THE ORIGINS OF MODERN VIRTUAL ECONOMIES
For about 30 years, virtual economies were exclusively the province of video games, and it is important to understand the changing role that economies have played in games. In a sense, a great number of video games are some form of economy: Mario must obtain mushrooms and flowers to grow stronger and hedge against the risk of death, Sonic the Hedgehog must collect rings to survive any damaging encounters, and the Master Chief (of the popular Halo franchise) must gather and expend weapons and ammo to cull the alien hordes.
Some single-player games even have simulated markets, where players can use the currency they gather from the game world to buy items from a game’s non-player characters (NPCs).2 But when we speak of a virtual economy, we are particularly speaking of the systems of trade, production, and distribution that arise when players can exchange items and currency with one another within the same virtual world.What, then, are virtual worlds? While definitions can differ in small details, we use the term ‘virtual world’ to signify any persistent online space in which two or more people can interact to some extent with one another and with that space. Key terms here are ‘space’ and ‘persistent’. By space, we mean anything that players treat as if it were a physical environment. So worlds can be 2D or 3D, but they can also be text based, where the program describes the world to the user and the user issues typed commands to the program to move through the world. By persistent, we mean that the world exists on a server regardless of whether any players are logged into it, and that the changes that players make to the world are not reset when they log out or quit the game entirely. Finally, as in many video games, players are represented by avatars - objects that are usually humanoid in form - by which they interact with the virtual world (see Bartle, 2003, pp.
1-3).The first virtual economies existed in so-called multi-user dungeons, or MUDs, which appeared in the late 1970s (ibid., pp. 4-7; Castronova, 2003). MUDs were a kind of role-playing game in which players explored, fought in, and learned about a magical, fantasy world. These games were frequently modeled after board games like Dungeons & Dragons. Early MUDs were text-based virtual worlds, and were usually hosted by a server on a university campus. The developers were students at the university, as were the players. MUDs could host a limited number of concurrent users, and were also limited in the overall number of players; nevertheless, they were persistent virtual worlds. As in single-player role-playing games, MUD players are rewarded treasure, or ‘loot’, for their exploration and for winning battles against monsters and other ne’er-do-wells inside the game. The loot might be a more powerful sword, or a magic potion that temporarily improves the avatar’s ability to slay monsters. The player might also receive a sum of virtual currency, which he or she can use to buy items from NPCs.
Early MUD developers introduced trade into their games as a way to make the fantasy worlds more immersive, but it had unexpected consequences. When a new MUD was released to the playing public, the first players would enter the game and begin slaying dragons and acquiring currency. They would then exchange their rewards from questing with one another. Later, new players would join the game, and because the first generation of players had created so much virtual wealth, they could sell some of their older equipment to these new players. The prices were low enough that some new players preferred to buy from older players rather than doing the work necessary to get the equipment on their own. The old players would pass on their knowledge about the game to the new players as well. New players used this human capital and ‘virtual physical’ capital to improve the rate at which they moved through the virtual world.
They experienced greater overall productivity compared to the earlier generation of players. By the time the third or fourth generation of new users joined, the game was trivial, because the most powerful items were available in large quantities for very low prices to new players.MUD developers, intending only to introduce an engaging game mechanic - trade - had unwittingly introduced economic growth! But while economic growth is always appreciated in real life, it can mean disaster in a video game as it trivializes the game, leading players to quit. The only solution MUD developers had for the problem at the time was to completely reset the game and wipe all player inventories, so that everyone had to start over again from square one.3
Another issue that could arise, either because of unforeseen imbalances or bugs in the game code, was that players could sometimes generate enormous amounts of in-game currency quickly. These exploits, if not quickly detected and remedied, could result in extreme levels of inflation. In many cases, the only solution was, again, to completely reset the game.
Though technology progressed, these basic problems of virtual economies were not remedied until 1997 with the release of Origin’s Ultima Online (UO), the first widely popular, massively multi-player online role-playing game, or MMO. Since it was developed by a major gaming studio and took advantage of the latest technologies, the world of UO was much larger than that of any of its predecessors (Bartle, 2003, pp. 21-3), as was the size of the player population, which was in the thousands per server. To solve the problem of economic growth and inflation, the developers introduced a variety of item and currency sinks into the game. For example, the equipment that players used would depreciate over time, requiring repairs that could only be made by NPCs and only in exchange for some of the player’s virtual currency. NPCs would also offer players fixed sums of virtual currency in exchange for any quantity of a given good.
The game company also introduced the idea of big-ticket money sinks. Players were granted an item that conferred an important advantage (such as a horse that greatly increased their avatar’s speed), at the expense of large amounts of virtual currency (Simpson, 2000).UO developers learned to take advantage of the fact that they could control the sources of items and currency as well as the sinks. They were able to finely tune the rate at which items and currency flowed in and out of the system at any time, given the overall patterns of player behavior. If that behavior changed in a way that caused the amount of currency or items of a particular type to begin to rise above a certain threshold, they need merely dial down the rate at which players received items and currency, or dial up the rate at which those assets exited. This system of management became known as the faucet-drain system. While the manner in which the drains and faucets are manifested may differ between virtual worlds, that paradigm underlies the management of every single virtual economy that exists (Simpson, 2000; Bartle, 2003, p. 310).4
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