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Virginie Fayad
Between December 2017 and January 2018, 34,356 parcels of land were sold in a single real estate auction in a single city to buyers from all over the world. The auction had a number of peculiar features. By far the most unusual was the fact that the real estate being sold did not exist in any traditional sense. It was virtual. These plots were being sold in a yet-to-be-created digital city accessible only through a browser, enhanced by a sophisticated marketplace and a proprietary cryptocurrency. Tens of millions of dollars have flowed through the marketplace since its auction launch.
This is the Virtual Economy. An agglomeration of sophisticated platforms, fledgling and often dubious marketplaces, skilled nixers, volatile assets, and ambitious pioneers that exist or operate uniquely in virtual environments. It sits just out of reach, behind a digital curtain, invisible to most of us. Within it, there is a galaxy of activity and opportunity. A new economic frontier that may just be the answer to the generational wealth gap.
It is a place frequented, with varying degrees of immersion, by some 2.5 billion people through phones, consoles, laptops, desktops, and headsets. It is an environment native to the tech savvy, a dual citizenship of sorts for the technically fluent. It is a place where people go to socialise, to play, to create, to work, to fantasise, to deceive, and to prosper. An emerging habitat exhibiting the capacity of emerging technologies like distributed ledgers, virtual reality (VR), computer vision, real-time ray tracing, cryptocurrencies and non-fungible tokens (NFTs).
Over the last century, the developed world has built economies based on principles of rationality, efficient markets, and crucially, a merit-based system of social mobility. These systems imbued a sense of fairness and opportunity that generally placated and incentivised the masses. People were promised that hard work, education and adherence to social convention would be rewarded with prosperity, comfort, and financial stability.
This system of fair exchange drove extraordinary improvements in global equality, poverty and innovation over decades. But since the early 1990s, social mobility has slowed considerably. According to the OECD, it now takes at least five generations for a child born into a low-income French, German, Korean, British or American family to reach average income. This is evidence that as economies mature and growth slows, social mobility becomes increasingly difficult.
The Virtual Economy is an opportunity to short-circuit that system failure. It is an environment where entrepreneurs, prospectors and skilled agents can generate significant wealth very quickly without the need for startup capital. Esports players, streamers, skin designers, level boosters are just some examples of the creative new ways that people are generating wealth in this new economy.
The Virtual Economy will provide an opportunity for people to smooth or augment their real-world income through a non-native economic system. This has profound implications for global wealth and income inequality. Participants in the Virtual Economy can circumvent the barriers preventing financial equivalence in the real world.
The promise of extraordinary opportunity is magnetic to those in a position to take advantage of it. But historically opportunity tended to discriminate against all but a select few. Those who have the means, the profile, the heritage or the good fortune to access it.
The anonymity afforded by the Virtual Economy obviates the traditional characteristics that would preclude the unprivileged from accessing the opportunities presented by great industrial change. The Virtual Economy is notably distinctive in that it is possible for almost anyone, young or old, rich or poor, regardless of gender, ethnicity, religion, location, heritage or social status, to succeed as long as they have the intellect, decisiveness and the technical capacity to see the opportunities emerging within it.
The efficacy with which a virus has shut down global transport and trade is startling to most. The contemporary systems of travel, economics and communication make the spread of ideas, knowledge, shocks and indeed viruses inevitable. We have witnessed billions of people retreat to their homes, relying on digital platforms and environments for socialisation and competition. We have seen an immediate and significant rise in streaming viewership, gaming participation and virtual spend.
What the global pandemic has demonstrated is both the opportunity and necessity presented by the Virtual Economy. The participants active within it are still earning, largely unaffected by outside events, illustrating the value of supplemental virtual incomes.
We will emerge from this global quarantine to see new icons, influencers and entrepreneurs within virtual worlds. They will come to prominence at a time when people question the fundamental usefulness of traditional institutions, protocols, and the social contract. The virus is underlining the inequity of and unfairness of some of our civil systems. The Virtual Economy is emerging as natural ventilation to the pressure chamber of a now fragile and fractured social order.
Much of the Virtual Economy lives on and and thrives off massive multi-participant platforms in gaming and beyond. Many of those were designed to have or subsequently developed internal markets and economies, with proprietary currencies that players use to buy and sell virtual goods and services.
These platforms are the nerve centers of the Virtual Economy. They are simultaneously places for entertainment, content creation, social interaction and, ever so often, economic production and exchange.
About 85% of the revenue of these virtual marketplaces is dominated by spending inside the platforms in the form of repeated purchases of virtual goods, known as microtransactions. The rest comes from related activities such as retail and digital sales, downloadable content, and advertising.
The success of virtual platforms has also spawned a wild multibillion-dollar world of online grey and black trading of in-game currencies and goods, casino gambling, money laundering, and online piracy.
Most of the marketplaces in the Virtual Economy are owned by a gaming publisher that sets the rules of the virtual world, oversees its economy and facilitates the creation of virtual assets. Game publishers and developers typically determine or manage every aspect of their economy - from the supply of resources, through pricing, to capital controls. Within these worlds, users - sometimes in the tens of millions - can build, earn, buy or sell virtual goods and services, often using one or more in-game currencies. Inflation, deflation, bubbles and even recessions can occur.
Virtual assets vary in nature - from weapons, cars and real estate, to skins, clothing, characters, accessories, currencies, and more. These goods can be created either directly by game publishers within the game, by a third-party vendor, or in some cases, by players themselves.
As the ultimate owner of everything created on the platform, the publisher typically does not permit the external sale or transfer of those assets beyond the gaming environment. This makes it difficult to commercialise them for real money, save for the illicit trade of virtual goods on grey and black markets.
Released without much fanfare in 2017, Fortnite quickly turned into a cultural phenomenon with 350 million registered accounts as of May 2020 - up by 100 million since March 2019 - and more than 57 million active players in 2019. The third-person shooter game generated more than $1.2 billion in revenue in its first 10 months, becoming the first free-to-play game to reach that mark in its first year. At launch in 2018, its mobile app was generating $2 million a day.
Fortnite has become a cultural juggernaut, with more than 350 million registered players. The game is free to play, but players invest in digital goods such as skins and emotes. Image credit: Epic Games
Third-party marketplaces have popped up to fill this need - Fortnite skins and V-Bucks reloads are trending on multiple peer-to-peer exchanges. However, there is a distinct lack of oversight, governance, and transparency, making using these sites risky for players who have accumulated valuable items.
There are also a number of more open, and often more sophisticated, marketplaces within games or other virtual worlds that bear many similarities to closed in-game marketplaces but allow the purchase or sale of assets within the platform or externally. For example, users can sell game assets for money, or exchange game currency for real-world currency.
Most of these transactions are made inside the platforms themselves. This means the transactions occur on a marketplace that is owned and operated by a publisher. This is the easiest and most secure way to purchase assets, and more gaming companies are recognising the additional monetisation benefits from creating a sanctioned marketplace.
This explosive growth of virtual transactions, combined with the ease of online payments and the rise of mobile and console gaming, has propelled virtual goods into a new digital asset class and an area of interest for financial institutions.
Virtual goods exist at every price point. Most in-game purchases rely on microtransactions as a continued source of revenue. The business model has been controversial with many gaming communities, yet has grown immensely since the early 2010s through the introduction of in-game currencies, ever-growing collections of rare in-game items, lucrative packs of random chance purchases, and the setting of expiration to encourage users to purchase to continue playing.
Ask the occasional gamer about the best-selling video game of all time, and chances are they would guess Pokmon or Super Mario, or even Tetris. In fact, the title goes to Minecraft, a game without flashy graphics, an intricate storyline, or even an endgame.
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