kode on Nostr: Gresham’s Law is usually summarized as “bad money drives out good.” When two ...

Gresham’s Law is usually summarized as “bad money drives out good.” When two coins are legally treated as equal even though one contains more silver, people spend the worse coin and keep the better one. The stronger money disappears from ordinary circulation.

MMO economies complicate that story. In Diablo II, official gold became too abundant to matter for serious trade, so players shifted into scarcer assets like Stones of Jordan, gems and runes. Guild Wars developed a similar hierarchy, with gold handling ordinary transactions while ectoplasm and other scarce items became common for larger trades.

The difference is that players were free to price the currencies differently. A rune did not have to settle the same debt as a unit of gold. Once the market could recognize scarcity explicitly, the better monetary asset could carry a premium rather than simply disappearing into storage.

Edward Castronova helped establish virtual worlds as useful economic laboratories, while Alexander Salter and Solomon Stein later studied Diablo II specifically as a case of endogenous currency formation. Players were spontaneously separating the functions of money without being told to.

The abundant currency handled the small and frequent. The scarce currency increasingly handled the large and important. Gresham still seems to hold where monetary differences are suppressed, but once those differences can be priced, “good money” can move from something people save into something they prefer to settle serious trade with.