“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, not a predictable simulator. But at the same time, we are also creating another world through code. This world has predictable and unpredictable parts.
With the gradual development of this world, we seem to have a new way to rethink and understand the real world we live in. Looking back at the development of online games, we can’t help but lament that this “cloud ball” created by our real-world players has gradually been born.
According to Statista estimates, the revenue from the online game segment in 2021 is expected to reach US$23.582 billion, and the market size is expected to reach US$31.328 billion by 2025, and the number of players is expected to rise from 1.097 billion in 2021 to 1.277 billion in 2025. The ever-expanding market size, the ever-increasing number of players, and the online time that is gradually greater than the real-world life time, declare that this virtual world is gradually developing and improving.
In this process, our research and thinking on the virtual world may have a transformative impact on our cognition, similar to the general effect mentioned by Frank White in his book Space Exploration and Human Evolution, which refers to when some astronauts are sailing in space, there will be a cognitive shift when looking at the earth from space or the surface of the moon. Now we try to start from the virtual world and look at everything that happens in this world from the perspective of economics. In this way, it may reconstruct the understanding of the objective world.
Games and Economics
Games and economics, these two seemingly unrelated words, are actually inextricably linked.
In the game world, players enter this virtual world as game characters, presenting various microeconomic behaviors: choice, cooperation, and gaming. And in this artificially constructed economic system, it is also full of various economic principles: scarcity, demand and supply, institutional design, and so on.
In essence, this is the appearance and law of the real world mapped in the virtual world, but the economic interpretation of the two is still different. The reason why virtual and reality are different is because they are two worlds.
We perform many rational and irrational behaviors in the real world. Economists, at least classical or neoclassical economists, study individual and market efficiency from a rational perspective. They tried to open the Edgeworth box and find the laws of welfare economics that described the “invisible hands” and the Walrasian equilibrium point in perfect time.
Of course, there are also behavioral economics or other schools that study chaotic, nonlinear, and unpredictable economic systems from the perspective of human irrationality.
However, in the game world, or in the larger virtual world, all these behaviors are reflected in the process of players trying to find the optimal solution, or recorded in the computer program.
This virtual world has huge data mining capabilities and the ability to accurately track player behaviors, which to some extent opens new doors for economists and sociologists.
In addition, the economic exploration of the virtual world also provides new ideas for us humans to better understand ourselves.
This requires rethinking from another perspective. We all know that there are two main ways for humans to understand the world: observation and learning. On this path of learning, we are actively or passively learning two major scientific fields: social sciences and natural sciences, but what is the difference between the two?
Regarding the discussion of this issue, Felix Martin, an economist who studies monetary theory, mentioned a point of view that the difference between social science and natural science is that “fish do not know water in water”. This view explains to a certain extent why sociology and economics And social disciplines such as anthropology are different from natural disciplines such as physics, chemistry, and biology.
In fact, in the field of natural sciences, we study the physical world, and we are constantly discovering the underlying laws of the operation of this world, or that the world can be objectively understood.
The social sciences are not so simple. We often study ourselves with the goal of individuals, groups, and society. We cannot be separated from society, let alone ourselves, and this makes it very difficult to understand things objectively. The closer we are to our daily core system or framework, the more difficult it will be to break out of this circle and analyze it.
This is why for Felix Martin, the research on the nature of currency is so controversial, because it itself is a very important part of our economic life.
Therefore, if you want to become a fish out of water and better understand ourselves living in the real world, we need to conduct research in different time and space environments, so that we can get a relatively objective understanding.
From the perspective of the virtual world, it undoubtedly provides us with a new way of thinking to further understand the objective world.
Early Exploration of Virtual World Economics
Edward Castronova is an early scholar who explored the virtual world economy. In Edward’s early paper Virtual Worlds: A First-Hand Account of Market And Society on The Cyberian Frontier (2001), he described a virtual world named Norrath (Game EverQuest’s virtual world).
In the description of the paper, the world seems to be a normal economy with economic activities such as production, labor supply, income, inflation, foreign trade, and foreign exchange. People live there, work there, consume there, and accumulate wealth there, just like what they do on earth.
However, there are certainly differences in the basic mechanisms of the two worlds, such as the question discussed by Edward in his paper On Virtual Economics (2002): Should the government try to control prices?
Most economists in the real world would say no to this question because the costs of government intervention in prices would be much greater than the benefits generated. Moreover, the costs are often borne by the very people the policy is supposed to help.
These perverse effects occur because any attempt to make price controls will eventually lead to excess supply or excess demand, which in turn generates various social costs. Excess goods, for example, need to be purchased or destroyed, while shortages must be distributed through a mechanism that usually proves to be both unfair and expensive.
But what if the government could buy the excess goods or destroy it at no cost? Or what if the government could produce any amount needed at no cost? If these two actions are possible, then a government policy of price control is feasible.
In the Cyberspace or virtual world, code can easily create or destroy any number of goods, so price controls may be good policies in cyberspace, but they are not necessarily so in the real world.
Moreover, for economists, the essence of human behavior is that it is a process of choice within the constraint of not having everything we want. This “want” is often expressed in terms of preferences, which are usually represented by a utility function, and we look for solutions that maximize this function within our respective constraints.
If something happens that releases our constraints, such as a decrease in the price of our preferred good, then our utility will rise. And at that point most economists would also assert that we would be happier.
So if we want to make people happier, we should remove or release their constraints and limitations. Then under this reasoning, those less challenging games should be the ones that the market needs.
But we can find a profound conflict between this economic reasoning and the behavior observed in the game market, and the fact that players hate games that are less challenging.
Edward constructed a simple utility function and economics model for players by linking the level of difficulty of a game to the rewards that players could receive in the game, and explored the allocation of game time to real-world wages, which was at the time a very impressive piece of virtual world economics research. research.
With the development of games, game developers need to build game worlds in order to improve the utility level of players in the game world, they need to follow more economic principles in the game world, and design more unique “game world operation mechanism”, relatively balanced economic system, and the solution of the Social Planning Problem in the game world.
The Development Process of the Virtual World Economic System
As mentioned above, in the early studies of virtual world economies, scholars found similarities and differences between virtual worlds and real world economies. Further, as the research progressed, Tanla E. Bilir in her paper Real Economics in Virtual Worlds: A Massively Multiplayer Online Game Case Study, RUNESCAPE (2009) summarizes three important characteristics regarding the economy of virtual worlds.
- Comparability: The virtual world economy has obvious similarities to the real world economy
- Reality: virtual world economies involve real, well-functioning economic systems
- Laboratory: The virtual world economy is a place to experiment with economic theory and behavior.
As for the second point of Reality, we can find that the game economy system is constantly developing and becoming more and more realistic, taking the most familiar game virtual world as an example.
The Establishment of the Economic System
In the early days of home consoles and console games, the economic activities of games were mostly based on pickup, system distribution or store purchase, such as the classic game “Super Mario” gold pickup and the weapon store of “Resident Evil”.
Players collect gold and supplies by consuming labor or time to break through levels, which can be used by themselves, or can accumulate a certain amount to buy other supplies or unlock new levels, which actually means that players get gold and supplies through production and then trade with the system to get what they want.
The higher the attribute of the weapon or the more difficult the level, the more gold is needed, and therefore the more “labor” (time, effort, money, etc.) the player has to put in.
Such a setting divides the simple economic hierarchy and stimulates the middle and lower tier players to invest more in the game world to unlock advanced weapons or difficult levels.
At the same time, a single-player game without an Internet connection means that players cannot interact with each other, and each player faces a separate virtual world, which also means that these items are non-competitive, i.e., player A’s possession of a high attribute weapon cannot prevent player B from obtaining the same weapon in his own separate game world. Therefore, most players can eventually own these high-attribute items as long as they are willing to put in enough labor and acquire a sufficient amount of gold.
Based on these two characteristics, it can be seen that trading in early games enhanced the playability and operability of the game, but did not form a complete economic system for spontaneous exchange or buying and selling, and individuals did not affect each other.
The level of productivity or purchasing power divided the players into levels in the early stage of the game. However, as the game progresses, the number of players with advanced weapons or levels will increase, the value of items will be squeezed, and the division of levels will naturally disintegrate.
Eventually, the game will end with the death of the protagonist or the end of the plot, the accumulated gold and equipment can only be discarded, there is no other use value or exchange channels.
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, that is, 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.
Further in general terms, the online game economic system consists of supply and player demand. Players acquire supply through their actions in the game world and consume this supply to improve their character performance and development.
In terms of production distribution, players get money or production materials by collecting, fighting monsters, upgrading and completing tasks; in terms of exchange, it can be divided into trade with system NPCs and exchange between players, the former can buy and sell all kinds of props in the stores with different attributes in the game, the latter can exchange with each other through the trade function key.
Unlike 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 the 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 number of labor is no longer the only criterion for acquiring high attribute items; luck is also a determining factor.
Secondly, the speed of material consumption was limited, such as restoring life value, mana value or enhancing skills props for one-time use, weapons and equipment in the process of fighting will produce damage and so on.
As a result, the setting of limiting the number of virtual items fundamentally inhibits the expansion of materials (especially those with high attributes) in the virtual world, i.e., their value will not depreciate excessively as the game progresses, thus laying the foundation for the long-term stable existence of the market.
Along with the rapid development of online games, Legend of Mir under Shengqu games has pushed the market economy system in online games into a mature stage.
The process and channels of production, distribution, exchange and consumption are quite well developed, with special markets for buying and selling the needed materials and guaranteed transactions between players. 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 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”.
Improvement of the Economic System
The biggest difference with the real world is that the economic system in the game is essentially to increase the game experience and meet the players’ needs of 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 durability, 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 lead to the devaluation of wealth in virtual games in the short term, which hurts the interests of players. 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 quantities of dropped materials or give raw materials for players to build finished products by themselves, and accelerate the consuming speed by setting the worn-out properties of items.
(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 goods. As a result, the game currency loses the trust from players, causing the collapse of the monetary system and even the economic system.
The primary reason for this is that the amount of currency issued is excessive and far outweighs 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 handle the balance point of “perfect” economic system.
Therefore, after entering the mobile era, most online mobile games no longer have an in-game trading system, but let the in-game mall be the only place to trade 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 mobile version of Fantasy Westward Journey has developed a compromise economic system: it opens a unified trading platform “Hidden Treasure Pavilion”, allowing players to trade freely, but restricting the price range of items and the acquisition and sale of high-end items. This half open system increases the stability of the economic system, but also limits the free trade between players.
The economic system of the game world is still in the state of exploration. How to balance the artificial intervention of the 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 intervention-free 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 obtain the virtual currency in the game world by fighting monsters, doing quests, participating in activities and trading virtual items in the game.
However, most in-game currencies are produced independently and not issued according to economic needs, so in-game currencies are not general equivalents that represent the value of items as in real money.
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, the currency itself is not money, currency is a system of credit records and credit liquidation, and currency is only a representation of this system.
Therefore the essence of money is actually the system behind it consisting of credit records and clearing mechanisms. 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 money’s value
- 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 is certainly creating a much larger virtual world, giving us more room for imagination and inspiration. In another dimension, blockchain technology has also made a great contribution in connecting the economic systems of the two worlds.
Game Asset Authorization, Reuse and Trading
The role brought by the combination of blockchain technology and games is mainly reflected in three aspects: the authorization, reuse and trading of game assets.
1. Authorization
First of all, let’s talk about the issue of recognition. As the information in the physical world is continuously 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 continuously generating new “values” for the digital world.
However, in reality, we do not feel this 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 right at the beginning, that property right will eventually flow to the person who can best exploit 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 undoubtedly materializes some of the assets in the digital world, and as we gradually increase our knowledge of asset ownership in the digital world, we will also gradually accept this form of technology. And the process of our gradual acceptance of the application of blockchain is also the process of gradually enhancing our knowledge of the ownership of digital assets.
When the data assets in the game are not really owned by the player, any payment method other than copy sales is a “rental”.
Although the player does invest a lot of time and real money, the player does not really “own” any of the game’s virtual assets.
When the game developers stop the game for various reasons, all the levels and characters that players have invested hundreds of hours in the game will also be lost.
Although game designers will be more on the side of getting more revenue in the long run to adjust and plan the future direction, there is often a gap between the game experience that players want and what game developers want, and there will be a discrepancy between the game update content and what players want.
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 this game has players and they are willing to pay the corresponding cost, the game can always exist on the blockchain.
If most players are dissatisfied with the game for some reason, they can vote with their feet to get the content of the game out of the original plan and get a new development according to the wishes of these players.
At the same time, players’ game states 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.
2. Reuse
Once the player’s game assets have been authorized, it is natural to start thinking about the next question: can players reuse the assets they own and which virtual assets can be reused? To answer these questions, we need to first classify the virtual assets owned by players.
The first category, 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, 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 own the first category of assets — virtual currency assets — they rightfully enjoy the right to freely dispose of such assets. However, at this stage, given that the monetary payment systems between games are all independent of each other, i.e., the currency that players acquire or top up in Game A is only allowed to be used or traded in Game A.
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 multiples of labor or money, and the virtual currency of the game that has been acquired before becomes “invalid currency” and loses its value once it leaves the game itself.
The solution to this problem is actually easy to think of. If players all use a central account when playing games and bind virtual currency assets to the central account instead of 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 blockchain technology, if the currency, weapons, characters and other assets 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 purchase and acquire assets for the reason of appreciation and collection, and the reuse of this part of virtual assets with the nature of collection can give players a sense of satisfaction, which is not only conducive to increasing players’ stickiness and game experience, but also stimulate 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 means to obtain their own personalized data, and player data are centrally in the hands of game manufacturers, which become their tools to accelerate commercialization and expand interests.
If the use of blockchain is then envisioned at this point, the information is transparent after being chained, and vendors can collect personal information by paying certain remuneration, but at the same time the information assets are owned by the individual. 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, thus generating the most suitable personalized game difficulty and experience for players.
3. Trading
After investing time and money, players create very personalized images of their characters in the game. On the basis of the digital asset confirmation, these images can be taken out and traded by players.
In the non-blockchain game market, the demand for account trading based on purchase and rental 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 in the account will be deleted and moved, and secondary trading.
Players’ needs for in-game digital content are experiences, and the trading needs associated with such experiences include trading for other accounts and collecting for sensory and psychological satisfaction.
Of course, the above is about account trading during 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 collection 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 props or costumes on him, then the digital character will likely have a higher collector’s value.
Players can continuously use this tool, service or platform to enjoy the game characters from previous games, use them for simple interactions and showcase skills, etc., as well as to trade them and operate them in other content-based ways.
Last but not least
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 humans in better understanding the world and the universe.
And this process must be long and painful, only with the generation of pain, 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 huge thing to study from the perspective of economics, because from the perspective of economics 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 give us inspiration to some extent.
We believe that pain is only a by-product of human evolution, and that there are still many unknowns waiting to be explored on the road to understanding the world, but that is why we will continue to move forward.
Reference
https://www.theneweconomy.com/technology/virtual-worlds-and-broken-models
http://news.17173.com/content/2003-6-18/n509_426109.html
https://wenku.baidu.com/view/05326b0368dc5022aaea998fcc22bcd127ff422a.html
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.
庄莉. 网络游戏经济体系研究[D].北京交通大学,2012.
