Guess we all knew this was coming.

At the beginning of this year, Daeity got the feeling that DCUO would be merging servers, lowering prices, and then converting into a F2P game.

Everything has happened just like he predicted.

Funny note too; back in January Sony also said that F2P was very unlikely. That was around the time they also promised major content releases every month too.. :)

I've touched on this subject a couple of times and you could say that I have a fixation on the subject. I'm not a lawyer, so I really don't know what or if certain online games can be classified as gambling. What I do know is that lawyers aren't perfect, sometimes they make mistakes and sometimes they don't realize or comprehend all of the variables. I also know that there hasn't been enough questions, or even answers, about this very grey area subject.

Here's what I do know though;

In 2006, a guild on Lightbringer held a virtual raffle for the AQ War Effort with prizes consisting of virtual items like Guild Gold or Gear. Blizzard promptly shut it down and they called it "ILLEGAL GAMBLING."

In 2007, the FBI launched a probe into online gambling taking place within Second Life. As a precautionary measure, Linden Labs shutdown all gambling activity within Second Life and prohibited all forms of gambling. It was left as a grey area, and never deemed illegal, but Linden Labs didn't want to take the risk of potential prosecution. Most lawyers agreed however, that it was illegal gambling; you buy the game, play a game of chance within the virtual world, receive Linden dollars, cash out the Linden dollars into real money. In this situation, however, it was a player run economy and not gambling games created by Linden Labs. (However, they provided the means of facilitating the gambling.)

In 2007, the UK Gambling Act 2005 was revised to include MMOs. They redefined the definition of "gambling" as any and all games which involves the use of both chance and skill to win a prize (the definition of a "game of chance"). Prizes can be cash prizes, products, or virtual objects that can be exchanged for money. A similar change was made in US law in 2006.

Online Gambling

Online gambling is illegal in most countries, but I'm going to focus specifically on the USA. Every country (or region) has different regulations of course, and they go about different ways of trying to control online gambling. It's very convoluted from what I understand and a very unclear legal area, which is why they created the UIGEA.

It's not just for gambling sites, but also anyone or anything related to the gambling service (installation, maintenance, facilitation, etc.) The reason why online gambling was made illegal in the US is because it's difficult to license, regulate, and internet gamblers don't know who is operating the gambling site, if the games are honest, if winnings will be paid, or if the money wagered is used for criminal purposes. Players also have no recourse if they are not paid or cheated, they're put at risk to identity fraud, and internet gambling is an uncontrolled environment for problem gamblers and minors.

As you read through each of those examples, you could see how this already relates to Blizzard in the case of the supported gold and item selling; accounts can be banned with no recourse, money or gold can be seized and not returned, minors can play the game, there's no regulation, it's an addictive environment that is uncontrolled, there's no oversight, it's impossible to tell if the games are honest, and RMAH users don't know if any of the money is used for criminal activities. Blizzard has made posts (but no strong regulations and monitoring) regarding identity theft, so we also know for sure that it happens.

Blizzard has also stated that the Diablo 3 Real Money Auction House will be completely anonymous. So, players will never know who're they're playing against, who they are buying and selling from, if the sales are honest, if sales are being used in criminal situations, or if Blizzard or Blizzard employees are selling items. It's impossible to know and there's no third party oversight.

The generally accepted definition of gambling has 3 components:

* consideration (you have to pay to play the game)
* chance (a random game of chance in which skill can play a minor part)
* compensation (cash, something of value, or a reward)

Consideration and Compensation

Both of these can come in many forms, and it doesn't necessarily have to be in the form of cash. Basically, it's "value in" and "value out".

For example, you could cash in to play a game, but win a car. Or, gamble your car for another car. Value in and value out can be representative of chips, tokens, or virtual gold. Technically, you could apply value to almost anything, but online gambling laws are only interested in something that is cash or can be converted into cash (e.g. "it's liquid").

Gold in Diablo 3 is just a token representing cash value, in the exact same manner as casino chips. Your gold "chips" can be cashed out into real money, or used to play other games inside the virtual "casino" game world. Blizzard owns the virtual property and when you pay for items or sell items, you collect money, but the items ("tokens") are still owned by Blizzard. It's much like a casino owning their own proprietary chips.

Real world value of gold can also change, depending on the virtual economy. Some days it might be worth more than others. Just like in the real world, there are dynamic economies and variables that can adjust the value of money.

So, how does Diablo 3 exhibit these 3 components?

1. The most obvious one that everyone immediately thinks of is loot drops.

Blizzard has repeatedly stated that Diablo 3 is an "item centric game" but they have also stressed a major difference between WOW and D3. Whereas WOW had fixed loot tables and drops in an "Achiever Economy", Diablo 3 random wins are "indeterministic" and everything has a random chance of dropping varying levels of value. There is no skill required in WHAT drops.. you can't control it, it's like a roulette wheel. So, the "loot generation" is purely a game of chance with no skill. However, there is another game of chance (and skill required) to get TO the loot generation components.. and that's by killing a virtual monster. The gambling part is what the monster might drop when you roll that dice.

In regards to loot drops, there's consideration ($60 to play the game and/or gold "chips" to equip armor and play the game), there's a game of chance (loot drops are randomized and have real world value), and there's compensation (items have real value and can be sold.)

But this is where it gets interesting. You see, even though World of Warcraft already falls under this same example, Blizzard is free from legal prosecution because the compensation component is not maintained by Blizzard nor is it supported in any way. Blizzard has called gold sales illegal, and compensation can only occur in the black market. Most MMORPGs are free from prosecution, because gold selling (cashing out) is a violation of their rules, not supported, and there are preventative measures in place to prevent it. Without the "cashing out" component, it's not considered gambling.. even though a form of virtual gambling does take place.

In Diablo 3, it seems as though they're getting around this loophole by calling it a "Player Run Economy". The current beta client also has old references to actual "gambling" systems within the game, but I strongly suspect that the word "gambling" will be removed from all Blizzard announcements and communications and probably stricken even from the game itself. :)

In a "Player Run Economy", Blizzard is implying that any activities or gambling within the system will take place between the users and which they won't directly profit from. But, they still get a cut of all the action, they create the games and prizes, they collect consideration, they control the odds, and they can influence or change the economy. It's not really a "Player Run Economy" either if they can control and change the economy on a whim directly or indirectly. This is what Linden Labs tried with Second Life, and it didn't work out for them.

2. Player Gambling and Betting

The impression that Blizzard is trying to give is that the "Player Run Economy" will all take place between the players and they're completely hands off. We know that's not exactly true though. But, let's say for arguments sake that it truly was a player-run economy and that they profited in no way from gold or item sales.

What if players started gambling in game? What if they create virtual casinos like they did in World of Warcraft? (Which Blizzard had already banned and called "illegal.")

What if players engaged in gambling and placing wages in Arena PVP matches?

There are already some great communication systems in place to facilitate and support these exact activities.

The players might be doing something illegal, but Blizzard is supporting the activity, facilitating it, and maintaining it. And, as stated by Blizzard previously, since they don't view it as "gambling" in the first place, then that would mean it's not regulated, there's no oversight, minors can participate, and they're not stopping or preventing the activity from taking place.

Arena PVP would be an awesome betting and gambling system with very high stakes and risks. (And undetectable cheating.)

It might also encourage the development of virtual bookies, escrow services, and loan sharks. Don't have enough money? Just put your high level players up for collateral, if you lose, they're sold off. Gaming is becoming a professional sport, and it wouldn't be a professional sport without gambling and cheating.

3. "Gheed" Gambling and Artisans

As mentioned previously, there are references to gambling and a Gambling Vendor in the Diablo 3 beta files. They're right along side the General, Weapon and Armor vendors.

It appears that there was, at one point, a "Gheed" gambling vendor available in the game. I'm uncertain if it will be in retail or not, but I suspect that all references to "gambling" will be removed.

"Gheed" gambling is a gambling system within the game where you can wage gold, and there's a small chance to win a highly valuable item. That item can be, in turn, converted into real money.

Artisans also have a gambling feature. When you craft certain items, by inputting gold and materials, the item crafted has random statistics.. this means that you can gamble your money (gold) for a chance at winning an item of less, equal, or higher value. Salvaging of items is also gained through a randomized gambling system.. so you can gamble an item, to create random materials, which can be used for more gambling to increase overall value and win more cash.

You shake the dice when getting loot, you shake the dice when converting the loot into mats, you shake the dice when turning the mats into a random item, and you shake the dice when selling the item.

As you can see, there are layers upon layers of gambling systems within this virtual world.. and everything can be cashed out into the real world.

4. The Auction House Metagame

This is one of the activities that Blizzard lawyers might not have considered to be gambling. Blizzard has already boasted at great lengths about the new Auction House metagame within Diablo 3. They're completely right about the AH being a metagame.. it's a game of chance within a game of chance.

However, when you see how the system works, it's evident that "playing the Auction House" is actually a type of gambling.

Whenever you put an item up for sale on the Auction House, you must pay a mandatory Listing Fee. So, every time you post an item, you're taking a risk or a gamble that your item may or may not sell. If you don't win the AH gamble, you lose money. If you do win the AH gamble, Blizzard takes their cut and you get a cash prize.

There are inherent risks involved in every listing. And don't be fooled, there are a significant number of random variables that can alter your odds of winning or losing the AH gambling game; number of players buying or selling, when farmers are banned or allowed to play, when new patches are implemented, hotfixes, hacks and cheats, Blizzard changes listing fees or AH cuts, when certain regions have network access or others can't access the AH, Blizzard changes random loot, changes loot value, decreases loot drop chances, increases treasure drop amounts, changes skills or items that affect MF%, creates new items or loot, creates new bosses, changes number of monsters per zone, etc. All of these examples can drastically alter the economy and your chances of winning with just the simple flip of a number.

The RMAH metagame is like taking all of your winnings from various casino games, and then gambling with the casino to see if you can exit the building with your prizes. You also gamble to see how much they cut into your profits and how much you get to keep.

Bidding and Posting

Keep in mind that the RMAH "metagame" does involve chance and risk due to the non-refundable Listing Fee. But, there's very minimal case law when it comes to gambling and auction systems. There are a lot of websites or online games right now that are operating in murky legal waters because gambling commissions have not pushed the issue.. yet.

When you're posting items, you're playing a game against other players where very little skill is involved and it's mostly random chance. Bidding for items, on the other hand, is something different and more strategic.

So, forget auction listings.. what about just bidding in an auction?

When you examine the Unique Bid Auction system for example, it's considered gambling but not always enforced in most countries. The reason it's considered gambling is because BIDS are NON-REFUNDABLE.

(a) Paying a non-refundable fee
If no fee of any kind is required to bid, as with traditional auction models like EBay, the scheme is not a lottery because participants are not losing money or kind.

In Diablo 3, bids are refundable.. but posting items is not.

Last year, the Italian government shut down a number of online auction sites because they were charging non-refundable fees for bids. So, in Italy, unique bid auction sites are considered games of chance and they are illegal to operate without a gaming license.

And this was just for BIDDING on an auction, not even the POSTING aspect that I've been writing about.

There is also the Bidding Fee auction system (aka Penny Auctions) where players must pay a non-refundable fee to place on a small incremental bid. Some lawyers claim it's illegal and others say it is legal because bidding on the items is strategic. But, once again, it's very ambiguous because government regulators haven't pushed the issue.

In South Africa, however, this type of auction/gambling system is considered illegal. And, here's the interesting bit as to why:

(7) No fee may be charged for participation in an auction, but this does not apply to refundable deposits.

In other countries, though, they don't have any clear legislation about this type of auctioning system. Because of the advances in technology, gaming regulators just can't keep up and there are a lot of legal loopholes being exploited.

Swoopo is a good example in the US. They've gone bankrupt now, but it was under heavy criticism because of its gambling nature. This NY Times article was a funny read, the gambling industry consultant basically said: 'Well.. it's not really permitted in some states and most of Europe, but it's also not explicitly prohibited either." Brilliant. :)

I liked this part too from the sources in the Wikipedia entry: "the non-determinism comes directly from the actions of other users." That sounds very similar to the D3 RMAH, however Blizzard also has the ability to alter the non-determinism of LISTINGS by changing loot flow and random chance within the game.

If Blizzard and PayPal want to avoid any possible legal complications, they should remove the Listing (Non-Refundable) Fee to remove the definition of gambling from its auction system.

But, that would mean EBay is also gambling!

There are huge differences between EBay and the RMAH. Anyone who uses this as an example shows just how little they understand about the situation. It would be the only possible "auction" system they could think of, for example, and they wouldn't be aware that there are forms of online auctions that are in fact illegal.

Here are some of the reasons why EBay is not considered gambling, and how the RMAH is different:

• EBay does not create all of the items that are sold in the auction.
• EBay cannot control of the odds and random chance of user auctions.
• EBay does not sell any products or services that they own themselves.
• Users do not sell items that they received through gambling with EBay.
• Users do not play games of random chance with EBay directly to sell items or to receive items to sell.
• EBay does not create virtual auction items that have no real value.
• Users sell physical items that have real value and depreciate.
• Users sell something they own, and are transferring ownership. They are not selling something that EBay owns and continues to own after sale.
• Users buy items for less or equal to what they are worth. They do not pay increasingly high prices for zero value items in which EBay profits.
• In EBay, users compete with other users. There is transparency and rules. In the RMAH, you are playing against the House.
• Users do not use a proprietary currency created by EBay.
• EBay users know who they are selling to, financials are traceable, and monetary transactions are refundable or recoverable.
• EBay users sell highly unique items. Not millions of the same item.

If EBay were to be run like the RMAH, here's how it would work:

EBay would have their own proprietary currency. Users would buy a license in order to use EBay, and told that they don't own anything. EBay would create virtual items themselves (that are worthless), and users could win these items through games of random chance. Users could then attempt to sell these items on the EBay Auction House, but selling the item would be completely random chance and based on odds that EBay controls. You would be competing against "the House" to sell your item and EBay can make it easier or harder to sell your item. You have to pay for the Insertion Fee every time you lose an auction. All transactions would be anonymous, and you have no idea if you're playing against a real person, a minor, a criminal organization, or an automated system.

But it's only pennies!

I think a lot of people don't see the gambling nature of the game because the transactions are just so small. But, I see it as an entire world (or virtual casino) full of microgambling transactions in different forms. All of the little games are presented in different ways, there are different rules and players, and they have flashy graphics and colorful disguises.. but at their core, it's still gambling and everyone knows it.

Making $0.10 per day by gambling items on the RMAH doesn't sound like a lot, but multiply that by millions of transactions per day or per hour.

Like Blizzard said, it's an item centric game. The entire game is about items and gold (basically, casino chips), managing them, organizing them, buying and selling them, and gambling even further with them.

In a typical gaming session, an average player might participate in thousands or tens-of-thousands of microgambling related interactions and not even realize it. NPCs drop tons of treasure (from 1-10 objects like gold or loot). Say you kill 500 monsters in one session (which is probably very low); that's potentially 1000-2000 random dice rolls at a game of chance. Salvage the items for their mats and that's another 1-2k in attempts at gambling for higher valued items. Craft items from those mats or sell on the Auction House; that's another gambling metagame.

PayPal is also part of and supporting this new infrastructure. For the past several months, they have been eliminating the "illegal" black market gold sales competition and clearing a path for Blizzard to be the only authorized gold seller for Blizzard games.

What's even more funny is that gambling is strictly against PayPals own policy.

PayPal Acceptable Use Policy

You may not use the PayPal service for activities that:

- involve gambling, gaming and/or any other activity with an entry fee and a prize, including, but not limited to casino games, sports betting, horse or greyhound racing, lottery tickets, other ventures that facilitate gambling, games of skill (whether or not it is legally defined as a lottery) and sweepstakes unless the operator has obtained prior approval from PayPal and the operator and customers are located exclusively in jurisdictions where such activities are permitted by law.

Other Impacts

I imagine that when the RMAH launches it will be a rather frightening time for Vivendi, Activision, Blizzard, and PayPal. But, let's say the RMAH is highly successful, and either the governments of the world don't consider it gambling or they win court cases proving that it's not considered gambling.

The problem up until now is that online gambling is illegal, but the lack of prosecution has made it an unwritten rule that indirect online gambling (or within video games) is legitimate. No one has ever pushed the boundaries (take Linden Labs for example), but once an entity pushes the boundaries, everyone else can learn from it or abuse it.

* Blizzard, for example, could push the boundaries even further. They can start introducing more game features that look a lot more like obvious gambling; for example a real "Gheed" gambling vendor in the game, minigames where players can compete against each other, or a UI and payment system for Arena PVP gambling and betting. If it becomes a popular spectator sport (like Starcraft), there might be a fee system for watching or participating in the fights.

* Setting a legal precedent will allow gambling sites in many countries to create a legal loophole for their own games. Here's a video game example; players buy the MMO game from a retail store or online, players meet together as avatars in a virtual world with casino games and can compete to win virtual gold, this virtual gold can be sold on an auction house to other players for real money. New players must buy virtual gold from the auction house in order to participate in the casino games.

* Don't want it to look like real gambling? Change the name "Horse Racing" to "Bunny Chase" and swap their textures. "Dog fighting? No no.. that's just the players demon pets engaged in PVP". Gambling sites could seriously exploit this same approach by just changing names around, or make it indirect gambling. Kill a monster by tapping the space bar a few times.. oh wow, he just dropped a deck of cards. Let's use this deck of magic cards (that looks just like a poker deck) with some other players in my zone. "The casino isn't running this virtual economy.. it's a PLAYER RUN ECONOMY! See, there's a difference! This is legal!"

* Other than the new waves of gambling addictions, how about the other real world economical or sociological effects? Blizzard has condemned Gold Selling due to the detrimental effects that it has on players. It's a well known fact that RMT is an effective business in developing countries and it encourages exploitation, forced labor, creation of sweat shops, and other what we would call inhumane conditions.

Whether it's a black market or legitimate RMT business, it makes no difference. Sweat shops will still be created no matter who is running the RMT business. By "legitimizing" RMT, however, it makes it easier for more people to participate, potential buyers feel more safe, it creates a system for them to use that guarantees trust and certified sales, and if anything, it makes it much more easy to profit from the exploitation of workers. I wonder what human rights groups would say to a business that first condemns exploitation of workers, and then turns around and supports the activity because they profit from it?

Players from any country can farm on whatever D3 regional server they select, and players would have no idea of what their money is supporting or what was involved in farming that anonymous item that was purchased.

Don't get me wrong..

I'm not anti-RMAH or really pro-RMAH either. What I like about the RMAH is that it's new, exciting, thought provoking, and untested for such a popular franchise. But, I also have no illusions about Blizzards new direction.

I'm most excited about the concept of "illegal online gambling" and if it can be legally applied to Diablo 3. Online gambling is very ambiguous at the moment, and no one has taken the risk of going to court over the issue. Because of this big push into virtual world gambling, we should see some interested things come out of it.

From a morality standpoint, we all know it's gambling, but that doesn't matter because it comes down to what you can prove in court. If it's made legal, so be it; it will open a door to new opportunities for online casino owners. I wonder if they're tracking this new direction at all and understand how it affects them..

The first few months should be really fun, but it probably won't happen the way most players are expecting.

Everyone is talking about selling items, but no one is talking about buying items. Every forum message I see is, "Oh man, I can't wait.. I'll be farming for hours and selling this stuff for cash baby!" like they're truly expecting everything they post will sell. I haven't heard anyone say, "I can't wait to spend all my money to help level up my character!" or "The first thing I'm going to do is buy a new character!"

During the beginning phases, there's going to be an explosion of people selling every item imaginable with impossibly expensive price tags. All of the rookies think they've discovered the holy grail and foolishly believe that no one else will be doing the same thing. The market will be flooded, and no one will be buying because everyone just wants to sell. Blizzard is going to clean up on all of those Listing Fees. Investors will be very happy.

The sad truth is that eventually the casual player isn't going to care as much about making money on the RMAH, they'll give up, and fall in line like everyone else. The RMAH will become a place to visit occasionally and spend money on a couple microtransactions every once in a while. More time will be spent enjoying the game, but it's the select group of professionals who will know how to drive RMAH revenue and they'll be the ones making all the sales.

Problem is, content will be desperately needed to continue driving players to collect loot. What's the point in getting better and better gear, if you already have adequate gear to beat the final difficulty level solo? Players need new content where gear is more valuable, especially in cases like PVP battlegrounds. Introducing more PVP features will increase the need for the better items on the RMAH. And we all know that's where the best gear will come from.

Blizzard should have a very good understanding of their players, especially from all of the lessons learned through World of Warcraft. Increasing PVP features (1v1, 2v2, 10v10 arenas and huge battlegrounds) will significantly increase RMAH sales and also drive up their revenue. Because of the importance of driving revenue, and how directly related PVP is, you should see a TON of PVP features implemented in the future through both patches and expansion packs. Right out of the gate, though, it will be limited.

I do know that large scale battleground combat will eventually be made available. It's their destiny.

Related Posts

Here's a summarized list of the other various Diablo 3 Gambling related posts that I have written. I think they're a very important read, and more people should be aware of what's going on.

How the RMAH can be considered online gambling: [LINK]
Comparison of D3 to other forms of gambling: [LINK]
Another follow up on illegal gambling: [LINK]
How players are forced into using the RMAH: [LINK]

On a related note to that last link, the Listing Fee for the gold auction is currently 15% of the final price. That's a HUGE amount, and definitely a turn off for players who could save a ton of money by paying the Cash Auction House flat fee. Not only will players only be able to obtain the best gear on the RMAH, but the current state of the Gold Auction House is further pushing players into the RMAH.

So far, there's really nothing out there on the net that discusses this important topic. But if I find any thought provoking articles, I'll be sure to post them here.

* Here's an old article from 2005 about gambling in emerging MMORPGs that is relevant today.

[Sept. 24, 2011] Update:

* Here's an interesting read about the South Korean GRB (Game Rating Board) questioning multiple large MMO developers about types of gambling within their games.

Blizzard is not one of them (since they don't have any current in-game cash systems), however NCSoft, Mgame, and Nexon are included in their investigation. Their concern is about "jackpot items", or basically players who have certain or little chance of winning high value items. I wonder if this could be applied to selling high value items with little chance?

* And, here's an older post from the same Korean site about the MCST (Ministry of Culture, Sports, and Tourism) considering regulation about Random Items. It's a very grey area there too, but it's still recognized by many as gambling.

Even the UK Government has been drafting legislation in which auction site owners would need to obtain a gambling license to operate. Certain auction sites would be exempt, but this is for the substantial changes in online auction and gambling systems and still years away from completion.

* Here's a case where two players were charged for buying and selling virtual items in Lineage II. Apparently, they bought a large quantity of items through an online trading site, sold the items in-game, and then resold the virtual gold for a much higher profit. Both users were acquitted as the SK Supreme Court ruled that the money was not gained through random chance or coincidence, but rather that it was strategically bought and sold. This is a very good example proving that Auction Houses can be used to buy and sell items in-game, and it's not gambling as long as there's no random chance or risk involved (in getting the items or buying/selling the items.)

* Imagine a penny auction system within a virtual world for buying items. Many geographies would consider that gambling. Or when you try to sell items, it's through luck, coincidence or random chance.. and each attempt costs you money (risk based.)

* A blog that discusses Korean legislation. Interesting read that's related to the gambling issue.

Alright, so by now you're aware that Diablo 3 has been designed with a new type of client/server security system and with methods of exploit detection.

I've also updated the Unrealized Reality of Diablo 3 post with an example showing what happens to areas that haven't been randomly generated yet, and how model editing (for the purposes of world crafting exploitation) is not possible in Diablo 3. Well.. there is sort of a way to still do it, but it's rather annoying and relies on a certain measure of random generation by the server. Plus, Diablo's Warden system will be checking for file modifications.

Anyways, F&F beta players are discovering that the client is doing a lot of little combat tricks in order to keep the flow of combat and mask latency issues. Unlike WOW, which is more turn based in hit and damage calculations, Diablo 3 seems to be taking some liberties with client side damage calculations. Maybe this is just part of the beta test and things will change when it goes live? Who knows.

There are more details here that help explain.

F&F sources have it that Blizzard are using a new method of client/server communication that provides a secure and tamper-proof method of using the local client to handle its own calculations, while sending the data to the server for verification.

This is really good news for hackers.. it's something different, interesting, and a new challenge with some hefty financial rewards. :)

Even during bad latency, combat damage and related calculations are still being calculated on the client end so combat action and fighting appears seamless (and enemies can die) even with terrible latency.

This means that there's a client element involved, and if there is, it can be manipulated or exploited. For example, injecting swing count or damage numbers in the packet stream to increase DPS.

If I was designing the game, the approach that I would use would be a "forward thinking algorithm" where all of your combat damage is already pre-calculated several steps ahead by the server. This could be very easily done in all MMOs to reduce latency, and it's the approach I would take to improve client speed and response time (it's actually more of an illusionary effect) while simultaneously retaining security of data.

For example, you know how the D3 server streams map data to the client as territory is explored? Well, it could also be streaming (pre)randomly generated combat damage data to the client in preparation for all upcoming damage. Say, for example, 100 hits in advance of the actual combat. Even if your connection is experiencing heavy lag, both the client and server knows what damage and identical outcomes to all future combat will be. This way, the data can't be manipulated locally else it will fail security checks.

If this is true, it might also mean that drops are randomly calculated in advance too. :)

It's very clever, but it opens up some new challenges for Blizzard. For one, it means that future hit data would be pre-cached somewhere in memory (so players could essentially determine future damage and make adjustments to exploit it). Knowing future rolls would also allow a player to "reset" the stream to get better loot, but I doubt they would allow this.

That's if "future data" is actually streamed; no one has investigated this yet to confirm. However, if damage IS calculated by the client without a simultaneous server check (maybe there's one within a set period of time?), then latency hacks to adjust DPS will definitely be possible.

Can't wait until someone digs deeper into the client server packet stream. Maybe that D3 Emulator team might discover the truth during their investigation. :)