, since it is buried there anyway, and expand a bit.  My thesis is as follows: PLEX are in a bubble, but that does not mean what most people think it means, namely that PLEX will eventually "pop".  The PLEX bubble won't pop because PLEX are being used as money.  Money is a bubble that does not pop.  Due to peculiarities of its design, EVE has two forms of money, splitting the normal functions of money in two.

I.  About Money

What is money, and what are its functions?  You can look at the definition at wiki for some insight:
Money is any object or verifiable record that is generally accepted as payment for goods and services and repayment of debts in a particular country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past, a standard of deferred payment. Any kind of object or verifiable record that fulfills these functions can be considered money. 
Money is historically an emergent market phenomenon establishing a commodity money, but nearly all contemporary money systems are based on fiat money. Fiat money, like any check or note of debt, is without intrinsic use value as a physical commodity.
ISK is a fiat money, the ultimate fiat in a sense.  It does not need a "legal tender" clause.  It is implemented in software; within New Eden, ISK-as-money is a physical law.  Now consider the functions of money.  Certainly ISK is the medium of exchange in New Eden, and its unit of account.  ISK do store value.  So, ISK have definite monetary qualities there.  However, ISK are relatively poor as a store of value.

II.  The ISK Economy

Why are ISK a poor store of value?  It does not matter why, for the purposes of my argument; only that it is.  You can skip this section if you want.  However, it's worth understanding anyway.

ISK are a poor store of value because they are being created much faster than they are destroyed.  (Two step computed the rate of ISK dilution in 2012 as 1 trillion ISK per day entering the economy.)  Note that I avoid the word "inflation" because it has been coopted in modern times to mean a measured rise in "general" price level, whatever that is exactly.  It's inherently ill-defined and thus subject to endless debate.  Dilution is a precise concept: there are more ISK in existence.  This is a measurable thing and, for ISK, a confirmed fact.

Players can create as much ISK as they like, simply by ratting in null, or farming sleepers for blue loot, which is then sold to NPC buy orders.  Both of these are massive faucets.  (Incursions are also apparently a pretty big faucet, though I don't know exactly how.)  There are also many sinks, but the sinks are mostly one-off things (skillbooks, BPCs) or related to production; they are inherently limited.  And of course they are also disincentives for behavior; you can't farm a sink.

What is the purpose of this ISK dilution?  It is to subsidize the faucet regions (null and wspace) at the expense of the sink region (highsec).  Without the huge faucet of rat bounties, null would be an abandoned wasteland.  Similarly, wspace would be a lot more abandoned without blue loot.  Killing sleepers does have a use-valuable product (sleeper salvage, particularly nanoribbons), and so there would be some chance for market forces to help keep it viable.  But the same is not true of null: little resource extraction or production happens there.  (I hope this changes with Crius.)  And yet those huge fleet battles are priceless publicity for EVE, and the fascinating metagame with comrades keeps people subbing.  Thus, ISK subsidy.

III.  ISK and PLEX Contend

Returning to the main argument, we observe empirically that ISK is anything but a reliable store of value.  Thus, there is an opening for a second form of money.  This will be whatever commodity is found to be best at holding value; it must be in limited supply and very hard to produce, if producible at all.  In addition it should be highly liquid.  You guessed it: in EVE that commodity is PLEX.  PLEX is superb as money in this important respect.  Not ideal -- the ideal money cannot be created; obviously players can create PLEX.  But PLEX creation is sharply limited by real-world economic constraints, namely, that PLEX cost real money.  And also it is balanced by the constant removal of PLEX via use.  As such, it is not a serious problem.

Now, what happens when you have two currencies in contest?  Generally, one will out-compete the other and dominate it utterly; the loser fades away.  The reasoning here is a bit subtle, and I refer you to this excellent and provocative long-form piece on it.  Put short: because money is necessarily more valuable than the use-value of the underlying commodity, it is always in a bubble.  (The disproportion in values is extreme for fiat currencies, which have a use-value of essentially zero.)  However, unlike "normal" speculative bubbles, there is always a need for money; thus although there may be multiple money-like commodities, there can never be zero.  There must always be at least one.  And all of them look like a bubble unless you know them as money.  But multiple currencies are not stable: one will be better than another, and there is a positive feedback loop for the better one, and a negative feedback loop for the weaker.  If everyone piles into dollars, you want to hold dollars, because pesos will be become worthless if everyone piles into dollars.  Free market currencies are like Highlander: there can be only one.  (That one, historically, was gold.  It took the head of silver in a brutal contest during the 19th century.)

However, the free-market outcome -- one commodity is money, and all others not -- will only happen if the currencies are competing on a free and level playing field.  If one has a government behind it, it can take the fiat route; a legal tender law can prevent its complete demonetization.  (And indeed, fiat took the head of gold in the 20th century.)  Still, a fiat currency may retain only very limited value compared to better currencies.  This shows that it is not being used as a medium of savings; it is being used only for exchange.  Many currencies in the world today are like this.  If you get paid in pesos, you take them and spend them as soon as you can on rent and food.  If any are left and you want to save, you buy dollars.

In our case, there is no way to fully monetize PLEX, that is, not unless CCP does some serious programming.  Recall that ISK is part of the physical laws of New Eden.  (Aurum -- a PLEX derivative -- is kinda sorta a step in that direction.  But I doubt we shall ever see people spending milli-Aurum at Jita to buy a DCII.)  And ISK serve a strong purpose: taxing highsec to benefit null and wspace.  So ISK will always be with us.  But there is a way to take a lot of ISK's monetary bubbliness out of it: that way is for everyone with value to store to buy PLEX to store it.  That is what people are doing.

It is a bubble, mynnna.  Yes, indeed.  Money is a bubble that does not pop.

IV.  What Could be Done?

There are a few ways in which CCP might attack PLEX, if they wanted to de-monetize it.  The problem is the dilution of ISK: there are not enough sinks, and too many rich player-controlled sources.  As such, the price of PLEX should be sensitive to these things.  If CCP adjusts the balance of source and sink towards more sinkiness, then we should see fewer players storing value in PLEX and the price drop some.  They could do that; indeed the new industry coming in Crius appears to be more of a sink than the old.  But I doubt that the amount we are talking here is significant, and in any case the arms race out in null is not going away.  Those supercapitals don't build themselves.  Highsec must pitch in.

(Incidentally, for some exploration of what would be needed to have a rock-hard ISK, which would certainly defeat PLEX as money, you can read my old post, Towards Hard Currency in EVE.)

I see little strong reason why CCP would want to demonetize PLEX.  The main reason is that players whine about PLEX prices; that is not a strong reason.  There is at least a colorable argument that in letting PLEX bubble, CCP is squeezing out content creators.  Probably true, but not that important.  The people being squeezed out are the most marginal ones, those who can produce more than 500m per month but less than 700 (or a billion, or whatever the PLEX price is at), and refuse to pay money to subscribe.  Also, plenty of people create content without PLEXing accounts.  And for that matter, plenty of people are PLEXing without creating much content.  (I discuss this a bit with Gevlon, who criticized multiboxers.)

There are certainly good reasons why CCP should encourage PLEX monetization.  Remember that each PLEX is purchased using IRL money.  Thus, if PLEX are hoarded to preserve value, CCP gets the use of that money indefinitely.  (See the wiki on seignorage.)  They earn interest on it by putting it in a real-world bank, or they can invest it as they choose.  Another good reason for CCP to want PLEX to monetize is that it raises the PLEX:ISK price.  Higher PLEX costs are ruinous to RMTers, since the PLEX:ISK price is essentially a floor below which nobody will do RMT.  So, profits are recaptured for the company.  (The goto man in the EVE blogosphere on RMT is the Nosy Gamer; his most recent assessment of the situation is CCP's War On Illicit RMT: Reviewing PLEX.)

Thus, not only is PLEX monetization happening, it is good for CCP.  They don't have to do anything to benefit as things now stand; the process will continue.  And they seem to know this (read what mynnna writes about what Dr. E. presented at fanfest.)  As such, I do not expect PLEX monetization to reverse, but rather to continue.  And thus, if you are looking to store value, the time to get into PLEX is now.  Next PLEX sale they have, I rate PLEX a strong buy.  Next PLEX sale, I'll be putting my money where my mouth is.


  1. I don't think you understand what a bubble really is and what it means for it to pop.

    If mynnna is correct and PLEX are primarily being stored rather than used, it certainly is possible for the PLEX bubble to pop in a 1929 style bank run on PLEX.

    All it really takes is a significant movement to cash in on PLEX. Inherent in the idea of using PLEX to store value is the future desire to retrieve that value. Since PLEX is not in fact tender in Eve, one must either barter with PLEX through item exchange contracts or convert it to ISK through the market.

    If a sufficient number of people do this simultaneously, PLEX prices will start to drop as supply begins to outnumber demand. If the price drops sufficiently, people will begin to fear that the value they thought they had secured in the PLEX is beginning to evaporate and they will decide to cash in now. In doing so, they price is forced lower causing more panic at the margins. It's events like this that caused us to come up with the term death spiral.

    Is this a likely scenario for PLEX? Probably not, but then it wasn't a particularly likelihood in the American housing market either but we saw it happen.

    1. On the other hand the price of gold was far more stable when it was money than not, see

      Still, one thing I should clarify is that I'm not arguing PLEX are PRIMARILY being stored rather than used. Hell, I'm making no argument on how many are being stored vs used at all - I have no data which would allow me to estimate that, and if the bubble did pop, prices would drop 150-200m at most... and that's probably grossly high. Such clarifications, however, would have only diluted the piece. ;)

      @Von Keigai: Not sure I agree with all of your assertions, perhaps not the least of which being your assessment for why isk does not hold value. If my having a trillion isk meant that your isk were less valuable it'd make sense, but that's a bit of a stretch to claim. It will be interesting, though, to see what manufacturing & research as a new sink does - when costs for those are currently measured in hundredths or thousandths of a percent, increasing them even to 1-2% is potentially a big deal.

      Good read though, regardless of what I do or do not agree with.

    2. @Kevin: I believe I do understand bubbles. Your scenario is exactly the scenario where PLEX gets demonetized. And yes, that could happen, for one sense of "could"; people can indeed be irrational. But you do not explain why it would happen. Why, when ISK are being diluted by 5% per year (or whatever it is), would players want to hold value in ISK and not PLEX?

      As for PLEX popping like a 1929 bank run, that is not possible with PLEX. Bank runs are a failure mode of fractional reserve banking, not demonetization.

    3. @mynnna: I think the PLEX being fully de-monetized might take off more than 200m. I've been storing value in PLEX almost as soon as I entered the game. PLEX was 500m then. My guess is that a lot of players have noticed the investment value of PLEX and use it.

      I also am curious to see what happens with Crius. I just looked at those numbers Two-step posted, and I cannot see that any of them are the amount spend on manufacturing fees. So I have no idea how big of an impact it might have. I'd love to get some numbers on that. (Can you pry them out of Dr. E. or someone with your insider connections? And get them to publish?)

    4. @von Keigai: You're right of course, I should have said 1929 style stock crash.

      But I would submit PLEX wouldn't crash because it becomes demonetized, it becomes demonetzed because it crashes.

      As to why, it only takes n people deciding to cash in at once. Maybe everybody decides they need a Titan on the same day. The why of the cashing in really isn't relevant. The relevant part is the market price of PLEX falling enough to start a self-sustaining sell-off.

      There isn't though, as you seemed to suggest, any intrinsic reason why PLEX prices will never fall.

      All of that notwithstanding, I really liked the post. Very thought provoking.

    5. Assuming Eve is finite at some point the bubble will pop. No one wants to left with 500 plex in their hold when CCP turn the server off.

    6. If CCP turns off EVE, then neither PLEX nor ISK have any value. Assuming people knew in advance, they would indeed try to unload PLEX, but that is because the whole point of saving would have become moot. They would also unload ISK; presumably many prices would skyrocket as every last ship would be bought and fit up for a last orgy of PVP.

    7. Sure but it could happen more incrementally and subtly than a CCP announcement. Suppose individually a bitter vet decides Eve is dying and liquidates for a pvp orgy. Then another. Then several. Then perhaps a group of old rich players.

      If you know you're going to stop or if you think Eve might end then it makes sense to liquidate, even if it's as simple as a transition from paying in $ to paying in plex.

      This leads to the interesting conclusion that a demoralised player base might see plex price pushed up.

  2. @mynnna: of course your having ISK makes mine worth less, or at least, if you ever spend them. We compete on the market for goods. As such, the more ISK you have, the harder it is for me to buy stuff. You keep one-centing me on those buy orders.

    If you never attempt to spend ISK, of course, there is no effect on anyone; it's just a number in a computer.

    Now, it is true that just having the numbers for faucets and sinks does not tell us whether people are trying to spend those ISK. But come on. People don't rat for fun, and most players don't care about running up an ISK number. They rat to get the ISK to buy stuff to blow up and be blown up.

  3. Incursions are a bounty faucet. The people who run them have it down to an art form with minimal downtime to ISK ratio. The fleets run 24/7.