The Logbook: A look at early virtual economies

Gamers have a long history of interacting with virtual goods and currencies. From Second Life to World of Warcraft to Fortnite, virtual worlds are becoming multi-billion dollar economies that bleed into real-world economies. This week, we examine the history of the virtual economy.

While most games have had some version of a native currency, gaming economies really took off in the late 1990s to early 2000s with the creation of games like Runescape, MapleStory, World of Warcraft and Second Life. In these economies, gamers buy and sell digital gear, skill upgrades, and cosmetic items to enhance their gameplay.

In 1998, Iron Realms Entertainment became one of the first companies to profit of the sale of virtual goods (not currencies), which the company sold through an auction. However, the virtual economy really got its boost with the creation of Second Life and the (in)famous Linden Dollar.

Second Life is a game where players can create virtual avatars to explore a digital world. On Second Life, players purchase land, build homes, and interact with their fellow players. At the core of the Second Life economy is the Linden Dollar, a virtual currency. In 2005, Second Life launched LindeX, an exchange for converting fiat currencies to Linden Dollars. This move placed real-world values on Linden Dollars. On LindeX, Linden Dollars had a free-floating value, that is, its value was based solely on supply and demand of Second Life players.

In 2006, former school teacher Anshe Chung became the first “virtual millionaire,” making her fortune through selling digital property on Second Life. During Second Life’s success, virtual banks started popping up to service the banking needs of Second Life’s users. The first Second Life virtual bank, GinKo Financial, began offering interest rates on deposits made by Second Life players. GinKo Financial was run by an anonymous owner and often cited as a Ponzi scheme, as it promised returns excess of 40% for its depositors. In mid-2007, the bank declared insolvency, stating it was unable to pay the 200 million Linden Dollars (approximately $750,000 at that time) to its depositors. As a result, Linden Labs, the firm behind Second Life, issued a statement banning digital banks from the game.

During Second Life’s run, another game, World of Warcraft (WoW), also became widely popular. World of Warcraft’s economy was run by virtual gold, which is used to purchase various items in the game. As WoW popularity increased among players, so did the demand for its currency. While purchasing gold using real-world money was prohibited by Blizzard (WoW’s creators), gold farmers began setting up operations in-game to generate gold for the sole purpose of selling it back to gamers for real-world currency on the black market. To mitigate the damage the gold farmers were causing to the WoW economy, Blizzard introduced a virtual auction house to allow players to directly purchase gold through WoW, which itself caused some wild fluctuations in the price of WoW gold.

Over the course of its lifetime, Second Life amassed over $3 billion in virtual goods transactions. In 2017, WoW generated nearly $10 billion in revenue. The success of their virtual economies has inspired wildly successful games like League of Legends and Fortnite to create their own version of virtual currencies and economies.

The Logbook: A look at early virtual economies written by Steven Zheng @ August 21, 2019 Steven Zheng

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