Virtual Economy

virtual real estate by adam hancher

A virtual economy (or sometimes synthetic economy) is an emergent economy existing in a virtual persistent world, usually exchanging virtual goods in the context of an Internet game. People enter these virtual economies for recreation rather than necessity, which means that virtual economies lack the aspects of a real economy that are not considered to be ‘fun’ (for instance, players in a virtual economy often do not need to buy food in order to survive, and usually do not have any biological needs at all). However, some people do interact with virtual economies for ‘real’ economic benefit.

Virtual economies arise in numerous platforms. Multi-User Dungeons (MUDs) are text-based games that predate the World Wide Web. The largest virtual economies are in massively multi-player online role-playing games (MMORPGs). Virtual economies also exist in life simulation games which may have taken the most radical steps toward linking a virtual economy with the real world. For example, in ‘Second Life’ there is recognition of intellectual property rights for assets created ‘in-world’ by subscribers, and a laissez-faire policy on the buying and selling of ‘Linden Dollars’ (the world’s official currency) for real money on third party websites.

Virtual economies can also exist in browser-based Internet games where ‘real’ money can be spent and user-created shops opened, or as a kind of emergent gameplay (complex situations in games that emerge from the interaction of relatively simple game mechanics). Virtual property is a label that can refer to any resource that is controlled by the powers-that-be, including virtual objects, avatars, or user accounts. They can mimic traditional property in various ways: Rivalry (possession of a resource is limited to one person or a small number of persons within the virtual world’s game mechanics); Persistence (virtual resources persist across user sessions — in some cases, the resource exists for public view even when its owner is not logged into the virtual world); Interconnectivity (resources may affect or be affected by other people and other objects; therefore, the value of a resource varies according to a person’s ability to use it for creating or experiencing some effect); Secondary markets (virtual resources may be created, traded, bought, and sold; real-world assets may be at stake); and Value added by users (users may enhance the value of virtual resources by customizing and improving upon the resource).

The existence of these conditions create an economic system with properties similar to those seen in contemporary economies. Therefore, economic theory can often be used to study these virtual worlds. Within the virtual worlds they inhabit, synthetic economies allow in-game items to be priced according to supply and demand rather than by the developer’s estimate of the item’s utility. These emergent economies are considered by most players to be an asset of the game, giving an extra dimension of reality to play. In classical synthetic economies, these goods were charged only for in-game currencies. These currencies are often sold for real world profit.

The release of Blizzard Entertainment’s ‘World of Warcraft’ (WoW) in 2004 and its subsequent huge success across the globe has forced both MMORPG and their secondary markets into mainstream consciousness, and many new market places have opened up during this time. A search for ‘WoW Gold’ on Google will show a multitude of sites from which the game currency can be purchased. Real money commerce in a virtual market has grown to become a multi-billion dollar industry. In 2001, ‘EverQuest’ players Brock Pierce and Alan Debonneville founded Internet Gaming Entertainment Ltd (IGE), a company that offered not only the virtual commodities in exchange for real money but also provided professional customer service. IGE had a trained staff that would handle financial issues, customer inquiries, and technical support to ensure that gamers are satisfied with each real money purchase. It also took advantage of the global reach of synthetic worlds by setting up a shop in Hong Kong where a small army of technically savvy but low wage workers could field orders, load up avatars, retrieve store goods, and deliver them wherever necessary. This lucrative market has opened a whole new type of economy where the border between the real and the virtual is obscure.

Hundreds of companies are enormously successful in this new found market, with some virtual items being sold for hundreds or even thousands of dollars. Virtual real estate is earning real world money, with people like 43-year old Wonder Bread deliveryman, John Dugger, purchasing a virtual real estate for $750, setting him back more than a weeks wages. This virtual property includes nine rooms, three stories, rooftop patio, wall of solid stonework in a prime location, nestled at the foot of a quiet coastal hillside. Dugger represents a group of gamers that are not in the market for a real house but instead to own a small piece of the vast computer database that was Britannia (the mythical world in which the venerable MMO ‘Ultima Online’ unfolds).

Although virtual markets may represent a growth area, it is unclear to what extent they can scale to supporting large numbers of businesses, due to the inherent substitutability of goods on these markets, plus the lack of factors such as location to dispense demand. In spite of numerous famed examples of the economic growth of ‘Second Life’ an amateur analyst in 2008 estimated the income inequity in Second Life’s economy as worse than has ever been recorded in any real economy. However, the application of these economic measures to a virtual world may be inappropriate where poverty is merely virtual and there is a direct relationship between in-game wealth and time spent playing.

Tools for the comparison of this secondary market have recently become more numerous. This has occurred as a response to alleviate the labor involved in leveling (increasing an avatars status) that requires hours, days, or weeks to achieve. Being able to exchange real money for virtual currency provides the player purchasing power for virtual commodities. As such, players are guaranteed opportunities, increased skills and a fine reputation, which is a definite advantage over others. As MMORPGs continue to grow in popularity and the secondary markets grow with them (some industry experts have suggested that secondary market sales may total more than subscription sales) virtual financial services are likely to become less curiosities and more accepted as a means of interacting with these markets.

Income from sale of virtual items is being considered as real revenue as players in such games have ascribed a real-world value onto them: ‘By taking any aspect of the game and connecting it directly to the real world, the games have only brought this possibility on themselves.’ And as that ascribed value is being increasingly converted into real money, attention is now being given by those in taxation law and in governments. Commentators in taxation law speculate ‘that profits made in virtual worlds could be taxable even before they are withdrawn as dollars.’ The speculation seems to be based on the observation that, as one commentator said, ‘the easier it is to buy real goods with virtual currency (e.g. order a real life pizza) the more likely the IRS will see exclusively in-world profits as taxable.’

Conversion between in-game and real-world currency has led to direct comparisons with other on-line games of chance as ‘virtual winnings.’ Where it is permitted by a game, such winnings may fall under gambling legislation. During an interview with ‘Virtual World News,’ Alex Chapman of the British law firm Campbell Hooper stated: ‘Now we’ve spoken with the gambling commission, and they’ve said that MMOGs aren’t the reason for the [Gambling Act 2005], but they won’t say outright, and we’ve asked directly, that they won’t be covered. You can see how these would be ignored at first, but very soon they could be in trouble. It’s a risk, but a very easy risk to avoid.’ He suggested that compliance might require MMOGs and related traders to obtain a gambling license, which is not excessively difficult in the EU. When queried about games where real-world transactions for in-game assets are not permitted, but there is an ‘unofficial secondary market,’ Chapman responded: ‘Ultimately the point is whether the thing that you win has value in money or money’s worth. If it does have value, it could be gambling.’ So to avoid regulation by these laws, the ‘operator would need to take reasonable steps to ensure that the rewards they give do not have a monetary value.’ They do this by demonstrating enforcement of their Terms of Service prohibiting secondary markets.

Monetary issues can give a virtual world problems similar to those in the real world. In South Korea, where the number of video game players is massive, some have reported the emergence of online gangs and mafia, where powerful players would threaten beginners to give money for their ‘protection,’ and actually steal and rob. Other similar problems arise in other virtual economies. In the game ‘The Sims Online,’ a 17-year old boy going by the in-game name ‘Evangeline’ was discovered to have built a cyber-brothel, where customers would pay sim-money for minutes of cybersex. Maxis, the games developer, canceled each of his accounts, but had he deposited his fortune in the Gaming Open Market (a short-lived virtual currency exchange) he would have been able to keep a part of it.

A 2007 virtual heist has led to calls from some community members in ‘Second Life’ to bring in external regulation of these markets: ‘In late July, a perpetrator with privileged information cracked a stock exchange’s computers, made false deposits, then ran off with what appears to be the equivalent of US$10,000, disappearing into thin air. Despite the seemingly small haul, this heist left investors feeling outraged and vulnerable.’ In ‘EVE Online’ however, theft and scamming other players is perfectly allowed within the game’s framework as long as no real world trading is committed. Players are allowed to loot all items from fallen victims in battle, but there is a disincentive in the form of NPC (Non Player Character) police intervention in higher-security space. Virtual possessions valued in the tens of thousands of actual US dollars have been destroyed or plundered through corporate espionage and piracy. This has resulted in widespread retributive warfare and crime between various player corporations.

Most MMORPGS strictly prohibit buying game currency, items, or any other product linked with the game, with real world cash. ‘RuneScape’ went as far as making this practice impossible by removing unbalanced trades and their traditional player killing system (this was scrapped in 2011 after having been in place for 3 years), resulting in over 60,000 cancelled subscriptions in protest. ‘Final Fantasy XI’ and ‘Warhammer Online’ both have entire task forces dedicated to the removal of real money trading from the game. To control real money trading, ‘EVE Online’ created an official and sanctioned method to convert real world cash to in-game currency; players can use real world money to buy a specific in-game item which can be redeemed for account subscription time or traded on the in-game market for in-game currency.

For a persistent world to maintain a stable economy, a balance must be struck between currency sources and sinks. Generally, games possess numerous sources of new currency for players to earn. However, some possess no effective ‘sinks,’ or methods of removing currency from circulation. If other factors remain constant, greater currency supply weakens the buying power of a given amount; a process known as inflation. In practice, this results in constantly rising prices for traded commodities. With the proper balance of growth in player base, currency sources, and sinks, a virtual economy could remain stable indefinitely. As in the real world, actions by players can destabilize the economy. Gold farming (users playing the game solely to acquire virtual gold) creates currency within the game more rapidly than usual, exacerbating inflation. In extreme cases, a cracker may be able to exploit the system and create a large amount of money. This could result in hyperinflation. In the real world entire institutions are devoted to maintaining desired level of inflation. This difficult task is a serious issue for serious MMORPG’s, that often have to cope with mudflation: when future additions to (or even just continued operation of) a game causes previously acquired resources to decline in value. This can take many forms and have many causes, including new items introduced by an expansion pack, fundamental imbalances in the in-game economy, or even spread of information that allows a previously rare resource to be acquired more easily.

In these virtual economies, the value of in-game resources is frequently tied to the in-game power they confer upon the owner. This power allows the user, usually, to acquire more rare and valuable items. In this regard, in-game resources are not just tradable objects but can play the role of capital. Players also acquire human capital as they become more powerful. Powerful guilds often recruit powerful players so that player can acquire better items which can only be acquired by the cooperation among many players.

Virtual economies have also been said to exist in the ‘metagame’ worlds of live-action role-playing games and collectible card games. Other ‘metagame’ currencies have cropped up in games such as ‘Everquest’ and ‘World of Warcraft.’ Dragon kill points or DKP are a semi-formal score-keeping system used by guilds in massively multiplayer online games. Players in these games are faced with large scale challenges, or raids, which may only be surmounted through the concerted effort of dozens of players at a time. Dragon kill points are not official currencies, but are created and managed by endgame guilds to manage distributions of rewards in those raids.

On a number of discussion and networking sites, such as ‘Slashdot,’ ‘Reddit,’ and ‘Yahoo! Answers,’ points are gained through the garnering of trust evidenced in upward moderations of posted content; however, as stated by ‘Slashdot’ co-founder CmdrTaco, his implementation of user moderation was not intended as a currency, even though it has evolved on other discussion-oriented sites into such a system. On some such sites, the accumulation of ‘karma points’ can be redeemed in various ways for virtual services or objects, while most other sites do not contain a redemption system. On some sites, points are gained for inviting new users to the site.

A game’s synthetic economy often results in interaction with a ‘real’ economy; characters, spells, and items may be sold on online auction websites like ‘eBay’ for real money. While many game developers, such as Blizzard (creator of ‘World of Warcraft’), prohibit the practice, it is common that goods and services within virtual economies will be sold on online auction sites and traded for real currencies. According to standard conceptions of economic value, the goods and services of virtual economies do have a demonstrable value. Since players of these games are willing to substitute real economic resources of time and money (monthly fees) in exchange for these resources, by definition they have demonstrated utility to the user. In 2010, Blizzard stepped up its offensive on account security scams with the launch of a new website: ‘Battle.Net.’ According to Blizzard, ‘Gold sellers and leveling services are responsible for the vast majority of all account thefts, and they are the number-one source of World of Warcraft-related phishing attempts, spyware, and even credit card theft. Players who buy gold actively support spam, hacks, and keyloggers, and by doing so diminish the gameplay experience for everyone else.’

In 2011, Blizzard Entertainment announced that their forthcoming MMORPG, ‘Diablo III,’ will include a currency-based auction house, wherein players will be able to buy and sell in-game items for real money. Robert Bridenbecker, Vice President of Online Technologies at Blizzard, explained that the intent behind the effort is largely to reduce account thefts resulting from player interaction with third-party sites. An undisclosed fee structure including listing fees, sale fees, and cash-out fees will accompany the Auction House at launch, and all transactions will exist within the protected context of Blizzard’s MMORPG. The ‘Real Money Auction House’ (RMAH), as it is called by the ‘Diablo III’ fanbase, will exist in the presence of a parallel auction house wherein items are exchanged for gold, the in-game currency. Accordingly, gold can be posted on the RMAH such that the two currencies may be exchanged for one another at the market rate less applicable fees.

Other virtual world developers officially sell virtual items and currency for real-world money. For example, the MMOG ‘There’ has ‘therebucks’ that sell for US dollars. If the currency in ‘Second Life,’ the ‘Linden Dollars,’ can be easily acquired with real money, the reverse is done through a market place owned by Linden Lab, but is not guaranteed, as the TOS of linden Lab explicitly says that Linden dollars are not redeemable. Rates would fluctuate based on supply and demand, but over the last few years they have remained fairly stable at around 265 Linden Dollars (L$) to the US Dollar, due to ‘money creation’ by Linden Lab. The currency in ‘Entropia Universe,’ ‘Project Entropia Dollars’ (PED), could be bought and redeemed for real-world money at a rate of 10 PED for U.S.$ 1. In 2004, an island in ‘Project Entropia’ sold for U.S. $26,500. One gamer also purchased a virtual space station for U.S. $100,000 and plans to use it as a virtual nightclub.

Many Korean virtual worlds (such as ‘Flyff’) and other worlds outside that country (such as ‘Archlord’ and ‘Achaea, Dreams of Divine Lands’) operate entirely by selling items to players for real money. Such items generally cannot be transferred and are often used only as a means to represent a Premium subscription via a method which is easily integrated into the game engine.

These intersections with real economies remain controversial. Markets that capitalize in gaming are not widely accepted by the gaming industry. Reasons for this controversy are varied. Firstly, the developers of the games often consider themselves as trying to present a fantasy experience, so the involvement of real world transactions takes away from it. Further, in most games, it would be unacceptable to offer another player real currency in order to have them play a certain way (e.g., in a game of ‘Monopoly’ between friends, offering another player a real dollar in exchange for a property on the board); and for this to be necessary or valuable may indicate a ‘Kingmaker scenario’ within the game (an endgame situation where a player unable to win has the capacity to determine which player among others is the winner). However, such rules of etiquette need not apply, and in practice they often don’t, to massive game worlds with thousands of players who know one another only through the game system.

Further and more involved issues revolve around the issue of how (or if) real-money trading subjects the virtual economy to laws relating to the real economy. Some argue that to allow in-game items to have monetary values makes these games, essentially, gambling venues, which would be subject to legal regulation as such. Another issue is the impact of taxation that may apply if in-game items are seen as having real value. If (for example) a magic sword is considered to have real-world value, a player who kills a powerful monster to earn such a sword could find himself being charged tax on the value of the sword, as would be normal for a ‘prize winning.’ This would make it impossible for any player of the game not to participate in real-money trading.

A third issue is the involvement of the world’s developer or maintenance staff in such transactions. Since a developer may change the virtual world any time, ban a player, delete items, or even simply take the world down never to return, the issue of their responsibility in the case where real money investments are lost through items being lost or becoming inaccessible is significant. Richard Bartle argued that this aspect negates the whole idea of ownership in virtual worlds, and thus in the absence of real ownership no real trade may occur. Some developers have acted deliberately to delete items that have been traded for money, as in ‘Final Fantasy XI,’ where a task force was set up to delete characters involved in selling in-game currency for real-world money.

However, ‘Second Life’ has shown a legal example which may indicate that the developer can be in part held responsible for such losses. ‘Second Life’ at one stage, offered and advertised the ability to ‘own virtual land,’ which was purchased for real money. In 2007, Marc Bragg, an attorney, was banned from ‘Second Life’; in response he sued the developers for thereby depriving him of his land, which he – based on the developers’ own statements – ‘owned.’ The lawsuit ended with a settlement in which Bragg was re-admitted to ‘Second Life.’ The details of the final settlement were not released, but the word ‘own’ was removed from all advertising as a result. (It should be noted that Bragg purchased his land directly from the developers, and thus they were not an uninvolved third party in his transactions.)

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