Value vs. ISK: The Macroeconomics of Fiat Money

Sorry for the dearth of posts, life got quite busy for me.

This post was motivated by a discussion in an EVE chat channel about how "destroying ships destroys ISK," which is patently false. The problem is people are conflating ISK with value as the statement "destroying ships destroys value" makes perfect sense. The reason people are making this conflation is to the player ISK and value are nearly the same, but to the developer these are vastly different notions.

To a player it is very easy to change back and forth between ISK and the assets which allows him to play the game. The thing is ISK is not actually used to accomplish playing EVE. In theory, players could simply barter for what they want and some alternate currency would probably develop. This happened in Diablo II with the Stone of Jordan as Gold is too common in the game. In this sense removing ISK from EVE would not remove any value from the game. (Slight caveot: ISK's value to EVE is smoothing transaction costs. But having one ISK more or one ISK less circulating doesn't hurt at the margin.)

Taking a more Macro perspective, it is clear that when a ship gets blown up no ISK is removed from the game. The player probably purchased the ship with ISK and definitely lost a valuable asset with its destruction, but the ISK he spent is still in game, in the hands of the player who sold the ship. It is this perspective that CCP must take as they are essentially the monetary authority of EVE and need to worry about inflation. This is a serious problem in MMOs as once ISK enters a player's hands, the only way to make it leave the system is through players conducting transactions with NPCs.

Note that the destruction of ships actually places strong inflationary pressures on the game. First a valuable asset is destroyed without a corresponding drop in money supply. Hence the ISK is chasing fewer goods. Second, when a player loses a ship, he then needs a new one to fly. This means that as more ships are blown up ISK is changing hands faster which increases its velocity. So ship destruction both decreases the total real value of assets in the game and increases velocity, which is worrying for the state of the economy if CCP keeps pushing PvP.

For the uninitiated ISK stands for Icelandic Króna InterStellar Kredits, the unit of currency in EVE Online.