The Covid-19 pandemic has seen widespread financial uncertainty, job loss and employment insecurity sweep across the globe. In the UK, for example, unemployment could reach 2.5 million people by the end of the year, according to the Bank of England.
In this context, many are looking to alternative sources of income. While some have chosen re-skilling to prepare themselves for an increasingly challenging job market, others have taken a more unconventional approach.
The virtual economy refers to ways of generating income that operate fully online, typically in the context of online games or platforms.
Be it selling valuable in-game items on RuneScape, partying in virtual nightclubs, creating digital assets on Second Life, streaming gameplay on Twitch or managing online communities on Discord, participating in the virtual economy can be lucrative.
According to technology and innovation tracking unit L'Atelier, which has conducted in-depth research in this area, the virtual economy generates a total income of $66.2bn.
Verdict Magazine spoke to L'Atelier CEO John Egan to find out more about the risks, rewards and future of the virtual economy, and how it could fare in the wake of the Covid-19 pandemic.
Ellen Daniel: What is the virtual economy?
John Egan: The virtual economy is the system of online jobs, assets, marketplaces, and traders which has emerged across a range of online platforms.
Those platforms include aspects of online multiplayer gaming titles, such as Fallout and Minecraft, and non-gaming virtual worlds, including SecondLife and Decentraland. On these platforms, billions of people spend time socialising, playing, creating, working and trading.
Among those people, some earn and spend real money through online marketplaces on virtual assets and virtual labour. For example, in the online world Decentraland, in the space of just a few months users spent the equivalent of $18m in real-world currency on plots of virtual real estate, which they will use for playing, speculating, creating and virtual business ventures.
This economic activity – taking place in virtual environments, based on the trade in virtual marketplaces of virtual assets and virtual labour, but with real monetary value – is the virtual economy. Our recent report, the Virtual Economy, explored this online realm in more detail.
What are some examples of the virtual economy?
Virtual jobs are as varied as jobs in the real world. In some cases, for example in professional esports, people stand to make millions. In others, such as virtual farmers who ‘farm’ and sell valuable in-game items, earnings will be smaller and used to supplement their main income.
Virtual assets range from in-game items such as weapons, clothes and furniture, which can either be found ‘organically’ or bought in microtransactions, to non-fungible tokens (NFTs), which enable the trade of unique in-game and on-platform items such as digital plots of land and virtual kittens in CryptoKitties - one of which sold for >$60k.
And the virtual marketplaces where these jobs and assets are traded range from decentralised virtual spaces such as Decentraland where virtual plots of land are sold for either development or speculation, to specialised NFT marketplaces such as OpenSea, where customers can buy digital goods of any conceivable description.
How large is the virtual economy?
The virtual economy is big. Around 2.5 billion people around the world participate in some way on the platforms which make up the virtual economy. A smaller, unknowable number of people make up the traders, pioneers, workers and entrepreneurs.
The multiplayer gaming platforms which form part of the virtual economy are worth more than $100bn a year, making them larger than the global film industry. The jobs supported by the virtual economy generate real income totaling at least $66.2bn (€59.8bn or £52.4bn) in gross value added (GVA) - equivalent to the total output of Bulgaria.
What sorts of people does the virtual economy typically attract?
People from all walks of life are discovering opportunity in the virtual economy – from artists using NFTs to monetise their creative output, to traders speculating on the value of virtual plots of land, to people from countries such as Venezuela who earn money by selling in-game currency amid national economic downturns.
What attracts people to it?
What attracts all these people to the virtual economy is the fact that the only barrier to entry is having the intellect, decisiveness and the technical capability to succeed.
It doesn’t matter if you’re young, old, a man or a woman, or whether you have a degree or not – virtual economies represent viable and often lucrative opportunities for supplemental income, whoever you are.
How does it compare to other industries?
The virtual economy is more comparable to a traditional economy than an industry. Within the virtual economy, there are countless sectors of diverse economic activity - for example, artists creating and selling virtual art, musicians performing virtual gigs to audiences of millions, shopfronts being set-up by entrepreneurs in online worlds such as Decentraland.
As the virtual economy grows and matures, these sectors will multiply too. For example, we think it is only a matter of time until financial services firms recognise the potential of the virtual economy and start to offer products designed specifically for and available only within virtual spaces, whether insurance for virtual assets or small business loans for virtual entrepreneurs.
What is the difference between centralised and distributed virtual marketplaces?
Virtual marketplaces are the backbone of the virtual economy. There are several different types of virtual marketplaces – closed, open and distributed open marketplaces – and they each function uniquely with their own set of characteristics.
Much of the virtual economy lives and thrives on massive multi-participant gaming platforms where players often buy and sell virtual in-game items and services with proprietary in-game currencies. There are two types of these centralised marketplaces: open and closed. Some gaming platforms, like Fortnite and Animal Crossing, are considered closed centralised marketplaces because the publisher doesn’t allow the external sale of in-game assets, and players are unable to ‘cash out’ in-game currency for real money – money can go in, but it can’t go out.
In contrast, open centralised marketplaces, like the virtual simulation world of Second Life, allow users to sell in-game assets for money or exchange in-game currency for real-world currency. For example, the virtual equivalent of Amsterdam was sold for $50,000 in Second Life. This open-ended model has become the launchpad for lucrative virtual jobs for many developers who create, trade and sell virtual in-game items.
Distributed open marketplaces on the other hand, typically based on decentralised infrastructure, are not owned by any single entity and allow the creation and sale of unique virtual assets that only exist in virtual space. This is different to an open centralised marketplace, in which a single authority dictates the concentration of control, for any given activity.
From buying virtual cats in CryptoKitties to virtual real estate in Decentraland, decentralised open marketplaces have emerged as worlds in and of themselves. They allow people to create unique virtual assets that can be created, bought, licensed, rented and sold in decentralised markets.
How has the virtual economy been impacted by the Covid-19 pandemic and the financial uncertainty it has caused?
As Covid-19 spread, we witnessed billions of people retreat to their homes, relying on digital platforms and environments for socialisation and competition. This led to an immediate and significant rise not just in the number of people using virtual environments, but in the range of activities they relied on them for. Much of this activity has contributed to significant growth in the size of the virtual economy.
For example, since lockdowns were imposed across the world, we have seen jumps in streaming viewership, participation in online gaming platforms and virtual spend. For example, spending on digital games increased 11% to $10bn in June 2020 – the highest monthly total ever. And Linden Labs, the creator of Second Life, reported spikes in new user registrations, including a 133% increase in subscriptions in France in one week of March.
We have also seen several examples of real-world events like funerals, corporate meetings, and concerts, be replicated in virtual worlds such as Animal Crossing, Second Life and Fortnite.
What the pandemic has demonstrated is that the virtual economy can operate as a counter-cyclical source of supplemental income for people whose ‘real economy’ source of income has been disrupted. This could have significant implications for how we recover from this and future economic shocks.
What are some of the risks of participating in the virtual economy?
When performing any activity online, there are always nefarious bad actors who exploit systems and individuals. As gaming is one of the largest areas of the virtual economy, many of the illicit activities taking place in the virtual economy are found there. Illicit activities are any transactions that are in direct violation of both the gaming terms of service and gaming culture generally.
This includes the creation of counterfeit virtual goods, in-game currency or character framing and selling cheat codes.
Many illicit activities require users to give the seller access to confidential account information in order to complete the unsanctioned transaction. Not only can players have their current virtual assets stolen, but scam artists have also been known to use this method to access credit cards and other sensitive account information.
For example, criminals are using Fortnite’s in-game currency, V-Bucks, to launder money. V-Bucks are typically purchased with stolen credit cards or prepaid cards and then sold at a discounted price on a variety of platforms, both on the deep web and across social media platforms. Payments made with cryptocurrencies are difficult to trace, and total profits are hard to estimate, but security firm Sixgill tracked the sale of $250,000 Fortnite items on eBay during a two-month period in 2019.
Despite efforts to combat illicit market activities, players, vendors and criminals continue finding ever more creative ways to adapt to evolving technology and evade restrictions. They find new loopholes to exploit and continue to profit from emerging unmet needs.
What does the future hold for the virtual economy?
As technological change accelerates in the coming decade, the virtual economy will increase in importance.
We expect to see rapid growth within the virtual economy as people commit more of their professional and personal lives to virtual spaces.
As the population of these platforms increases, there will be opportunities for major brands to tap into this market and reach audiences that they might not have otherwise been able to target. We also anticipate an opportunity for financial services firms to monetise the virtual space by insuring and collateralising virtual assets.
Longer term, technological changes and an increase in virtual populations could lead to a transformation in society, culture and economics, with virtual tycoons, decentralised government and digital nations emerging online.
By 2030, the emergence of a ‘Strativerse’ of mixed real-virtual reality, driven by advances in technologies including AI, the internet of things and implants, will provide new opportunities for further growth in the virtual economy.
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