[A Brief History of the Virtual Economy] From the evolution of in-game currency to Bitcoin with absolute scarcity.

There is a lot to say about the virtual world. The so-called “information revolution” has been going on for decades, and it should be clear to everyone that our world is becoming increasingly digital. But what does this really mean? Does it mean that things are turning into something less real? Will everything become immaterial, including ourselves? Is the nerd’s carnival coming, and only those who praise the god of the singularity will be saved?

I hope not. Although software is indeed eating the world, we must distinguish between digital and virtual.

As any dictionary will tell you, digital refers to anything that can be represented as a number, that is, any information that can be represented in a discrete numerical form. In our modern binary-coded world, this means anything that can be encoded as zeros and ones.

Not everything that is digital is virtual. A digital radio is not a virtual radio; it just works differently from an analog radio. However, once the aforementioned radio is placed in a computer game, it clearly becomes a virtual radio.

According to a dictionary definition, virtual is “anything that exists in essence or effect, although it does not have actual fact or form.” A virtual meeting room is not an actual meeting room, but it has the effect of a meeting room. It is composed of bits and bytes, not bricks and mortar, but the meetings held in it, the conversations going on, and the decisions being made are still real. The space is virtual, but what happens inside it is not.

As we will see, digital currencies can and will emerge in the virtual world. In fact, it has emerged many times, in multiple worlds and in various forms. In the words of Charles Stross: “Build a world conducive to trade, and money will appear.”

For thousands of years, humans have used a variety of items as money: cows, salt, shells, bones, pearls, stones, copper, bronze, silver, gold, and other precious metals. Although the list of currencies in history is long, there is one characteristic that all effective currencies have: scarcity. After all, if something is very easy to find or produce, it is not good money, or at least not for the long term.

Digital goods are not inherently scarce. The marginal cost of copying them is almost zero, something that anyone who has ever copied and pasted can attest to. For this reason, digital scarcity used to be an oxymoron. If something is digital, it is just information, and information can be easily copied.

Before Bitcoin, all digital scarcity was authoritative scarcity – authority that could be circumvented or exploited. This has always been analog scarcity. Virtual, not real.

Due to the lack of physical constraints, digital products require a central authority to manage the issuance, acquisition, and copying of the aforementioned digital products. If access is not regulated, anyone can simply obtain the information representing this digital good and copy it (or, sometimes more problematically: change it). It doesn’t matter whether it’s the bits and bytes defining your bank account balance, the books in your Kindle, the movies in your Netflix data vault, the songs in your Spotify playlist, or the items in your favorite video game. If access is not centrally controlled, people will change things to their advantage. They will update the balance of their bank accounts, modify the items in the game to make their characters stronger. In other words: they will cheat. Digital products are just information, and information wants to be free, as the unsinkable ship of the Pirate Bay and the endless leaks and data breaches clearly show: it is not easy to build a cage around information.

To better understand digital goods and their scarcity (or lack thereof), let’s look at the virtual worlds that spawned them: online games.

The economy in games is almost as old as online gaming itself. In 1995, Julian Dibbell published “MUD Money,” describing how currency was introduced into multi-user dungeons (MUDs). Coins would randomly appear in these online worlds, so if you hung around long enough, you would eventually find enough money to pay for certain goods and services in these games. MIT researcher Randall Farmer studied the emergence of virtual economies at this time, describing how, in a game called Habitat, “players could obtain… funds by engaging in commercial activities, winning contests, finding buried treasure, etc.” He detailed how players were given a certain number of tokens upon each login, which they could spend on various items sold by vending machines known as Vendroids. There were also pawn shops where items could be bought back (at a discount, of course).

Money, gold, points, tokens, and coins are almost constant companions in most games. On second thought, most of the games we now consider classics have something like money in their virtual worlds: Mario has his coins, Sonic has his rings, and almost every final boss drops precious items or piles of gold when defeated. Especially in RPG games, you may need to obtain gold to upgrade your weapons and armor, no matter what