Interesting feedback as this topic always seems to generate.
The simple facts are as follows.
#1: It is working as intended. Prior to this mechanic there was an unacceptable level of players simply staying online for the sake of staying online and therefore breaking fundamental mechanics revolving around crime and punishment. This has almost all but been eliminated.
#2: Dual boxing, AFKing in town, Alt blocking, bots & all other forms of play that I do not encourage have gone down dramatically. Typically people are logged into Salem when they wish to play Salem, and not logged into Salem when they do not. Sure that hurts our population by not letting players leave dozens of characters online constantly, but I would rather have an active playerbase playing the game than an army of AFK players simply bolstering population.
As for "it doesn't add anything". Neither does inspiration. I could eliminate it and simply let you click the + sign next to your numbers to advance. Gluttony is pointless too. I could just let you click the forks and everytime you do you gain levels. One can argue that every 'hurdle' is unnecessary and that everything would be more enjoyable with the removal of a hurdle. Unfortunately, I do not subscribe to this. Insanity adds a tremendous amount to the game because the pure 'existence' in this harsh world now comes at some core cost. Every player that logs into the game is in a perpetual state of 'dying', and you are forced to address this issue with approx 6 minutes out of every 5 hours of playtime. Surely there is an argument that "I don't want to do what you want me to do for 6 minutes out of every 5 hours". And that is what the teddybear is for. Sleeping in a bed with a teddybear allows for nearly 8 hours of play time without ever truly 'dealing' with the mechanic. Now if you get yourself an affluence set you can push that from 8 hours of uninterrupted play to 12 hours of uninterrupted play.
For those who say "But I want to play in LONGER than 12 hour play sessions and still 100% completely ignore this core mechanic of gameplay". Too bad. However, luckily for me there is absolutely nobody who falls into this category. Instead there are players who don't understand what is stated above, are too lazy to plan 6 minutes of playtime every ~5 hours, or quite simply lack the planning, fortitude, or attention to detail that being a successful Salem player demands. I am also fine with this.
In conclusion, it adds another dynamic to just about everything in the game. There is now an immediate 'frustration' when a blood moon is summoned because simply being online adds madness levels from it. There is a penalty for the mass wringing of necks of small helpless creatures, forcing you to diversify your current focus when the actions of of questionable sound mind. The mass murder of players now requires attention to insanity. Taking drugs requires attention to insanity. The mechanic was woven into many corners of the game and anybody who thinks that it serves some 'sole purpose' really hasn't paid very much attention. If what I considered a reasonable % of educated playerbase were unable to cope with the mechanic then I would certainly address it. However, so long as it plagues the bottom 5% it does nothing but bring me joy

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I will concede that perhaps Tobacco could be re-worked tho to be more of a go-to way to counter it.