Wildcat Currency: How the Virtual Money Revolution Is Transforming the Economy

Wildcat Currency: How the Virtual Money Revolution Is Transforming the Economy

by Edward Castronova


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An intriguing look at the exploding phenomenon of unregulated private currencies and how they will change our economy forever

Private currencies have always existed, from notes printed by individual banks to the S&H Green Stamps to Bitcoin. To

Product Details

ISBN-13: 9780300212495
Publisher: Yale University Press
Publication date: 06/30/2015
Edition description: Reprint
Pages: 288
Product dimensions: 8.80(w) x 5.70(h) x 0.80(d)

About the Author

Edward Castronova is professor of media and cognitive science at Indiana University. His previous publications include Synthetic Worlds and Exodus to the Virtual World. He lives in Bloomington, IN. 

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Copyright © 2014 Edward Castronova
All rights reserved.
ISBN: 978-0-300-18613-0



When my students and I began our research project, we thought our goal was to examine the growth of shadow economies on the boundary between the real and the virtual. By "real" we meant offline or brick-and-mortar economies, and by "virtual" we meant the economies of video games and social media systems like Facebook. We were especially interested in gray areas like the Amazon trading platform or the Steam marketplace.

After a lot of time spent looking at different examples of virtual economies, we chose twenty-seven of them as representatives of various sectors of the social media world. We developed a lengthy content analysis questionnaire and hired several assistants to go into each environment and answer as many of the questions as possible. We asked, for example, whether the social media environment had a marketplace and if so, whether it was heavily used. We also asked how real resources like time and money affected the experience of the virtual environment, and whether they contained other aspects of a normal economy such as wages, banks, or production.

These environments, we found, contain tremendous economic, social, and cultural diversity. Yet there was one striking common factor: every world we explored had its own virtual currency. Anyone who launched a social networking project of any kind was introducing his or her own currency. Like the wildcat oilmen of the past century, currency builders were rushing to capitalize on a moneymaking opportunity that, for now, proceeds with no government oversight whatsoever.

The first thing most people ask me, when I describe my research at cocktail parties, is, "How much money are we talking about?" It is very hard to say. First, are we talking about virtual economies, or the currencies that support them? There are no generally accepted public data on the size and growth of either one. Virtual goods are being generated and traded all over the world, with a rapidity and ease made possible by the simple fact that these are all digital entities. The situation would have thrilled Plato, intellectual father of The Forms: here we have a bewildering cloud of things, all of which are definite, distinctly identifiable things as such, and some of which have clear economic value. Yet none of them has a physical manifestation. The physical traces these things leave—and they're only traces—are electrical signatures on memory chips. Those signatures come and go in response to computer program commands; they are just footprints on the seashore, washed away almost at once. The things themselves are merely notions. How can one begin to describe such a chaotic, fluid phenomenon?

One way might be to take a direct measure of virtual-goods transactions and assign them a dollar value. This is a massive task, not because of too little information but because of too much. Markets in virtual worlds typically spawn tremendous amounts of data, on trading, prices, and transactions. In many virtual economies, the data are streamed to the user's client computer and transferred directly into a common data analysis software package. A statistician has only to enter the virtual world and record the numbers as they come to the screen. But making sense of the information is not easy. The data stream produced by a virtual world is immense but completely disaggregated. It consists of many thousands of time-stamped records of item-for-item trades, such as One Bolt of Linen Cloth for Twelve Gold Pieces. The companies themselves generally do not create economic aggregates for their own analysis and management. While is possible to clean the data and analyze a virtual economy as a "normal" economy, it is an immense task.

A more manageable but indirect way to get a global sense of virtual economies, if not currencies, is to consider virtual item sales: how much real-world money a company makes from its customers' purchases of virtual goods. One recent estimate put the virtual goods market at $15 billion per year. A recent report of the European Central Bank estimates that the amount of real money people paid to acquire game and social media virtual currencies (so-called "real money trade" or RMT) lay between $200 million and $10 billion in the years 2008–2010.

But an estimate based on the virtual goods market fails to count everything in virtual economies that has value. Transactions of virtual goods for real currencies represent only a small part of a virtual economy. They do not count the value of virtual goods traded for virtual currency, or those produced for self-consumption. Such items have economic value even though they are not sold for real money. Hence the statistics generally underrepresent the significance of the economy they are measuring. It is like measuring the scope of the Japanese economy by counting only the value of Japanese goods that are purchased with U.S. dollars, while ignoring goods purchased with yen or consumed by the people who produced them. In a virtual economy, most virtual goods are consumed directly by the producer. Most of the rest are traded to other users using the in-world currency. Sales of virtual goods and currency for dollars are the tip of the iceberg.

The most reasonable assessments that we have indicate that virtual currencies—including game currencies, digital currencies, and customer-loyalty currencies—constitute a substantial and rapidly growing phenomenon. Nonetheless, the European Central Bank concludes that there is not much to worry about—yet.


So why should we care? Although virtual currencies and virtual economies are not on many people's radar, their explosive growth rate suggests that they will quickly become an extremely important part of the world economy. Almost every social media product we studied, whether game, service, or business, carried with it a virtual currency. To the makers of these worlds, having a currency seemed entirely natural, even necessary, even if the product was not a fantasy or a game. With customer-loyalty programs, it seemed as though everyone who runs a business has decided to make his or her own currency.

Moreover, a currency is only one element of a payments system. It is possible to conceive of a payments system with no fixed currency. Virtual currencies point to a future of seamless digital value transfer. The four examples below show how virtual currencies offer easy solutions to economic, social, and commercial needs. Their emergence and application seem quite natural. They "work." This functionality might explain why we found virtual currencies in every environment we studied.


The first example actually has nothing to do with the internet. But because it shows how easily a virtual currency can be launched and then used for trades among a large group of people, it provides a good look at the basic mechanisms by which play money becomes real money.

Magic the Gathering is a card game launched in 1993. Until 2002 it had no formal presence on the internet. Yet it spawned an economy and generated trade; the trade required a currency and one evolved; the currency went online; and now it trades against the dollar at a fairly constant per-unit cost of a little more than a dollar. The story of Magic shows how easily almost anything can become money in the Information Age.

In the 1990s, a game of Magic looked like this: two people, usually male nerds, sat across from each other at a card table. Each had a deck of sixty cards. On his turn, Nerd 1 would take one card from the top of his deck. He then played cards from his hand onto the table. Each card had a different effect, such as attacking the other player's life force or destroying one of the other player's cards. Then Nerd 2 drew a card and played some from his hand onto the table. This went on until one player's life points, which start at twenty, were reduced to zero, at which point the game ended.

This simple mechanic—draw and play—is seen in hundreds of card games the world over. Yet Magic became explosively popular through two innovations. First, the rules are not in a rulebook—they are on the cards. When you draw a card from your deck, you read what it does. You can then strategize about what to do with it. A card can do very complicated things, but so long as the card tells you exactly what those things are, you don't have to worry about memorizing a bunch of arcane rules. It's all strictly need-to-know! If you don't have a card, its rules don't matter. If you do have it, its rules are right in front of you. The second innovation is that players can build their own decks, buying a specific set of cards from among those printed by the company based on how different sets of cards work together in creative and unexpected ways. Your prowess as a player is a matter in part of luck and in-game play, but also of managing and building a deck with just the right cards. The cards could be acquired by buying packs from the company, like baseball cards, or they could be picked up in trades with other players. Think Fantasy Football on steroids: you are trying to build a "team" of sixty cards that will work well together no matter what team they face.

These innovations allowed Magic to become an intricate and deeply strategic game. In 1994 it was selected as a Mensa Award winner. Yet kids can play it, too. Take a card, read what it does, use it. The brilliance comes in not at the level of reading and implementing cards but in anticipating the flow of cards into your hand and preparing for them. Young children might not do that, nor do they need to. But Einstein and Oppenheimer could have had a great deal of fun with Magic, each knowing exactly what was in his deck, each judging the probability of such-and-such a card being drawn within the next five rounds, the probability of some killer card being drawn before the match was 45 percent finished, and so on. For the very best Magic players, the game is all about how they build their decks to create the possibility of overwhelming combinations of powers.

Here's an example of how the Magic system leads to deck building and card trading. Magic players often characterize their decks by colors, because cards of similar colors tend to work together well. Let's take a green deck as a beginning concept. Green decks are filled with big monsters—large, powerful creatures that do lots of damage when played. Being so large and powerful, however, these monsters require quite a lot of resource build-up, in the form of "mana," before they can be summoned to battle. Therefore a green deck player spends the first half of a match in a very weak state, building up mana slowly. Once he has enough mana, the green guy can unleash his horde of Bears, Rhinos, and Spiders on the enemy, wiping him out. This strategy is different from what a player with a red deck would employ. Red cards tend to involve instant, small damage. A red player sends waves of little creeps to pick off life points here and there from his enemy. When red plays green, the red player hopes his creeps can take down the green player early, before the latter can build up enough power to bring out his massive goons.

Most tournament play in Magic, however, is done with decks combining blue and white. White cards preserve and defend life points. Blue cards allow deck management, and this power, more than any, is valued by the best players. A typical blue card allows a player to dig through his deck to find a certain card and put it in play immediately. In other words, he doesn't have to draw the card—he can go get it. Other blue cards let players bring powerful cards back from the discard pile, or to order the next ten cards to be drawn, and so on. If Einstein played Magic, he would play blue/white. His white cards would keep him alive, and his blue cards, combined with his knowledge of probability and card synergies, would allow him to ensure that he had maximal power in hand at all times.

Given these strategies, the cards produced by the company may have greater or lesser value. If I am a red player going up against a green, a card that destroys green mana is extremely valuable to me. If I can put several of these cards in my deck, chances are I will draw one early. If so, I can kill the green guy's mana early, and so set back the timetable of his juggernaut of behemoths. A blue/white player finds any deck-delving card to be very valuable. He puts only a few powerful cards in his deck and then relies on his abilities to dive into the deck to find them. If there's a card that lets him repeatedly go in and grab his most powerful cards, that card would be worth quite a lot in terms of its contribution to his deck's overall power.

Markets naturally emerge from such a situation. And a market did emerge, because Magic was an instant hit. Though originally conceived as a time-waster for fans waiting around for events at game conventions, by 1999 it was itself an event. The publisher, Wizards of the Coast, began releasing new cards at regular intervals. Magic tournaments began to offer prizes in five figures.

All of this made good money for the game's developers. Think about the business model. You've got 100,000 supersmart guys wanting to beat down their friends, and they can buy playing cards to do it. How much would they pay for a slightly better card than the ones currently in their deck? How much does it cost to design and release a single card? This is easy money in the short run: if the average power of existing cards in the system is 5, just invent some funky rule that gives your card a power of 6, pay an artist $100 for a nice image, print and sell. In a world of 5s, who wouldn't pay $1 to have a 6? Or $2? Or $20?

In the long run you have to be more careful. The developers are monopolists and, as we all remember from Econ 101, monopolists understand that they need to restrict their output in order to keep the demand price high. So Magic's developers release new packs, with new rules and powers, only once a year, adding new rules and new powers while "retiring" old packs, making them no longer acceptable for official play, in order to keep a steady demand for new product.

Magic quickly grew to involve thousands of cards with thousands of different powers. The infinite breadth of human creativity expressed itself in the infinite variety of decks people built. Each player had a preferred flavor of deck.

And then came trade. If hundreds of thousands of players all have different tastes, and if the cards are released in random packs, then players have an incentive to exchange cards. It began with barter among kids—I'll give you a Doom Angel for your Forest Lurker. But barter is inefficient. The second kid says, "Wait. Forest Lurker is way more powerful. Give me a Fire Goblin too." And so it goes, with kids: they work it out. Not so the advanced players, who know that Forest Lurker is worth (1.13) × (Doom Angel + Fire Goblin) and thus not a fair trade. These players require a divisible currency, such as the dollar, to facilitate trades, so that Forest Lurker might be worth $2.60 and (Doom Angel + Fire Goblin) $2.30. Once that currency is established, you can make the trade, then throw in thirty cents to make it even.

EBay was an early answer to the demand for card trading in Magic. Even today I can try to buy Isolated Chapel for $11.38 on eBay (nine bids). The only difficulty is the service fees and the hassle. Cards have to be shipped, with attendant costs. Moreover, a fellow involved in this business owes income tax and sales tax; things traded in dollars are subject to the laws and regulations of dollar-land. If you use credit cards, fees have to be paid. It's all very clunky.

There's nothing like the internet to remove clunkiness from a human interaction system, and sure enough in 2002 the company launched an internet-based version of the game, Magic the Gathering Online. The developers designed a client software program that goes onto your home computer and allows you to talk to a central server. Among other functions, the central server sells you digital versions of cards, keeps track of which players have which digital cards, and maintains chat channels in which you can "buddy" another player and then trade cards with him. You can sign up for events: dates and times when many players will come online to play with other members of the network. To sign up for these events, you must pay $1 to the company for a digital admission certificate called an Event Ticket. If you don't use a ticket for the event you originally bought it for, you can store it, give it to another player, or exchange it for other things, such as cards. Or dollars.

Now suppose I want to create a wonderful Magic deck and am willing to pay a lot of money for it. I can go the face-to-face route: search on eBay, buy up all the great cards I can, dutifully paying my sales taxes (or not), and take the risk of not getting my cards in the mail after I've paid. Then I have to find other people to play, go to tournaments in the physical world, and hope for the best.


Excerpted from WILDCAT CURRENCY by EDWARD CASTRONOVA. Copyright © 2014 Edward Castronova. Excerpted by permission of Yale UNIVERSITY PRESS.
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Table of Contents

Acknowledgments ix

Introduction xiii

Part I The Currency Explosion 1

1 Weirdly Normal: Virtual Economies and Virtual Money 5

2 Forms of Money 41

3 Is It Legal? 83

4 Is It Money? 99

Part II Implications 127

5 Wealth, Power, and Happiness: The Effects of Counting Money 129

6 Currency and Confidence 153

7 How Money Will Evolve 177

8 Wildcat Currency and the State 201

Epilogue. Dear Politicians: Please Don't Screw This Up 231

Notes 239

Index 255

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