Fieldnotes from the Metaverse — Market and Society on the Cyberian Frontier
In 2001, Edward Castronova looked at the economies within virtual worlds — and invented the field of virtual economics with his paper “Virtual Worlds: A First-Hand Account of Market and Society on the Cyberian Frontier”.
Setting the scene
The late 1990s were a period of massive growth in the use and adoption of the Internet. As a result, many startups and traditional companies focused on Internet transformation, or simply “doing something with Internet”. Excessive speculation on these companies caused the dot-com boom, which finally burst in late 2002, burning through $5 trillion USD in capital and causing a global recession.
Globalization re-shuffled economic power. The United States’ dominance over the world economy declined, with economically rising nations like China and India showing signs of becoming contending world powers. The Euro became a legal tender in twelve European Union countries in 2002, making it the largest monetary union in history.
In games, Underlight was the first commercial 3D massive multiplayer game, released in 1998. But it was Asheron’s Call and EverQuest in 1999 that achieved commercial success first. Phantasy Star Online followed in 2001 as the first MMO on consoles. This was the first time when millions of players entered virtual worlds, fueling their in-game economies.
Meanwhile, Edward Castronova obtained a BS in international affairs from Georgetown University in 1985 and a PhD in economics from the University of Wisconsin–Madison in 1991. In 2000 he accepted a position as associate professor of economics at the College of Business and Economics at California State University and published what he thought would be a rather funny paper about the virtual economy of a massive multiplayer game.
Virtual Worlds: A First-Hand Account of Market and Society on the Cyberian Frontier
The paper looked at the recently released virtual world EverQuest (1999). EverQuest was the first commercially successful 3D MMO with around half a million players by the end of 2001. In terms of gameplay, it was a fantasy game, drawing strong inspiration from MUDs, especially DikuMUD. But Castronova wasn’t interested in the game per se or its setting: He looked at the emerging in-game economy.
In the paper, Castronova concluded that the economy of Norrath (the fantasy world of EverQuest) had a GNP per capita somewhere between that of Russia and Bulgaria, making it a world top twenty economy in that category at the time.
A unit of Norrath’s currency traded on exchange markets at USD 0.0107, higher than the Yen and the Turkish Lira at the time. Based on that rate, the nominal hourly wage was about USD 3.42 per hour, which was the 16th highest in the world, around that of Slovenia and Portugal.
Based on that, Castronova predicted a future of virtual daily life and commerce, in which virtual worlds become economically meaningful environments.
Here is a summary of the paper, written by Karl Smallwood and narrated by Simon Whistler:
Impact
What Castronova had thought was a humorous paper launched the new field of virtual economies. Of course, economies in virtual worlds had existed before, but the paper uncovered just how massive they had become.
After trying to suppress the secondary market for virtual goods on Ebay, Sony Online Entertainment adjusted to this new reality and launched Sony Station Exchange in June 2005, allowing EverQuest II subscribers to securely buy and sell the rights to use virtual characters, items, and coins for real money on a dedicated platform.
Station Exchange was the first big official, sanctioned virtual-to-real economy marketplace, brokering $1.87 million in player transactions during its first year, with players paying as much as $2,000 for the right to use a single EverQuest II character. The top seller earned $37,435 from 351 auctions in 2006.
In 2006, Julian Dibbell published a sort-of-sequel to already discussed My Tiny Life called “Play Money: How I Quit My Day Job and Made Millions Trading Virtual Loot”. It documented his experiences as a trader of virtual gold and artifacts in Ultima Online between 2003 and 2004. The first half of the book covers the concepts of play, work, and money, while the second half covers his trading activities, during which he also describes his relationships with other traders, entrepreneurs and “Chinese gaming factories”.
He also kept a diary on his blog, which is still public. In his last month of trading (March 2004), he made a profit of $3,917. Annualized, that’s $47,000.
EVE Online also launched in 2003 as a massive multiplayer space trading game, in the spirit of Elite. The game features an extremely complex player-driven economy as a core gameplay mechanic, to the point where people describe EVE as an “Excel sheet simulator”.
EVE’s main currency ISK (Interstellar Kredits) is freely exchangeable within the game. There is also PLEX, which is an in-game item that can be traded for ISK or bought with real money through the official exchange, creating an in-game to real-world currency conversion rate.
CCP Games, the developer of EVE, recruited a full-time economist in 2004 to monitor and control their economy. In 2008, they hired Dr. Eyjolfur Gudmundsson as its Head Economist, leading a team of analysts. CCP grants access to the economic data of EVE and publishes a monthly economic report, which some sites data mine and analyze as part of the metagame.
Virtual economies opened a new, parallel income stream for developers and operators of virtual worlds, beyond initial sales and monthly subscription fees. Eventually this trickled down to single-player experiences and games in the form of microtransactions.
As virtual worlds and platforms thrived, so did the field of virtual economies. The simulated nature and scale of virtual worlds make their economies a valuable field to research and look for real-world insights. Valve Corporation, creator of Half-Life and the Steam platform, hired Yanis Varoufakis in 2012, who later became the Greek Minister of Finance.
As for Castronova himself, he continued to explore two questions around virtual economies: First, will these economies grow in importance and second, if they do grow, how will that affect real-world economies and governments? Over time, he authored many influential books and papers as well as co-founding the game research blog Terra Nova in September 2003, together with Julian Dibbell, Dan Hunter and Greg Lastowka.
Afterthoughts
I was developing and running persistent browser games during university and fell in love with the complexity of virtual world economies: Designing an experience to be fun for a diverse audience, playing together, but also being able to transition through the game at different speeds. And systems need to be engaging right away, but also stay exciting effectively forever. I still love thinking and talking about these problems.
One thing to remember is: Time is always a central resource in virtual worlds. Players expect to have access to an increasing number of resources over time, meaning more time played = more resources. Other central resources are usually measured in relation to time, for example “gold per hour” or “damage per second”.
This means that every virtual economy has a direct link to reality: Through the time a player spends in the world.
Since everybody can calculate their “real-world money gain per hour” (aka their hourly wage), they can also infer the subjective worth of virtual items in actual money. Or rather: They can assign a personal ceiling what a virtual item might be worth to them: “Assuming I can work for an hour and earn $X, and I need to grind for one hour to get an item, then paying <$X for it might be fine.”
Let’s say you enjoy certain aspects of the game, but not others. You could use spendable income to “skip” the aspects that are not fun to you and only focus on the subjective fun bits. And this is exactly what happened when virtual items started suddenly appearing on platforms like eBay in the early 2000s.
In this scenario, it’s important to understand that when you buy virtual items from others, you employ them to do things for you. This might be on a 1:1 basis, sellers as freelancers or organized as commercial organizations, but whenever you use your spendable income to save the time required to create or acquire a virtual item, you offload this task to somebody else. In economics terms, there is no difference between the virtual avatar skin in an MMO and a real t-shirt.
This leads to two big issues.
If the main differentiator is time, that also means the most economical way to offer such services is by using — or rather, exploiting — cheap labor.
Julian Dibbell already described this in “Play Money” (2004-2006), with Axie Infinity and other more recent “Web3 Play to Earn” games just replicating the explorative structures we have seen as early as Ultima Online in 2000. So, sadly the analogy holds up, as real and virtual t-shirt production both tend to end up in illegal or unethical sweatshops eventually.
At the end of the day, virtual economies (just like the player experience) always have the form or effect of being real, with very real consequences.
The difference between both avatar skin and shirt is that virtual items are completely artificial, only kept in existence by a social contract.
Virtual worlds are artificial constructs, and thus the economy within such worlds is artificially designed as well. Virtual economies are anything that deal with the exchange of in-world resources, for example in-world currencies, any item or even resources like playtime and access to the world.
The economy, all its resources and the systems that run it are under full control of the game designers and operators and can be changed at will. This is especially important when evaluating the new trend of Blockchain games. Scarcity is a design choice in virtual worlds that can be changed at any time.
For example, The Sandbox can simply create another map with additional LAND via an expansion or print more SAND or introduce another primary currency. The fact that these are fixed to a specific amount is a choice (and in my view a bad one). This is a social contract between the operator and users (“I promise not to do an expansion”), but not a legally binding one. And as expected NFTs and Blockchains do not protect users when the rules suddenly change.
So as an investment, play-to-earn doesn’t make sense and seen as a paradigm, it totally ignores that time spent in-game is supposed to be an actual experience and you are just monetizing fun, turning it into real work.
Here is Julian Dibbell in 2007, talking about his works and arguing to establish game studies that go beyond traditional cultural and media theory — into the realms of political economy, social history, and computer science.
About the series
The term “Metaverse” is currently claimed by many groups, driven by different incentives. Some groups attach the term to specific technologies (for example VR, AR, XR, Digital Twins or Blockchains), others see it as a future vision or narrative (sometimes dystopian, sometimes utopian). Some groups talk about the coming Metaverse, others argue that it already exists.
“Fieldnotes from the Metaverse” is a series that discusses the history, visions, perspectives, and narratives of the Metaverse: Specific milestones, their immediate impact and how they shaped the discussion going forward. The goal is a holistic and inclusive view of the Metaverse space, separating visions, signals, trends, and hype.
