The Future of Virtual Currencies: Part 2, Brief History of Virtual Currencies

Below is Part 2 of my series on Virtual Currencies and Bitcoin.  You can find Part 1 here.

Brief History of Virtual Currencies Before Bitcoin

Virtual currencies have not only existed for quite some time before Bitcoin, but have been large commercial ventures for over a decade. An in-depth report from Eurogamer traces in-game currency trading back to one of the first multiplayer online games, Ultima Online, first launched in 1997[1].  Although Ultima waned, other MMOs grew over the course of the last decade. With larger player bases and more complicated games, more complex economies naturally arose.  Players spending dozens if not hundreds of hours in these games meant that in-game currency could be priced to many hours of labor, in essence creating a huge market where in-game currency had real-world value.

The Eurogamer article discusses both EVE Online(first released in 2003[2]) and World of Warcraft (first released in 2004[3]).  These games take vastly different approaches to how their in game currencies interacted with the real world; CCP, the company behind EVE Online, maintains a hands-off policy, almost actively encouraging users to trade freely between real world and in game money.  Game-time tokens can be purchased with real money, and then traded in-game for virtual currency, creating an active market that prices between EVE’s ISK currency and US Dollars or Euros[4].  World of Warcraft took a different avenue, harshly banning anything related to real world money involvement in gameplay including gold farming, powerleveling, and account selling.   As noted in various sources, this approach has largely failed to stem the supply of powerleveling/gold farming services[1, 5]. However, in order to make real world money out of in-game virtual goods, sellers must market their goods in real world markets. Ebay was a large market for these goods until the practice was ended on the site in 2007, when the market was estimated anywhere from $250 to 850 million[5]. However, since many games, such as Warcraft, ban real money trading of virtual items, selling of these currencies resembled something of a black market, with scams rampant. Nonetheless, many sites use virtual currency farming as their primary business model, and they can be fairly profitable[1].  Interestingly, a Blizzard (World of Warcraft’s developer) game released in 2012 shipped with a real money transaction feature[6], indicating Blizzard’s realization that real world trade of virtual goods was inevitable. However, it appears that Blizzard widely considers this move a failure, taking away from gameplay aspects of the game and focusing too much on economics[7].

Turning to non-videogame currencies, Tencent QQ operates one of the largest currencies in the world when looking at pure users. Tencent QQ is China’s leading instant messaging service, with about 800 million accounts. Q coins, used for in-app purchases are so widely used that many vendors accept them for real world products.  Q coins became so popular in China that the central bank was forced to take a look at regulating them, since they were reducing the demand for the national currency, resulting in inflation[8].

Virtual goods span a variety of different markets and levels of liquidity, but it is undeniable that they have grown in use along with the internet. However, it wasn’t until 2007 that a real attempt was made to create a virtual currency explicitly for use of trade instead of real money issued by governments with the birth of Ven and Hub Culture. Ven was introduced as a currency for use in the social network service, Hub Culture, but can also be used for micropayments across the internet[9].  Its usage remained limited until different technologies were utilized to change the paradigm of virtual currency exchange.

Next week we’ll be going exploring some of the technologies behind virtual currencies, specifically Bitcoin.

Sources:
[1]           N. Ryan. (2009, 2013 Apr 16). Gold Trading Exposed: The Sellers. EuroGamer.net. Available: http://www.eurogamer.net/articles/gold-trading-exposed-the-sellers-article
[2]           “Eve Online,” in Wikipedia, ed. wikipedia.org: Wikimedia Foundation Inc, 2013.
[3]           “World of Warcraft,” in Wikipedia, ed. en.wikipedia.org: Wikimedia Foundation, 2013.
[4]           “MAKING ISK,” in EVElopedia, ed. wiki.eveonline.com: CCP Games.
[5]           D. Terdiman. (2007, eBay bans auctions of virtual goods. CNET News. Available: http://news.cnet.com/2100-1043_3-6154372.html
[6]           J. Schreier. (2011, 2013-Apr-18). Sold! Hawk Your Diablo III Loot for Real-World Cash. Wired. Available: http://www.wired.com/gamelife/2011/08/diablo-3-auction-house/
[7]           M. Peckham. (2013, 2013-Apr-18). Diablo 3 Director Admits Auction Houses ‘Really Hurt’ Game. Time. Available: http://www.wired.com/gamelife/2011/08/diablo-3-auction-house/
[8]           (2007, Apr 16). Central Bank alert on “virtual money”. Available: http://english.people.com.cn/200701/12/eng20070112_340681.html
[9]           A. Jordan. (2009, 2013-Apr-18). The Currency Revolution. Wall Street Journal. Available: http://blogs.wsj.com/economics/2009/09/09/the-currency-revolution/