I’d like us to consider today the nature of liquidity, it’s benefits and how game mechanics can be used to create it.
Firstly, what is liquidity?
I characterise it as a smooth, some would say optimal, distribution of resources avoiding peaks and troughs of silo’ed supply and demand.
Pretty wordy, so since most of us know what a market is, let’s think of it as “a market operating normally.”
A market is truly liquid if all potential buyers and all potential sellers of a particular commodity have agreed on the same price.
I see three key benefits in liquidity:
- Fairness – everyone pays (and gets paid) the same price
- Resilience – there is rapid response to failure – if one supplier fails, another quickly takes its place
- Resource Optimisation – there is optimal distribution of the scarce resource across everyone involved
Now in practice it is a monopoly that breaks liquidity: monopoly suppliers (or purchasers) can dictate the price they choose is often regulated out in most markets.
However, temporary monopolies can occur when there is no current competition, logistical difficulties get in the way, a harvest fails or simply when people don’t show up for work. Much of business strategy is the pursuit of a temporary monopoly.
A market is rarely 100% liquid at any time. So we need some mechanics to create liquidity – we need game mechanics.
Game mechanics that create liquidity
A functioning market has game mechanics designed to facilitate liquidity. Let’s have a look at a few of them:
Having a single currency (or the ability to convert) goes a long way to creating liquidity. It means we all have a shared and agreed standard into which we convert our diverse commodity trades.
In games we tend to use the same term – Facebook Credits is a form of currency mandated for use in Facebook social games.
By allowing the same currency to be used across multiple markets we give purchasers the critical ability to compare prices. This helps set prices at the right level to begin with.
Fine grained pricing is essential – my 10 pork bellies (from fat, pedigree pigs, raised on organic food in a Cotswold farm) are not equivalent in value to your 10 pork bellies (mass reared on a factory farm for example).
Pricing is a game mechanic but this is rarely set by the player, more usually it is set by the game designer, a virtual handgun costs 50 credits, a virtual rifle 100 credits and so on. But in some games, such as the board game Monopoly, you can buy and sell your assets at prices you agree with another player.
Trading is a popular game mechanic – buying and selling gave a great dynamic to Elite (the space trading game). Trading is what creates liquidity in a market.
A trader identifies a peak and trough in the market – two places, typically, that have differing prices for the same commodity. He buys in one and sells in the other, making a profit along the way.
Somebody somewhere has to make (mine, grow or breed) the commodity in question.
In most games the producer is the game designer – Zynga have staff dedicated to making those cute ‘pink tractor’ icons that they then sell to players who place them on their farms in the popular Facebook game, Farmville.
In some games though, players have the ability to create, such as race track creation in Mod Racers. In some, like Second Life, players can profit from selling their creations to other players.
This is the last key piece in the market – the item must be consumed and ‘used up’. Or if it’s basically immutable then it gets permanently stored somewhere – like a painting in your house or a diamond on a ring.
Players are the consumers in games – an energy drink to keep your character fighting, a new sword to kill more monsters, and so on.
Many games have both places to store items (your Pet’s virtual house in Pet society for example) and ways to consume items (‘sinks’) such as energy drinks.
So we can see how much of the market can be broken down into a set of simple game mechanics.
Now you might see these as examples of ‘real-life-ification’ where games borrow from real life, rather than gamification, but I could argue the market stole the mechanics first, way back in the ancient greek agora.
The key thought though is that liquidity is the objective and game mechanics are the tools by which we achieve them. If we see the market as made up of mechanics then, as gamifiers we can start to see the potential to tweak and adapt them.
This is what organisations like the stock exchange, the financial regulator and central banks do for their day job. They are the gamifiers and the market, our market, is their game.
What needs liquidity in your organisation? Perhaps it’s knowledge, allocation of people resources, or time? How can you use game mechanics to solve the liquidity problem?
I’m not an economist so if you are better trained in matters of the market and know the correct terms I’d appreciate your clarifications in the comments!