MAWL's Obsidian-Economy Theory for SMP
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An essay on the economics of SMP Minecraft Beta v1.3 and the use of Obsidian as a currency.
Hypothesis : Obsidian can be used as a valid form of currency in SMP Minecraft Beta v1.3
Summary : Upon accepting the base value of time within the game, the player is able to ascertain the value of commodities. Time can be expressed as a function with Obsidian,
thus Obsidian becomes the base currency.
Economics
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This section details basic terms and concepts used throughout this document. It also relates them to the current situation of the game. This section can be skipped if you feel
you understand the concepts of economics within Minecraft, simply proceed to the section titled "The Obsidian Economy"
Basics
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The economy as it stands in SMP Minecraft is what is known as a "hunter-gatherer" economy. All goods and materials are obtained with an investment of time unless through barter. Barter is a valid system of trade, but because there are no commodities in this system, little trade actually occurs. Commodities do not exist in a system where there is no fungibility. What does this have to do with mushrooms!? Nothing, lol. Fungibility means that goods have the same value to everyone, or, Quoting wikipedia "Commoditization (also called commodification) occurs as a goods or services market loses differentiation across its supply base".
This is why there is no real economy in Minecraft: no one can agree on what things are worth.
Opportunity Cost "To be or not to be, that is the question"
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At the very basis of worth, or the determination of value, is opportunity cost. I can give an example here to demonstrate it:
A or B-I can play Minecraft, or, go to work and make $100.
A-If I play Minecraft-I sacrifice $100 by not working.
B-If I go to work-I sacrifice awesome Minecraft Theorycraft!
The Opportunity Cost = What is sacrificed by chosing one action over another.
This concept of sacrificing one possible outcome to achieve another gives a value to something which otherwise might not be measurable. Does that mean playing Minecraft is worth $100? Yes. The reverse is also true, but only in this scenario. Remember this is the opportunity cost not the actual value. Real life scenarios are far more complex, of course, but this example helps us to understand the nuance of opportunity cost.
Labor
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Labor is pretty self-explanatory(it's what happens when a woman gives birth, obviously!). For the purpose of this essay we are interested in "wage labor price". Laborers sell
their time for a wage. If we follow the previous example, the laborer incurs an opportunity cost in addition to losing time. This means that if the work is always the same, the
value of time(to the seller or laborer) is determined by opportunity cost. So, for equal work with equal opportunity cost, the wage has the same value:
Time = Wage(money) = Opportunity Cost
Commodities
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A commodity is a good which has fungibilty. Fungibility occurs when the value of an item is accepted universally. The 6 base commodities in Minecraft are: Stone, Redstone, Iron, Lapis Lazuli, Gold, and Diamonds. These goods have a value relative to one another, it is this relationship that allows their value to be measured. Other goods may be
commodities, but only in their respective economy.
The reasoning behind this is simple: resource distribution and quatities are unknown for all blocks. However, the distribution of ore within "rock" is known. From this knowledge we derive value. We know that:
Diamond occurs in 0.08% of Rock or 1 in 1250
Gold occurs in .1% of Rock or 1 in 1000
Iron occurs in .5% of Rock or 1 in 200
Lapis occurs in .72% of Rock or 1 in 138.8
Redstone occurs in 3.88% of Rock 1 in 25.773
Stone occurs in 94.72% of Rock, forming the baseline because whatever isn't Diamond/Gold/Iron/Lapis/Redstone is stone.
Note-Value for Lapis Lazuli and Redstone assumes the average amount dropped from a block.
From this we can make equations such as 1250 Stone = 1 Diamond. This allows us to progress further towards understanding the value of time in Minecraft.
On Coal and Why It's Excluded
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Coal is a very useful and is found in 1% of rock. The problem with coal is that it can be counterfeited with charcoal. Charcoal production is automated through use of the furnace item. If one has a tree farm and a few furnaces it is simple to mass produce. It also looks and functions exactly like coal. This causes inflation and because the value
of coal is indeterminate given charcoal I have excluded it.
Trade
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Trade is characterized within the game as any contract which results in an exchange of goods or services. For the purpose of this economy, in so far as it concerns our
calculations, we assume a "fixed-price contract". The ratio of this contract is 60/40 : Buyer/Seller. This means the demander always pays more than the supplier. This can be
demonstrated here:
I have $100 (Buyer)
You have $50 worth of Commodities(Seller)
We take $50 of money + $50 goods = $100 of value
We use buyer/seller ratio of 60/40
I pay you $60 for the goods.
Does this mean all trade will follow this format? Not neccessarily. A blackmarket will arise and prices will fluctuate. But for the purpose of determining the actual value of
currency we follow this formula.
Supply & Demand
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Supply and Demand controls the value of items as they exist within an economy(or it should at least). When supply is high, the price is usually low, and vice versa. While this
concept plays a factor in the game currently, it has a neglible effect on the value of commodities. Because there is no currency, trade is limited by the actual amount of goods within the economy. One cannot pay for high valued diamonds without a mountain of resources.
Currency
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Money is what is needed in order to facilitate trade. Currency has value which everyone agrees upon. There is no currency in Minecraft which is why I have written this document. I have discovered that obsidian can be used as a valid form of currency if one takes the time to understand what it is worth. I have also outlined ways that it can be implemented into the game.
The Obsidian Economy
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The Cobblestone Hour
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This most important block in Minecraft economy is the Stone Block.
[PIC]
The simple reason for this is that it contains ore. Redstone, Lapis Lazuli, Iron, Gold, and Diamond ores are commodities (see Economy). Mining stone has universal equality in value, or more simply; two players under similar circumstances can swing a pick at stone with equal results. All that is required is a mouseclick and time. This concept allows us to establish the base value of time.
The concept of the Cobblestone Hour is quite simple. As a basis, we use the swing of a pick into a stone block, or 1.79s(see diagram). The yield of this action is 1 Cobblestone. Now, if we repeat this over 1 hour(3600s), we yield roughly 2000 Cobblestone.
3600/1.79 = (2011.173) rounded to 2000 for user error and tool durability.
2000 x .86 = 1720 Cobblestone/hour
We assume some broken iron picks and a miss-swing or two and arrive at 2000. This is definitely for covenience
And calculating the exact numbers in this situation makes a negligible change(about 0.01%). Further, numbers will need to be rounded at a certain point because there are no half-blocks or quarter-blocks, etc. With this in mind apply an efficiency rate of 86%(see Mining Efficiency) and arrive at our minimum potential value for the Cobblestone Hour.
Potential Value--
The potential value of a cobblestone hour is much higher because of the existence of ore within rock. Because the worker is selling their time and not the yield this creates a
situation where it is potentially rewarding to buy and sell time. The intrinsic value of the laborer's time is increased because the yield is immaterial to them, a block is a block so to speak. The value of cobblestone increases, because each swing of a pick can potentially reveal ore. This allows for a situation to arise where; selling labor is more profitable for someone who does not profit from yield, and buying labor is more profitable for someone who does.
Maximum Potential Value--
We make theoretical assumptions here in order to elimante variables, for more info see the Mining section.
-We assume that all mining is done at the appropriate depth.
-We assume an efficieny rate of 86%.
-Any block that is not a Commodity is considered stone.
-Water and Lava are ignored.
We can calculate the maximum potential value of a cobblestone hour by using the Ore distribution variables as seen on Minepedia:
= Materials Baseline =
Diamond = 0.08% of rock or 1250 times Value of cobblestone
Gold= .1% or 1000 x Value of cobblestone
Iron= .5% or 200x Value of cobblestone
Lapis= .72% or 138.8x Value of cobblestone
Redstone= 3.88% or 25.773x Value of cobblestone
Stone= 94.72%
Assuming 1720 Rock
1.376 Diamonds = 1720 cobblestone
1.72 Gold = 1720 cobblestone
8.6 Iron = 1720 cobblestone
12.384 Lapis = 1718.8992 cobblestone
66.736 Redstone = 1719.9869 cobblestone
1629.184 Stone = 1629.184 cobblestone
Total = 10228.07 Cobblestone = Maximum Potential Value of a Cobblestone Hour
The actual value of mining stone for one hour could be more or less. The law of averages will always play out in the long run. The laborer sells his time which is fixed and
constant. The employer, or Buyer, hopes to convert this time into potential profit. This is important when it comes time to pay for labor.
Wages--
So here we are with a maximum potential worth of our stone. We have a laborer selling their time along with an employer who buys it. How much is this time worth?
Labor + Yield = 10228.07 Cobblestone
We assume a Buyer/Seller relation(see Economics, Supply & Demand), with the laborer being the seller and arrive at a wage of:
10228.07 x 0.6 = 6136.842 Cobblestone/Hour of Labor
The employer pockets 4091.228 Cobblestone.
Of course, our laborer has little interest in cobblestone and our employer even less. The value of cobblestone is implied not literal, it is a building material and little more.
We derive it's worth from an equation relating to time. Therefore it's value is not equal to the time value of the wage paid:
1 Hour of Swinging a Pick does not = 6136.842 Cobblestone
Why?
Because currency must reflect the value of time, and exchanging Cobblestone for commmodities will never happen because of this. The value of stone lies in its potential to yield ore and once it is harvested that value dissappears, unlike commodities. What is needed is a way to store time, a currency, and for it to be accurately measured. Fortunatley for us, this mechanism already exists within the game.
The Obsidian Standard
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We have discovered the value of time in Minecraft. We have also discovered the maximum potential value of stone mining and commodities. We have laborers who need to be paid. How do we pay them? What money do we use? What is currency?
Currency is stored value, and if our only value is time, then it is stored time. How do we store time? What activity or object occurs at a fixed rate which cannot be manipulated by the player? The answer, of course, is obsidian. Why obsidian? It is the only answer which fits. Cobblestone is of little value. Ores are expendable, they are refined into goods. No naturally occuring block can be used for fear of strip-mining. There must be enough of it to circulate in the economy. For more answers to "Why not x?" questions see the FAQ.
As a raw material, obsidian's actual value is fairly low. It is not a commodity. It's value is derived from the Cobblestone Hour because of opportunity cost(see economics). The time that is spent creating obsidian could have been used to mine stone. It is more profitable to mine stone than to create obsidian. The yield of obsidian is always the same. The same situation occurs with cobblestone, the laborer mines for a yield amount that is constant and a wage is paid. This leads us to a situation where we in essence sell our time to the block of obsidian.
First we determine the value of Obsidian in relation to time. Obsidian requires a diamond pick to extract which is a considerable investment, so we shall include it in our calculation:
Base Math Assuming 96% efficiency
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-Obsidian has a harvest time of 15.35s.
Assuming 15.35s/Block 3600s = 234.527 Blocks Obsidian
234.527 x 0.96 = 225.146 Blocks/Hour
-A Pickaxe uses 3 Diamonds and is good for 1562 swings before it breaks.
3 Diamonds = Pickaxe = 1562 swings of Pick / 3 = 520 swings = 1 Diamond = 1250 Cobblestone
225 Swings = 540.865 Cobblestone
-We use the base potential value of the cobblestone and add the pick value.
10228.07 cbs + 540.865 = 10768.935 Cobblestone
-Next determine value of the wage.
Labor + Yield = 10768.935 Cobblestone
We assume a Buyer/Seller relation again (laborer = seller)
10768.935 x .6 = 6461.361
-Finally establish per block value.
6461.361/225 = 28.71716
1 Obsidian = 29 Cobblestone
I believe in simplicity so in my opinion it should be 30 Cbs = 1 Obsidian, so that calculations can be done quickly.
The Standard
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We have established Obsidians value but we have a problem. There is no demand for it. As time goes by, the economy grows and obsidian continues to accumulate because no one has any real use for it. It's also hard to destroy. This will cause inflation, and people will stop farming it. We need to create an artificial demand for Obsidian. The server must have a shop or market where obsidian can be traded for commodities. Players should *not* be allowed to sell objects to the server because this creates other ways of acquiring obsidian. If a player can sell sand and string, suddenly they can acquire vast amounts of obsidian for little work. This creates inflation and allows for exploits, limiting gameplay and upsetting balance. I cannot stress this enough, no selling to server.
Oddly enough, only a few items need to be available to buy. Only Diamonds, Gold Ingots, and Iron Ingots are needed to properly regulate the economy. Everything else can be left to the open market and supply & demand will regulate them. I would suggest adding Leather as well for those who are low on funds but it is not neccessary. Here is an example price list using a Buyer/Seller ratio of 60/40:
50 Obsidian = 1 Diamond
40 Obsidian = 1 Gold Ingot
8 Obsidian = 1 Iron Ingot
2 Obsidian = 1 Leather
There also needs to be a neutral area where players can conduct trade without fear of being killed, usually the spawn area. Bandits can wait outside this area but should not be permitted to interfere with transactions as they occur. This is very important. Players will camp the vendor and kill all traders if the are not regulated. A war will be waged
over rights to the vendor. This is not desirable and measures need to be taken to prevent it.
There are several ways that this market can be implemented:
Basic
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The simplest way to do this is for Server Admins and Moderators to volunteer trading services. They act as a salesman and /give the goods to the player. Any obsidian received is destroyed. This could mean that certain times of the day are "Market Hours", or that there is even only a "Market Day" or two, when such services are rendered. The most important rule to follow(other than the prices, of course) is that trade be at a spawn or neutral area and nowhere else. This way a black market can develop and territory will be important.
Any events which offer prizes can instead offer obsidian which can be redeemed at the Market. The opportunity for trade will attract more players to these events.
The "vendors" have the ability to ban or kick any disruptive players, and can police player to player transactions.
Advanced
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A module could be created to implement the Obsidian Standard. Something like iconomy could be used to buy goods with obsidian. The caveat here is that it needs to be limited to the spawn or neutral areas. Allowing players to buy objects from any location gives them too much power. Supply and price on the objects sold remains fixed so most players will not need to acquire them naturally. This limits gameplay instead of expanding it.
A no-kill module could be used to pacify players. Something that makes players invulnerable when they enter certain areas would be good. This means that players could hide in the neutral area, but as long as players are prevented from leaving goods or creating buildings there, it should not effect gameplay negatively.
An item or NPC could be created to automate the use of the obsidian shop. By clicking on the shop the person could buy from the server.
Conclussion
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By establishing the base value of time and measuring it with obsidian we create a currency. When an artificial demand is created for obsidian the currency becomes valuable and useful. Using the suggestions I have outlined above, I believe it is entirely possible to implement a basic economy in Minecraft SMP. Players would need to be informed and some explanantions may be required. Some stimulus injected by the server admins can jump-start the process.
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APPENDIX
Freemining VS Obsidan Farming
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Freemining
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Freemining will always be more profitable than purely farming obsidian. This is true simply because the maximum potential yield of a Cobblestone Hour(approx. 10300 cbs) is superior to being paid for the equivalent labor(approx. 6140 cbs). Freemining is entirely self sufficient, but this does not mean that obsidian has no value to a Freeminer. The value of ore only exists because of currency. A short example:
Lets say you're a Freeminer and you refuse to use obsidian, you decide to use the base cobblestone values instead. Say you have a diamond to sell, someone comes to see you and says "I'll gladly give you 1250 cobblestone for it. No? Ok then how about 50 Redstone? Still no? Alright then 6 Iron! Last offer, I dont have anything else! Cool Sold!" You turn around and someone offers to buy your iron. He starts off, "So how about 1250 Cobblestone?"......
This example shows us the downward trend of the value of the goods. Logic suggests that we always attempt to upsell our goods. So, if I have redstone I will try to get
lapis/iron/gold/diamonds for it, if I have iron then gold/diamonds, etc. Logic also suggests that those without goods have less to trade to those who do. Obsidian allows for
trade to occur without the goods losing too much value.
With no fixed value currency we end up with a constant devaluing of goods. The accepted value system is discarded. This is known as deflation and leads to a recession, where goods and labor continuously loose their value.
Obsidian Farming
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While obsidian can be found naturally, it is not actually spawned in a chunk. The way it is formed is random; water must flow onto standing lava. For a more detailed explanation of this process see Minepedia.
The quantity of Obsidian farmed is based on time, thus the size of a farm matters only if there is more than one person farming. The player can never articially acquire more
obsidian. It must be acquired organically through harvest, trade, or conflict. This creates a situation where the player has several methods to increase their position relative
to other players, and allows strategy to flourish. This is similar to the Nash Equilibrium(see Wikipedia).
The way Minecraft is now, without a currency, the basic unit of value is manpower. Labor is not accurately measured so it only has potential value. Lack of fungibility limits
the value of commodities. The player becomes the currency because he is the only one with liquid-labor. The only fungible value is the potential labor created by a set of hands. The only way to increase position relative to other players is by acquiring more players. This is similar to a Zero-Sum situation(see wikipedia) and only limited strategy can arise.
Obsidian Farming will cause players to attach more value to neutral ground because it facilitates trade. This means that players can remain closer to spawn to take advantage of the liquidity of their assets. This results in an increase of the value of land close to spawn. Because their is potentially great value in cooperation, and value is agreed upon, cooperation can occur with more frequency. The reverse of this; potential loss, along with the opportunity cost, at an agreed upon value; means griefing becomes less frequent.
Mining Efficiency
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Many of the theories presented in this essay depend on assumptions regarding Mining. The prinicpal one, of course, is worker efficiency. In order to understand the relative
points regarding this, I suggest the reader visit Elites Of Minecraft: The Miner [First Ore loss Calculated] where Featherblade has done a very *cough* in-depth study.
Efficieny--
Efficiency is quite simply actual results versus maximum results. The result of mining are never perfect. The reason is because of the potential value of cobblestone versus the literal value of it. While you could mine every single block this is more time consuming. You could only look for ore but have you missed some? This is where we get efficieny from; how good is the laborer at doing it's job under ideal conditions.
From the Elites Of Minecraft: The Miner study we derive an efficieny of between 86-96%. This, however, represents freeminers who have different motivations than our laborers. Freeminers are affected by yield and are not constrained by time. They are not obligated to work if they choose not to. Time invested to work is not in balance with yield as it is with our laborer who is on the clock. Because of these factors I believe the minimum efficieny will be accurate for payed labor. Payed labor is not constant, though it is more so than freemining. Coincidentally, if one considers the work day at 8 hours with 30 minutes lunch and two 15 minute breaks, we get 7/8 hours working or 87.5% efficiency which is close to our minimum of 86%.
For obsidian, which occurs in a controlled environment, we assume the upper range of efficiency or 96%. Why? All obsidian will be harvested, given time, because there is no
potential-the value is fixed. The methods of farming promote less waste. Whole block value and worker motivation also factor in here. Basically for every 100 blocks harvested about 1 minute of time is wasted moving or recasting or what have you. This seems fairly accurate to me.
Mining Depth--
When considering mining depth we assume the right depth at all times. YYY has shown that both vertical and branch mining yield similar results in regards to efficiency. If we
did consider all rock(say everything below sea level(52)) instead of just target rock, all our calculations are useless because there is no way to determine how much rock is
present. We cannot safely estimate numbers to arrive at a reasonable alternative, so we exclude it. Because many other variables(mobs, dungeons, lava, water, natural caverns) are also ignored, I feel it is safe to assume mining is done at the appropriate depth for maximum yield.
Note: The actual method used to mine here is not considered important. We have no way of knowing how our theoretical laborers go about their work.
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FAQ Questions Answered.
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Credits
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Thanks to Notch for making an amazing game. Special thanks to Valerius Maximus for writing the Art of War and Featherblade for his efforts in producing Elites Of Minecraft: The Miner [First Ore loss Calculated] these documents inspired me to write my own. Mega-Thanks to Etherimp, Raging Monocle, and all the players of the Project Art of War server for inspiring me with their passion for the game. Uber-Thanks to my girlfriend Maliena for putting up with me while I ranted about economic theory in a virtual environment.
Version History and Updates
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0.1 Completed basic math Feb 23rd, 2011
0.2 Outlined Cobblestone Hour and Obsidian Standard, Feb 24th 2011
0.3 Outlined Economy Section and Appendix, Feb 28th
0.4 Completed first draft, Mar 4th 2011
0.5 Posted to Minecraft Scientific Foundation Forum for pier review, Mar 5th 2011
I am happy to have earned your respect, you have mine as well. 
I did not intend for it to influence your clan specifically. I was hoping to develop this idea with some peer review and criticism, I apologize if this is not the right place to be posting. 