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I'd think badges were useful, but then I think about what the environment would be like if all the loot was held by some vendor in the city and not on the big bad monsters.
I don't think I'd be able to help but to continuously think, "Why can't I just kill the vendor for my loot?"
Killing a dragon and then looting it's corpse will always win over getting his "badge" and bringing it back to show them you are worthy of the armor you should have been given to go try and kill the monster. I know it sounds RP'ish, but it IS an MMO, and immersion is to an extent why the game has done this well so far.
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