Sometimes, it feels like we’re in the middle of a virtual currency bubble. Articles about virtual economies, virtual item sales , and the benefits of using virtual currencies to implement “freemium” business models are appearing all around us. It’s clear that the market has caught on and that virtual economies are going to be central to the way the web is monetized from now on.

And yet, for all the current fascination and hype about virtual currencies, it’s almost impossible to find a definition of what a virtual currency is, best practices on incorporating virtual currencies into applications, or even a list of the things a virtual currency platform should provide.

At this writing, the number one hit on google for “Virtual currencies”  is the Wikipedia entry for Virtual Economies . There is no wikipedia entry on virtual currencies.

Over time, the Twofish blog will help to fill this void. For now, I want to talk about how virtual currencies fit into game or application design.

So What is a Virtual Currency Anyway?

What most of us think of as currencies in the “real world” are sovereign or fiat monies that are supported by or tied to national or multinational governments. These government-backed currencies are classically defined as having three core properties:

• They are a unit of account. That is, money provides a standard way to measure of the market value/cost of goods, services, or assets. In short, relative prices accurately reflect relative valuations of items.
• They are a store of value. That is, you can save money and then use it later. Money isn’t perfect at this because of inflation (and the remote possibility that the government that issued the money has been overthrown), but, in the short-term, money is a good way to store value.
• They are a medium of exchange. You trade money for the stuff you want. Other people accept it.

The folks at Offerpal, when they tried to define virtual currencies, more or less took this definition, focused on “medium of exchange” and came up with “Virtual currency, as you might imagine, is what you use to buy virtual goods or virtual services. It is essentially as good as real currency.” (( http://mashable.com/2008/12/18/virtual-currency))

If you were a little more academic, you might take this as a starting point and say:

A virtual currency is a currency, backed by a private company and not by a government or cross-government entity such as the European Union, which is used within a virtual world or online economic application, which meets the three classical criteria for a currency, and which is primarily used for the purchase of virtual goods and services.

But … But … That’s Kind of Useless

Definitions like the above, while they’re very satisfying from an academic point of view, and can help you recognize whether your virtual currency is performing well once you’ve designed your application, are kind of beside the point when it comes to application design.

To see what I mean, consider for a moment how you would define a door. Wiktionary defines one as follows:

A portal of entry into a building or room, consisting of a rigid plane movable on a hinge. Doors are frequently made of wood or metal. May have a handle to help open and close, a latch to hold the door closed, and a lock that ensures the door cannot be opened without the key.

It’s hard to argue with this; it’s approximately true and, if you already know what a door is, it seems correct. On the other hand, it doesn’t seem terribly useful. In short, it’s a lot like our definition of virtual currency.

Here’s a very different definition of door, though:

A door is a device which simultaneously allows friends in, keeps enemies out, makes the house warmer, and makes the occupants feel more secure.

This second sort of definition is more useful when you’re trying to understand what doors are for, and figure out how to add one to your house. More importantly, it can tell you whether a given door is a good door.

The trick is figuring out a similar definition for virtual currency.

Think About How People Feel About Money, and How It is Used Socially

The starting point for thinking about adding virtual currencies to your application is that you should focus on how people feel about money, and how they use it in social interactions, instead of focusing on the role it plays in economic analysis. It might seem obvious, but your virtual currency should be integrated into the rest of your application and feel like money.

The more your virtual currency behaves like money in the real world, and the more people think of it as money, the more compelling the application will become (and the more interested the user will be in acquiring, and spending, currency).

In particular, a large percentage of the user’s actions should have an economic consequence. E.g. they should either generate currency or cost currency.

Thus, when adding a virtual currency to your application, you should be thinking about:

• How do people acquire the currency? Is the acquisition (and loss) of currency firmly embedded in almost all application events and actions?
• How do people feel about the currency? Does it matter to them?
• How does the presence (or absence) of currency change their feelings about themselves, about each other, and about the game. Can people see other people’s currency? Can they see the impact of currency on the application? Do they feel envy, or at least a mild jealousy, when they interact with wealthier participants? How do social interactions change in the presence (or absence) of currency?
• How does the presence (or absence) of currency change what users do? Having more money should change what’s possible, and what’s likely.

Further Reading

Along these lines, I have two recommendations for further reading:

• Juho Hamari over at the virtual economy research network, posted a great article listing many of the ways in which virtual currencies can be used within an application. If you’re designing a game, or trying to add virtual currencies to an existing application, this article is the basis of a great checklist.
• Yang Wang and Scott Manwaring wrote a very interesting paper entitled Human-Currency Interaction: Learning from Virtual Currency Use in China that goes over some lessons they learned by watching how people use virtual currencies.

This entry was posted on Wednesday, March 25th, 2009 at 12:27 pm and is filed under Virtual Currency, Virtual Goods. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site. -->