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Virtual Currencies and the Laws of Economics

Read an article in the Communications of the ACM about “Social Games, Virtual Goods”.  I think unfortunately you have to pay to read that article unless you’re an ACM member, but the good news is it doesn’t say anything earthshattering except that online virtual currencies are not that different from “brick and mortar” ones.

I remember my first serious contact with virtual currencies.  My son was addicted to Worlds of Warcraft (WOW) years ago, a shoot-em-up game where your shooting is every so much more effective if you buy special weapons, charms, and poweres.  How do you buy them?  “Gold” is the virtual currency of WOW, and you earn gold by killing monsters.  In other words, you have to spend time in the WOW virtual world, and time costs you (non-virtual) money.

All straightforward: it’s like paying to go to a movie, except that the movie is immersive and you want to stay in it, for more and more $$.

Then I found out from my son — there was also an article in the New York Times about it around that time — that there were companies in Asia where workers would go into WOW on your account and build up gold for you.  You had to pay them — my son wanted me to pay them — with regular money so that they would get gold for you.

OK, not too bad: it’s like paying a airline to give you extra miles.  Question is: what determines the exchange rate?

In the case of the airline, the easy answer is: the air carrier sets the exchange rate.  But of course they can’t set it to whatever they want: they have to set it at a price where they can attract a willing buyer.

Same with WOW gold factories: it’s what a rich kid in the developed world can get out of his or her parents balanced against what Marx used to call the replacement value of the poor kid in the developing world.

How about Second Life?  This virtual world — where I have to say I haven’t spent much time (my avatar is still stuck on the Newbie’s Island, I think) — has virtual real estate bought and sold with virtual curency, but the supply of virtual real estate is a constant in the software.  Linden Labs can double the amount of virtual real estate with a few keystrokes and a system rebuild.  I suppose it’s a bit like diamonds, where the supply is controlled to keep the scarcity value up.  But, unlike diamonds, there’s no natural limit on the amount of “goods” that can be created.

Thoughts on virtual currencies?

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