Mudflation is the term used to describe inflation in MMOs.

Unlike in a real economy, there is no fixed amount of currency that circulates, but the amount of currency in circulation continuously increases - whenever a player sells an item to an NPC or receives ingame currency as a reward for a quest, this amount is added onto the money already in circulation, whereas in a real economy, this amount would not be conjured from thin air, but taken out of another entities funds.

Mudflation is very undesirable, as it makes gearing up significantly harder for new players.

Popular Anti-Mudflation mechanisms include ingame mail fees, auction house fees, repairs, upgrading or refining fees or consumables.

More recent East-Asian MMORPGs often have a tendency to have too efficient Anti-Mudflation mechanisms, causing players to become "poorer" as they progress in the game.
Bob sells 20 Smelly Livers to NPC Jim.
Bob receives 10 Gold which the game has just created.
Money in circulation: XXXX Gold + 10 Gold -> Mudflation

Bob sells a can of Red Bull to Joe.
Bob receives 2 Dollars, Joe loses 2 Dollars.
Money in circulation: unchanged
by vizzla January 20, 2011
Mudflation is an economic issue that exists only in massively multiplayer online games. Mudflation occurs when a more recently acquired or introduced item makes an existing item lose significant value. This is most common when a game releases a new expansion, as expansions tend to have better items.

The problem it seems was Blizzard was afraid of Mudflation. They didn't fully understand that it was going to happen regardless so they made instances with blues that were still less then MC gear
by Joff O'Connor August 22, 2007

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