The Faucet and Drain Model - How Virtual Economies Work

By and large, virtual worlds use what is called a "faucet and drain" model for their economies. Imagine a bathtub, except instead of water, the faucet pours out in-game currency (let's just go with the standard fantasy theme and call it gold). But this isn't just any ordinary bathtub. This is a very fancy bathtub, with many different faucets, and many drains.

The faucets act as inputs. This is how players make gold from the system, such as completing quests and killing monsters (gold that is exchanged between players falls outside of the model). The faucet analogy means that gold is being poured into the economy by the system itself...it is being generated out of thin air and given to a player. Thus, the faucets act to increase the total supply of gold in the system.

The drains act as outputs. This is how the system takes gold from the players, such as armor repair costs, training skills, and paying auction house transaction fees. These are player-to-NPC and player-to-system transactions, and they drain gold out of the system. Thus, the drains act to decrease the total supply of gold in the system.

So now we have our bathtub. As players play the game, the faucets are pouring gold into the system, and the drains are sucking gold out of the system. Ideally, there is a kind of equilibrium, so that players can earn the gold that they need in order to accomplish what they want to in the game, but also so that the economy remains stable. The problem is, these systems are very complex, with many faucets, many drains, and a whole lot of players. It's nearly impossible to get the balance just right so that the level in the bathtub is stable.

If the drains are draining faster than the faucets are flowing, we would see a virtual depression in our virtual world. Players would have a hard time getting the gold that they need in order to train new skills and otherwise play the game. This would be a Very Bad Thing, because broke players who can't even do basic things like train all of the skills available to their characters will be unhappy players. So, virtual world developers tend to err on the side of letting the faucets flow faster then the drains are draining. This means that our bathtub will eventually overflow, which in this analogy means the economy will experience inflation: as gold becomes more common, it becomes less valuable, and the prices of other goods within the game will rise. Plus, our bathroom floor will be all wet and messy.

What does inflation mean for a virtual economy? Stay tuned and find out.