Tuesday, 19 October 2021

#NoNeoNFT (1): a review of the Neopets economy

Neopets, the once dreamland who survived the decline of the PC era and even somehow hanging midair but still alive when flash discontinued, seemed to have encountered another trouble. This time, they are going against the whole fanbase.

They partnered with another company and planned to issue Neopets avatar based NFTs then trying to make a metaverse out there, calling it "the future of Neopets".

The fanbase reacted violently against the partnership under various reasons: the alienation between the OG Neopets and the "metaverse", opposition to NFTs in general and the speculation on how does it benefit the original one (assuming that it is not to be replaced)... It's hard to find a single player supporting the idea on social media.

My stance to NFTs or NFT/blockchain-based games are neutral. NFTs are not trash -- so as billions of arbitrary objects, material or abstract, in this world -- contains market value as long as there are people who wants those. The price could be so low or immeasurable, but it does exist. If people like some NFTs and of course a market could emerge just like farmers market. NFT is a economically natural object and it is not bad in itself. We have also seen games that works better under a decentralized, community driven environment and flourished under such setup. I have even participated in the development of games transiting into the blockchain setup. Again, the idea of blockchain-based games is neutral. Whether if it's good or bad, lies on the game itself.

Some people disliked crypto in general because of the impact on the environment. Yes and no -- yes for cryptos like bitcoins where coin is a proof of work, but not really for NFTs and some other tokens where tokens represents a proof of stake. Of course servers and participating the blockchain network requires energy from computers and servers but these are usually insignificant. 

I don't want to get into the actual execution either -- it was announced that the NFTs will just be regular NFTs aka ordinary pictures that you cannot do anything with, defying all meanings of existence as a virtual pet.

But assuming that they do everything possible to recreate the Neopets experience under the crypto setup why is it still a bad idea?

This is what I wanted to cover today, the economy of Neopets and how it is irreplaceable under the crypto (both NFTs and FTs...i.e. cryptocurrencies) setup.

The economy of online games has been an essential part of the experience. The price level controls how affordable the items are to players comparative to their effort invested.

Neopets may look very different from most MMORPGs, but their monetary models are the same: players invest efforts and gain ingame currencies to spend or as a medium of transaction. 

In long term as the money supply increases, the purchasing power per unit of money drops (see quantity theory of money) -- an phenomenon known as inflation. Should inflation be too fierce, players would found themselves too hard to catch up with the new trophies and give up. On the other hand, an overly mild inflation (deflation is very unlikely given the online habits...except for  final days of a game) would anger paid players as the paid advantage shrinks. In an ideal case, the developers shall control inflation to the balance between what is desired by paid and free players. (This is the duality of power inflation...which is another topic for another day)

Take MapleStory as an example. This is one of the most successful MMORPG and also one of the games with the best manipulation over its economy. The price ingame currencies in terms of real currencies (via black market) has been stable for 10+ years. This is a rare example where no inflation happens and everyone is happy, because MapleStory contains multiple side currencies which is where paid players have advantages over.

Countless history told the same story: to control inflation you must control money supply. This is true across the real world economy (cf. fed's action during America's stagflation period) as well as on virtual economies. But what can you do when money creation is not on our hands (in reality, money creation is strictly controlled by governments via monetary policies)? That is, you can't control how many monsters are slayed by players (strictly speaking you can, by a theoretical limit on spawning rate, but you will anger players if there aren't enough monsters), and you can't control how players spend either?

You need to provide incentives to spend called "sinks". These are players are motivated/semi-forced to put their money in to counteract the money created. For MMORPGs, the sinks are usually cost of enhancing items. By strengthening the monsters, players have to spend currencies to improve their weapon from the vanilla state in order not to get beaten. 

So, can we analyze Neopets economy using the same model?

The source for NP creation is clear. a big pot of freshly printed NPs are from those flash games (before flash went dead but even now some are playing those). There are also other games with positive payouts (potato guessers, dice-a-roo. Scratch cards also because the money that you spent enters the jackpot and is returned to players. Roulette maybe not if we only take money creation into consideration). Nowadays we have Trudy's surprise which gives a steady supply of money effortlessly. 

A good player can easily earn 40k per day via games and other dailies. Back when Neopets were filled with players, this is the main source of NP creation.

But we missed two crucial sources of income for Neopets players.

The stock market. According to the model the chance of a particular stock raising to the given price level within a period of time, has a long tail. That means given enough time, stocks could yield arbitrarily high/very high return, as much as 10000%. However considering that such chance is so slim and almost everyone sell at 60~90NP per share, this is considered a fixed income of 45k~75k per day upon realization...which is more than an average player can earn via games.

Bank interest is even more troublesome in the sense, because there is no limit on how much you can get, as long as you have money in the bank. 

Players with 20 million NP can apply for the highest bank account rank with 12.5% p.a. interest, compounded daily which is around 13.3%. 

If you know how things compounds you will know this is quite a monstrous rate: your NP stored into the bank on 2001 would have been 12 times the original. If you keep saving the same amount of money into the account every day since 2001 then your balance would be 400% the amount of money that you saved.

In retrospective, for a 1 billion account (not out-of-the-planet hard for top and consistent players -- you can even reach that by saving 50k into the account) you receive around 350k interest per day, more than what you can get by doing every daily tasks (where money is printed out of nowhere aka excluding profits from trading). 

As the player base dwindle and the flash games are no longer easily accessible, this is the dominant source money injected to the economy, but it grows exponentially.

What about money removed from the system? 

It is the old "sink" strategy. Official shops both in the Neopian Central and the Tower for high rollers. Games with negative expectation like wheel of extravagance and lever of doom. Levelling up your pets costs a lot too. We also have the taxation and thieves as random events, but that is probably all. Some money did sink with abandoned accounts, but they usually do not possesses too much (except for cheating accounts). 

More importantly, these ways of recycling money works at a constant rate and do not catch up with the money paid as interest. As the interest rate stands, the inflation rarely goes below that 13.3% -- take Negg as an example: Negg ties to Negg tokens has the significance of balancing value of all exchangeable Neggs. Given that the demand towards Neggs are constant (mainly for collection I guess?), the equivalent price for Negg (token) is tied to the general price level in Neopets. In 9 years of time, the price for Negg inflated from 2000 to 8700 NPs approximately (from JellyNeo), indicating an inflation of 17% p.a..

The high inflation plus high interest rate is surely unfriendly to new players. It is even unfriendly to new paid players because the old players have their assets inflated by at least 13% per year for many years while new players have to start from zero. Neopets had to do something or else people wouldn't be coming. 

Of course they did.

Neopets started off with a very generous socialist system. There are locations providing foods, NPs and items absolutely  for free. After that you have effortless dailies and games that require minimal effort. These ensures that completely new players do not receive a slap on the face immediately.

To climb the social ladder is still uneasy because anything you can do can also be achieved by top players. The only way to chase them is to do whatever they have been doing, but in a more efficient way. This is the harsh fact for anyone who want to reach the top tier especially among those PVP ranks (arena and food club).

In order not to scare away players who started to realized that after playing a while, Neopets contains designs to relive such dissatisfaction.

The constant source of easy income in particular from Trudy's surprise and the stock market boosts the player to the middle class -- say 20 millions so that you also reach the top rank in the bank -- within 1 year. Minimal effort from dailies including Trudy's would reward you at least 40k NPs daily on average, and stock market would do something similar. One could reach 20 millions in 9 months by doing that. Of course, Trudy's surprise is quite ruthless that missing a day would break the streak where the big prize is only offer for logging in 28 days in a row. They should really make it more generous given the current situation.

The main attraction of Neopets isn't competitive PVP contents after all. Many players focused on their own way of enjoying the game: making their pets beautiful, making creative contents and so on. Some of them still cost money but not as much. Neopets promotes a lot of non-competitive contents to enrich the game like the poems, art contests and so on. 

Lastly the price level of particular items can be manipulated. These items are usually confined to two categories: decorative items with widespread demand but very limited supply like Draik eggs, and top tier PVP items. Extra copies are distributed via events often by chance, meaning that all players are eligible to have a go.

The devs do not frequently distribute existing PVP items. Instead they create a power inflation to catch up the monetary inflation. Simply speaking, we expect the new weapon to be like 13%+ more expensive than the old ones, but the old weapons are not inflating (as much) because the demand suddenly shifts. Although such strategy does not really shorten the social ladder, it reduces the difficulty to make progress.

To conclude, Neopets economy is quite horrible mainly due to bank interest which leads to the inherited inflation. Neopets gets around by devising a system that is friendly to newbies and gives chances for middle class to catch up.

But do you sense what's essential in the Neopets economy? A centralized government.



Further reading:

Written in 2014, still applies in 2021. Written in a much simpler way and gives a clearer background about the economy. It also gives a number of economic articles published in the Neopets Dailies.

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