Invasion of reality: an analysis of the economics of virtual worlds

“People tend to forget that the world we live in is just a game designed by our governments. Our economic systems are just a game.”

— CCP Chief Executive Officer Hilmar Petursson.

We live in a random world, and randomness seems to make this world more real than a predictable simulator. And at the same time, we are creating another world through code, a world with predictable and unpredictable parts.

As this world evolves, we seem to have newer ways of rethinking and understanding the real world we live in. Looking back at the development of online gaming, I can’t help but wonder about the gradual birth of this “cloud ball” created by our real-world players.

According to Statista, online gaming revenue is expected to reach $23.582 billion in 2021 and the market is expected to reach $31.328 billion by 2025, while the number of players is expected to rise from 1.097 billion in 2021 to 1.277 billion in 2025.

The expanding market size, the rising number of players, and the number of hours spent online, which is gradually larger than the time spent in the real world, declare that this virtual world is gradually developing and improving.

Invasion of reality: an analysis of the economics of virtual worlds

In Statista’s market definition, online games are defined as massively multiplayer online games (MMOGs) as well as casual and social games.

In this process, our research and thinking about virtual worlds may have a transformative effect on our perceptions, similar to the overview effect mentioned by Frank White in his book Space Exploration and Human Evolution, which refers to the cognitive shift that occurs when some astronauts and cosmonauts look at the Earth from space or the surface of the Moon as they navigate space.

Now we try to look at what happens in this world from the perspective of economics from a virtual world, which may reconstruct the understanding of the objective world.

Games and Economics
Games and economics are two seemingly unrelated words, but they are inextricably linked.

In the game world, players enter the virtual world as game characters, presenting various micro-economic behaviors: choice, cooperation and game, etc. In this artificially constructed economic system, there are also various economic principles: scarcity, demand and supply, institutional design, etc. In essence, this is a mapping of the real world to the real world.

In essence, this is the appearance and law of the real world mapped in the virtual world, but there is a difference in the economic interpretation of the two, because the virtual and the real are two different worlds.

Economists, at least classical or neoclassical ones, study the efficiency of individuals and markets from a rational perspective, trying to open the Edgeworth box and find the laws of welfare economics that describe the “invisible hand” and the equilibrium point of Walrasian equilibrium at perfection.

Of course, there are also behavioral economics or other schools of thought that study chaotic, non-linear and unpredictable economic systems from the perspective of human irrationality.

However, in the game world, or in the larger virtual world, all this behavior is reflected in the players’ attempts to find the optimal solution, or is recorded in the computer’s program.

This virtual world, with its vast data mining capabilities and ability to accurately track player behavior, opens new doors for economists and sociologists in a way.

In addition, the exploration of the economics of virtual worlds also provides new ideas for us humans to better understand ourselves.

We all know that there are two main ways for humans to understand the world: observation and learning. And on this path of learning, we all actively or passively learn about two major fields of science: the social sciences and the natural sciences, but what is the difference between these two?

To explore this question, Felix Martin, an economist who studies monetary theory, has mentioned that the difference between the social sciences and the natural sciences is that “fish do not know water when they are in water”.

In fact, in the field of natural sciences, we study the physical world, and we are constantly discovering the underlying laws of this world, or rather, the world can be objectively known.

The social sciences, on the other hand, are not so simple; we tend to study ourselves as individuals, as groups, and as societies. We cannot separate ourselves from society, much less from ourselves, and this makes objective knowledge of things very difficult.

The closer we get to the core of our everyday system or framework, the more difficult it is to think outside of it to analyze it. This is why, for Felix Martin, the study of the nature of money is so controversial, because it is in itself a very important part of our economic life.

Invasion of reality: an analysis of the economics of virtual worlds

Super Mario & Biohazard

Development of the economic system
At the beginning of the 21st century, with the rise of online games, interactivity between players increased greatly, providing new channels for the buying, selling and exchanging of items. At this stage, players were still rewarded with money and items through labor (completing system tasks such as gathering resources, defeating NPCs, etc.) and spending money in stores to buy them.

But unlike before, a division of labor began to emerge in the game world, such as in World of Warcraft, where there are multiple professions such as mining, forging, leatherworking, engineering, alchemy, etc. A natural supply and demand relationship is formed between different professions – players have limited time and energy, creating the need to trade or exchange with excess items.

This reflects the total process of social production as described by economics, which includes:

Production: the main actors of the action are the game players, the workers in the game world, where labor refers to the activities that exist in the game world for certain purposes, such as gathering, fighting monsters, forging, etc.

Allocation: it refers to the allocation of production materials to laborers or consumption materials to consumers, and this allocation method determines the position of social members in the game world in the production process, and the game designer is the author of this allocation method

Exchange: refers to the interactive transactions in the game, mainly including the transactions between the game players and the game store and between the players and the players

Consumption: mainly refers to the virtual items that players need to consume in the process of growth, such as props, skill books, etc.

Total process of game social production

Further, from a general point of view, the online game economic system consists of supply and player demand. Players obtain supply through their actions in the game world, and consume these supplies to improve their character performance and development.

In terms of production distribution, players get money or production raw materials by collecting, fighting monsters, upgrading and completing tasks; in terms of exchange, it can be divided into transaction with system NPCs and exchange between players, the former can buy and sell various kinds of props in stores with different attributes in the game, and the latter can exchange items with each other through the transaction function key; and consume or use them after getting money or props.

Unlike in the real world, the items in the virtual world are just a string of codes and are not consumed like the real ones. If props in a game or virtual world appear consistently and randomly, the world becomes very crowded, which in turn causes prop inflation.

This is one of the culprits that ruin all online gaming experiences. As time migrates, almost all players will have items that seemed scarce in the early game experience, and eventually even newcomers won’t want them anymore.

As a result, developers have tightened the restrictions on virtual items to bring them closer to realistic items.

First, high attribute items were given scarcity. The possibility of failure was added to the upgrade smelting of weapons in Stone Age, and the ability of captured pets also differed significantly, and the probability of appearance of weapons and pets with higher attributes was strictly limited. The acquisition of high attribute items is no longer measured only by the amount of labor, and luck has become one of the deciding factors.

Secondly, the speed of material consumption is limited, such as props to restore life value, mana value or enhance skills are mostly for one-time use, weapons and equipment will all produce wear and tear during the fight, etc.

Thus, the setting of limiting the number of virtual items fundamentally inhibits the expansion of materials (especially those with high attributes) in the virtual world, and its value will not depreciate excessively as the game progresses, and lays the foundation for the long-term stable existence of the market.

Along with the rapid development of online games, “Hot-blooded Legend” under Shanda (later renamed Sheng Fun) pushed the market economy system in online games into a mature stage.

The process and channels from production, distribution to exchange and consumption are quite well developed, with special markets for buying and selling the needed materials, and transactions between players are guaranteed. In addition, high attribute items become more rare, and their high scarcity drives players to repeat their labor in the game, and obtaining the treasured items in the game becomes the direct purpose of players to play the game.

At this time, the market economy in the game becomes mature and orderly, commodities can be exchanged freely, and excess materials can be exchanged into more liquid currency.

The price of goods, like the real world, fluctuates by many factors, but on the whole, it does not produce large deviations. This is in line with the basic economic law of commodity production and exchange: “Prices fluctuate around value, the value of commodities depends on the amount of socially necessary labor time, and commodities are exchanged according to the principle of equal value”.

Perfection of the economic system
The biggest difference from the real world is that the economic system in the game is essentially to increase the game play and meet the players’ needs for consumption and trading in the virtual world. Therefore, the designers of the virtual world will more or less restrict and manage the economy of the game world, such as prop classification, prop wear and tear, trading mechanism, resource production efficiency, closed economic system, etc., in order to build a “perfect” economic system.

It can be said that the game world is a planned economy first, and then gradually open players to trade to form an internal market, and the overall economic system is constantly subject to artificial or spontaneous adjustment and optimization to achieve the final equilibrium state.

However, since the economic system in the game is created by the developers subjectively, it lacks long-term and dynamic consideration to a certain extent, and various problems will break out after a period of operation. Among them, the most common problems are wealth surplus and inflation.

(1) Wealth surplus

Wealth surplus can cause the wealth in virtual games to depreciate in value in the short term, to the detriment of players’ interests. There are two main reasons behind this.

One is the unreasonable production mechanism, the output is not controlled, and players get too much unneeded materials in the course of the game.

The second is that there is no channel to consume the supplies, and too much accumulation will lead to saturation of demand, and the supplies become less and less valuable.

In order to solve this problem, developers usually reduce the dropped materials or give raw materials for players to build finished products by themselves, and set the wear and tear properties of items to speed up the consumption rate.

(2) Inflation

When inflation is severe, the price level in the game will continue to increase, and players will choose to get rid of the currency to buy supplies. As a result, the game currency loses the trust of players, causing the collapse of the monetary system and even the economic system.

The root cause of this is that the amount of currency issued is too much and far exceeds the demand for it. In this regard, developers need to control the amount of currency and reduce the speed of issuance; on the other hand, they need to increase the channels for recycling excess currency, such as putting new supplies to stimulate players to buy them.

However, because economic problems are difficult to be detected visually and there are a lot of influencing factors, even if game developers have the power to modify economic settings at will, it is difficult to grasp the balance point of the “perfect” economic system.

Therefore, after entering the handicap era, most online handicap games no longer have an in-game trading system, but let the in-game mall be the only place for buying and selling game materials.

The closed management weakens the game play and makes players lose the fun of trading, but it is undeniable that the game’s economic system will be more stable and largely avoids substantial fluctuations.

The handheld version of Fantasy Westward Journey has developed a compromise economic system: a unified trading platform “Hidden Treasure Pavilion” is opened to allow players to trade freely, but the price range of items traded, high-end items acquired and bought and sold are restricted. This half of the open system increases the stability of the economic system, but also limits the free trade between players.

The economic system of the game world remains in a state of fumbling. How to balance the artificial intervention of developers and the spontaneous regulation of the market?

Is the game world really able to reach a balance and build a perfect system? Is it possible to have a completely free and non-interventionist virtual economic system?

For these questions, we do not know at this stage, but the closed market will not be the end of the game economic system.

The invasion of reality by the virtual world economy
In the previous discussion of the economic system, we mentioned that players mainly get the virtual currency in the game world by fighting monsters, doing tasks, participating in activities and buying and selling virtual items in the game.

However, most of the game currencies are produced independently and not issued according to the economic needs, so the game currency is not the general equivalent of the real currency that expresses the value of items.

In fact, both coins and currency are representations, a system used to record credit records as a basis and to implement the process of liquidating this basis. However, currency itself is not money; it is a system consisting of credit records as well as credit clearing, and currency is only a representation of this system.

Therefore, the essence of money is the system of credit records and clearing mechanisms behind it. Money is not a commodity that serves as a medium of exchange, but a set of social-type technologies consisting of three basic elements.

First, it is the abstract unit of value used to measure the value of money

Second, a system of credit records that allows individuals or institutions to keep track of their credit balances or debt balances as they engage in trade with others

Third, it is the ability of the original creditor to transfer the debtor’s obligations to a third party to settle certain unrelated debts

So if you want to create a more realistic virtual world economy, you need to use this social technology to open up the flow of money between the two worlds. Roblox, for example, creates a larger world where people can create new games, new content, and then spend and trade it with a currency called “Robux”. There is no generator for this currency, it must be purchased with real world currency.

Roblox has undoubtedly created a larger virtual world, giving us more room for imagination and inspiration. In another dimension, blockchain technology has also made a significant contribution to the economic system that connects the two worlds.

Authorization, Reuse and Trading of Game Assets
The combination of blockchain technology and games has brought about three main effects: the authorization, reuse and trading of game assets.

  1. Authorization

First of all, let’s talk about the issue of cognition. As the information in the physical world is constantly uploaded and recreated in the digital world, we have, to some extent, uploaded another digital world of ourselves, and at the same time, we are constantly generating new “values” for the digital world.

However, we actually do not feel this part of value ourselves, mainly because we are not clear about the ownership of information assets in the digital world.

In describing his theoretical framework, Coase states that with zero transaction costs, no matter who is given the property rights at the beginning, the property rights will eventually flow to the person who can make the most use of its value and achieve the Pareto optimal allocation of resources.

Of course, this can help to understand economically why it is often the giants or monopolies that further leverage the value of the information we create, but there is another starting point in the process that is the initial determination of rights.

Blockchain certainly materializes some of the assets in the digital world, and as we gradually raise our awareness of the ownership of assets in the digital world, we will gradually embrace this form of technology. And the process of gradually accepting the application of blockchain is also the process of gradually enhancing the knowledge of ownership of digital assets.

When the data assets in the game are not really owned by the player, any other payment method is “rent” except Copy sales.

When the game developers stop the game for various reasons, the levels and characters that the players have invested hundreds of hours in the game will all go down the drain.

Although game designers will be more in the long term to get more income to adjust and plan the future direction, but the players hope to get the game experience and the game developers think there is a gap, the game update content and players want content will also be a certain difference.

Of course, many people have discussed that some features of blockchain can solve these problems, such as a game running on the chain that no one can force to close. As long as the game has players who are willing to pay the corresponding cost, the game can stay on the blockchain.

If most of the players are dissatisfied with the game for some reason, they can vote with their feet to get the game’s content out of the original plan and get new developments as these players want.

Meanwhile, players’ game state and game information are permanently stored on the blockchain, and players’ digital assets such as characters and items in different games can be used across different games, which means that any game can call data from other game worlds.

  1. Reuse

Once the player’s game assets are authorized, we naturally start to think about the next question: can players reuse the assets they own and which virtual assets can be reused? In order to answer these questions, we need to first classify the virtual assets owned by players.

The first category is the virtual currency (such as points, diamonds, gold, etc.) that players recharge or are rewarded by the game for spending in the game store.

The second category is the weapons, equipment, skins, characters, etc. that players get through purchase or reward.

The third category, the game’s personalized data and records for the player.

If players have the first category of assets – virtual currency assets, they rightfully enjoy the power to freely dispose of such assets. However, at this stage, given that the currency payment systems among games are independent of each other, i.e., the currency that players obtain or top up in Game A is only allowed to be used or traded in Game A. This greatly limits players’ virtual currency assets.

This greatly limits the availability and effectiveness of players’ virtual currency assets. Especially when players experience multiple games, the currency in each game needs to be acquired from scratch, for which players need to pay many times more labor or money, and the virtual currency they have acquired before becomes “invalid currency” and loses its value once they leave the game itself.

This problem is actually easy to think of a solution. If players use a central account when playing the game, and tie virtual currency assets to the central account rather than within a single game, players can reuse the virtual currency they have across games.

However, the process of implementing a central account is too cumbersome and complicated due to the different spending and currency conversion rules within each game, so only a separate system can be used.

This is also true for the second category of virtual assets. Weapons, equipment, skins, characters, etc. are often not directly interoperable and reusable among games because of different game types or playing styles, and they will become “invalid assets” when they leave a specific game.

At this point, we think of the blockchain technology, if the assets such as currency, weapons and characters in each game are put on the chain, and NFT is introduced as the medium to transfer them on the chain, it seems possible to realize the transformation and reuse between games. As a result, the problem of “invalid assets” can be solved, and players do not have to spend time and money unnecessarily.

In addition, some players buy and acquire assets for the reason of appreciation and collection, and the reuse of these virtual assets with the nature of collection can give players a sense of satisfaction, which is conducive to increasing players’ stickiness and game experience, and also stimulating players’ purchase of virtual assets to a certain extent.

For the third type of assets, players’ personalized information such as game preferences, abilities and feelings can be extracted through algorithms and big data, and each game player’s personal data comes from the players themselves.

However, at this stage, players are not given the way to obtain their own personalized data, and player data are concentrated in the hands of game manufacturers, which become their tools to accelerate commercialization and expand interests.

If blockchain is envisaged at this time, the information after the chain is transparent, and the manufacturers can collect personal information by paying certain remuneration, but at the same time the information assets are owned by individuals. As a result, the personalized data of players generated in the game can be extracted and used repeatedly, for example, by synchronizing the information into new games through artificial intelligence, so as to generate the most suitable personalized game difficulty and experience for players.

  1. Trading

After investing time and money, players will create a very personalized image of their characters in the game. On the basis of digital asset recognition, these images can be taken out and traded by players.

In the non-blockchain game market, the demand for account trading based on purchasing and renting has emerged, but both the demand and supply side of the account will worry about various problems, such as the account in the transaction being tampered with the password again, the game assets within the account being deleted and moved, and secondary trading.

Players’ demand for in-game digital content is experience, and the trading demand related to this experience includes: acquiring other accounts through trading and obtaining sensory and psychological satisfaction through collecting.

Of course, the above is about account trading in the game operation phase, which represents the ability of users to experience different games with different identities, appearances and states after trading. However, when the game is discontinued, this digital content will disappear and no user will be able to continue experiencing it.

When blockchain secures a portion of ownership of digital assets for the player, the player can not only trade his account more securely during the operation of the game, but also consider it as a collectible and let the digital image he owns appreciate in value through his continuous investment in the game and its operation outside the game.

The discontinuation of the game’s operation also does not deprive the player of the right to collect, and the player can somehow make the character in which he can interact and browse for simple actions to enjoy. If the player has some kind of rare prop or costume on him, then the digital character has a high probability of having a higher collector’s value.

Players can use this tool, service or platform on an ongoing basis to enjoy the characters from previous games, use them for simple interactions and to showcase skills, etc., as well as to trade them and operate them in other content-based ways.

Write at the end
Whether through natural science to understand the objective world ontology, or through social science to understand the self in society, this is the process of human in better understanding the world and the universe.

And this process must be long and painful, only the pain generated, our cognition will be enhanced and evolved.

From the virtual world, it is a very difficult thing to re-understand the operation mechanism of the real world, and it is a very big thing to study from the perspective of economics, because from the perspective of economic imperialism, there are many things in the virtual world that deserve to be viewed from the perspective of economics, including the behavior of players, the implementation of policies in the game world and the economic mechanism driven by algorithms, etc. All these can to some extent be able to understand the world and the universe better. All of these can inspire us to some extent.

We believe that suffering is only a by-product of human evolution, and that there are still many unknowns to be explored on the road to understanding the world, but that is why we will continue to move forward.

References & Materials

Castronova, Edward. “Virtual worlds: A first-hand account of market and society on the cyberian frontier.” Available at SSRN 294828 (2001)

Castronova, Edward. “On virtual economies.” Available at SSRN 338500 (2002).

Castronova, Edward. “Game development and social science.” Journal of Game Development 1.1 (2004): 91-94.

Bilir, Tanla E. “Real economics in virtual worlds: A massively multiplayer online game case study: Runescape.” Available at SSRN 1655084 (2009).

Martin, Felix. The Unauthorised Biography. Bodley Head, 2013.

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