Creating Virtual Economies: The Ultimate Guide

Introduction

Virtual Economies are an emergent phenomenon. Companies have a lot to gain by that successfully creating virtual economies around their platforms. Data and experiences from virtual economies may also help economists, social scientists and policy makers improve our real-world economies.

This post is split into two sections:

Part 1 describes virtual economies, businesses that can benefit from virtual economies, relevant technologies and key economic principles required to understand how to create a virtual economy.

Part 2 presents a comprehensive process for creating a virtual economy. This includes defining how value is created and exchanged, economic planning and governance mechanisms, user strategies, mapping relationships and best practices regarding architecture, design and features.

Abbreviations

The word “User” throughout this post refers to either of the following:

· Video game players

· Blockchain platform participants

· Social, E-commerce and Sharing Economy platform participants

Whenever I use the term ‘Games’ I specifically mean MMOs & MMORPGs

· MMOs: massively multiplayer online games

· MMORPGs: massively multiplayer online role-playing games

Brevity

I’ve written this post with action-oriented people in mind. It’s meant to be a quick guide to get you started. Throughout this post I have tried to keep my explanations brief and crisp.

Part 1: Prerequisite Knowledge

1. Virtual Economies

2. Relevant Technologies

3. Businesses that can Benefit from Virtual Economies

4. Economic Principles

Part 2: Building a Virtual Economy

5. User Profiles

6. The User Value Grid

7. Defining How Value is Exchanged

8. Mapping Relationships & Interactions

9. Economic Planning

10. Creating User Benefits & Incentives

11. Best Practices

PART I: PREREQUISITE KNOWLEDGE

1. Virtual Economies

What is a Virtual Economy?

A Virtual Economy is an economy that exists in a virtual world where users can exchange virtual or real assets, products and services in the context of a game or platform environment. Users can participate in virtual economies for entertainment or for real economic benefit.

Virtual economies originally emerged in MUD (Multi-User Dungeon) games as early as the late 1970s, but exist on other non-gaming platforms as well. Today the largest virtual economies exist on MMORPGs (massively multi player online role-playing games) such as World of Warcraft & Guild Wars.

User engagement and moderation on some social networking platforms have evolved into forms of social currency. Virtual economies have inadvertently developed on these platforms. A virtual economy can exist on any platform on which real money can be spent on user created digital assets, products, services and interactions.

How Virtual & Real Economies Interact

There is a growing overlap between virtual and real economies. Assets that exist in virtual economies are often traded in the real world using real money. These transactions are usually conducted on online auction sites and are referred to as ‘Real Money Transactions’ (RMTs).

Many platforms actively promote the idea of linking virtual goods to real world money. Some gaming platforms, however, discourage and even prohibit the exchange of real-world money for virtual goods, as it is believed to be detrimental to gameplay.

Gold farming is a practice where users play online games with the objective of acquiring in-game currency and then selling it to others for real money. Gold farming takes advantage of economic inequality as most gold farmers are from developing nations, and they sell their tediously earned in-game currency for real money to wealthier players from developed countries.

What Virtual Economies Mean for Businesses

A lot of successful companies own platforms in which virtual economies exist. By creating virtual economies in a game-like environment for their users to interact and collaborate in, company platforms can experience rapid growth in their primary business activity.

There are several benefits for companies that create a virtual economy for their consumers to participate in.

Earning Opportunities for Users

Virtual economies are becoming increasingly popular because they create earning opportunities for their users. Users are able to interact in new ways, create value and earn real money on these platforms.

User Engagement & Platform Growth

Platforms which are able to gamify their interactions have higher rates of engagement and user retention. Applications with virtual economies can experience a lot of organic growth because their users actively spread the word and encourage more people to join.

Collaborative Interactions

Some platforms allow third party advertisers and business service providers to participate in their environments. Businesses and service providers in virtual environments often develop collaborative rather than adversarial relationships with users.

2. Relevant Technologies

This section outlines some of the technologies and concepts which can be used in virtual economy creation.

Blockchains

A blockchain is an immutable digital ledger in which data and transactions are recorded chronologically. Blockchains hold batches of valid transactions in ‘blocks’. Each block is linked to the blocks before and after it using cryptographic hashes.

Blockchains are tamper-proof. A number of security mechanisms such as ‘Merkle Trees’ make it very difficult to tamper with data saved in previous blocks. Integrity of data is one of the key features of this technology.

Decentralization is at the heart of public blockchains. Every user of a public blockchain can participate by downloading the entire blockchain as well as the associated software. Decentralized data storage enables each user to have the exact same copy of the evolving blockchain ledger.

A range of complex use cases are possible with this technology. Blockchains are easily auditable and can be private or public, permissioned or permission-less. Blockchains create an environment where users can interact and transact without having to trust each other.

Blockchain Structure.

Cryptocurrencies

Cryptocurrencies are digital assets which were primarily designed to be mediums of exchange. Cryptocurrencies are powered by blockchain technology, and are therefore decentralized in nature. Cryptocurrencies use extremely powerful cryptographic security mechanisms to secure financial transactions.

Developers can assign a set of attributes and rules to a cryptocurrency which they have created, such as the total supply, the process of creating new units and how the transfer of value will be verified.

You can think of cryptocurrencies as programmable money. A smart contract can have cryptocurrency units programmed into it, which are only released to someone who fulfils the conditions or work described by the creator of the smart contract.

Tokens

A token represents a unit of value of an asset or utility issued by a private entity. Tokens are digital and usually reside on top of a blockchain platform. Tokens are usually fungible, meaning that a token issued by a company holds the same value as all the other tokens that it has issued.

Utility Tokens

Utility tokens represent a unit of value and can be redeemed for a good or service provided by the issuing company.

Security Tokens

Security tokens are tradeable financial assets issued by a private company. Security tokens represent either debt, equity or derivatives.

Expiring Tokens

Tokens can be programmed to expire at a certain time or when particular conditions are met. These tokens may or may not have economic value or certain rights attached to them.

Limited Use Tokens

The use of tokens can be limited by the issuing authority. Tokens can be programmed so they can only be spent in certain places or when certain conditions are met. The limited use feature can help set the economic value of the tokens.

Non-Fungible Tokens

Non-fungible tokens (NFTs) are a special type of cryptographic token that represents something unique. Each non-fungible token is different from other tokens, not directly interchangeable with them and valued differently.

Non-Fungible Token Enabled Asset Ownership

The ownership of virtual and real world assets can be embedded into non-fungible tokens. For example, ownership of the Mona Lisa can be embedded into a non-fungible token. This token can then be traded digitally and whoever holds it can claim ownership of the Mona Lisa.

On the Ethereum blockchain non-fungible tokens can currently be created using the ERC-721 token standard. Another non-fungible token standard known as the ERC-1190 has been proposed on the Ethereum Network.

ERC-1190 tokens feature two different types of digital asset ownership.

Digital Scarcity

Scarcity is what makes a good valuable. Digital media has been easily shareable and replicable, with or without the consent of the owner of the media’s intellectual property.

Non-fungible cryptographic tokens have finally enabled digital scarcity to exist. A non-fungible token cannot be replicated. An image held in a non-fungible token could be copied, but the ownership of the original image can only be held in that one token.

Digital scarcity is becoming an increasingly important topic in the fields of entertainment and Digital Rights Management.

3. Business Types

Virtual economies suit certain business types more than others. Blockchain companies, gaming companies and platform based businesses stand to gain the most from a well designed virtual economy.

Blockchain Companies

Blockchain platforms are decentralized peer to peer networks. These networks are cryptographically secured and use consensus mechanisms to prevent modification of data. Blockchain platforms enable a range of different user interactions and unique features. Blockchain use cases include smart contracts, tracking and optimizing logistics, identity management, distributed storage, secured voting, managing healthcare records and interactions, digital rights and media, energy tracking and trading, fintech and banking, real estate registry.

Blockchain companies offer a platform where users can interact with one another, exchange value and collaborate. Cryptocurrencies are built using of blockchain technology, and units of cryptocurrency can be exchanged automatically when certain conditions are met in a smart contract. Complex blockchain platforms create virtual economies where scarce digital assets can be created, utilized and traded by users. Several different categories of users can exist depending on the functions and complexity a blockchain platform has.

Blockchain platforms with an intelligently designed environment will enable every user type to gain some value by being a part of their environment.

Gaming Companies: MMOs & MMORPGs

MMOs: massively multiplayer online games

MMORPGs: massively multiplayer online role-playing games

Multiplayer online games inevitably create huge virtual economies. Persistently open online worlds are continuously evolving with thousands of regular players creating and exchanging value with one another. Users can interact, collaborate, organize themselves and compete with each other on a large scale. Games already have virtual economies that enable players to create in-game assets and objects and then trade them with each other, sometimes for real money.

Games which are currently popular provide social interactions, roleplaying, have unique themes and progress in a somewhat defined manner. A distinct culture usually develops around these games.

In-game inflation has been an economic issue that several gaming platforms have had to address. Several gaming companies have hired economists to help optimize their in-game virtual economies.

World of Warcraft is a popular MMORPG with over 10 million subscribers.

Platform Companies

A platform’s purpose is to match users and facilitate the exchange of social currency, goods and services. Many types of platforms exist. Social media platforms include Instagram and Facebook. Social ride sharing is well known, due to Uber and Lyft. Matchmaking platforms such as Tinder and Match.com help people meet one another. Platforms such as Upwork & Fiverr help match people in the gig economy. Ecommerce platforms such as E-bay & Amazon help people buy and sell. Successful platform companies spend a lot of time thinking about their core interaction, their participants and the value they are creating for their users.

Platform companies are a lot more rigid in their interactions compared to blockchain and gaming companies. However, interactions between users on microwork and sharing platforms are becoming more game-like to maintain motivation and user engagement. A lot of value may be created by allowing users to serendipitously develop new functions and interactions. Enabling virtual economies to develop around more traditional platforms could increase interaction and enable growth.

4. Economic Principles

This section presents a few economic principles which need to be understood to properly create and manage virtual economies.

Micro Economics

Micro economics is the social science that studies the behavior of individuals and firms to better understand their decision-making mechanisms. It analyzes market mechanisms that establish relative prices among goods and services and how the decisions made affect the utilization and distribution of finite resources.

Users interact with each other in the goods market. Producers make up the supply side, and consumers buying their products and services make up the demand side. A market could be competitive and open or monopolized by a handful of users. A proper analysis must take the structure of the goods market into account to create an accurate model.

Macro Economics

Macro economics studies how the entire economy behaves. It analyzes interrelations among the different sectors of an economy to better understand how the whole functions.

There are two primary areas of research in Macro economics:

1. The Business Cycle: understanding the causes and consequences of short-term fluctuations in national income

2. Increasing National Income: understanding what factors decisively affect long term economic growth

Macro economics focuses on the way the economy performs as a whole and analyzes factors like output, consumption, savings, GDP and inflation, among others. A governing body uses these factors to develop its economic policies.

Inflation

Inflation is the rate at which the prices for goods and services is rising, and therefore, the purchasing power (or intrinsic value) of a currency is falling.

Inflation happens when the money supply grows faster than the rate of economic growth. Main causes of inflation are demand growing faster than supply and price rises due to higher costs of production or raw materials. Most economists today favor a low and steady rate of inflation.

A high inflation rate is regarded as harmful to an economy because it adds inefficiencies to the markets, makes it difficult to budget or plan long-term and uncertainty about the future purchasing power of money discourages investment and saving.

Deflation

Deflation is a decrease in the general price level of goods and services.

Deflation happens when excess production occurs, consumption decreases, or when the money supply decreases. Deflation happens naturally over time when the money supply of an economy is fixed. Cryptocurrencies that have a fixed supply will experience deflation.

Deflation can cause an increase in unemployment. As firms make less money they may lay more people off in order to cut costs.

A deflationary spiral is where decreases in price lead to lower production, which in turn leads to lower wages and demand, which leads to further decreases in price.

Currencies

A currency is money in circulation that is used as a medium of exchange. A currency is common within a nation. Cryptocurrencies are common in enclosed digital environments. Cryptocurrency exchanges enable users to change their holdings from one currency to another without having to switch to fiat in between.

Fiat currencies.

Governance

A set of rules and mechanisms are needed to govern any economic system. Governance is the way in which rules and actions are structured, sustained regulated and held accountable. How formal a governance system should be depends on the level of complexity of the environment being governed.

Fiscal policy is the policy a government follows to collect money and then spend to influence the economy. Revenue collection is primarily through taxes, and expenditure can be done in several ways including through direct investment and by providing subsidies for certain sectors. Fiscal policy is used to stabilize the economy over the course of a business cycle.

CentralBanks

A central bank is an institution that manage a state’s currency, money supply and interest rates. A central bank holds a monopoly on increasing the monetary base in a state.

Monetary policy is the process by which a central bank controls the cost of short term borrowing or the monetary base, often targeting an inflation rate or interest rate to ensure price stability and trust in the currency. It is set by the central bank.

Currency Boards

A currency board is a monetary authority which maintains a fixed exchange rate with a foreign currency. In a virtual economy a currency board is important if interoperability with another virtual economy is enabled.

National Income Identity

The national income or product identity describes the way in which Gross Domestic Product (GDP) is measured. The formula for GDP is Consumption + Investment + Government Spending + (Exports — Imports). In short, this is GDP = C + I + G + (X — M).

PART II: BUILDING A VIRTUAL ECONOMY

5. User Profiles

In a virtual economy, value is created by users, so the logical place to start the design process is with the user.

The goal of this section is to describe a detailed user profile document that defines Users, their functions and their permissions.

Define Types of Users

Start out by defining the types of users your platform has.

Examples:

· Instagram and Twitter both have one type of User

· Uber has 2 types of Users: Drivers and Riders

· Games can have multiple types of Users

Instagram and Twitter users create personal accounts, accounts for their pets, or accounts for their companies, but the user type for these accounts is still the same.

There is no need for this step to be complex. Simply list the users that your platform has in a vertical column.

Define Functions

Functions are the actions that users can take on a platform.

Examples:

· Twitter’s functions are: tweet, retweet, tweet at users, delete tweet, reply to user tweets, follow users, block users, message users, edit profile, make account private, and more.

· Instagram’s functions are: Upload posts, delete posts, add a location to posts, add descriptions to posts, comment on other pictures, follow other users, like posts, forward posts, message users, block users and more.

· Uber’s functions are: select destination, select pickup location, order a ride, cancel a ride, select number of riders, select which type of car (pool or private), report incident, add tip and so on. From a driver’s perspective, the functions are turn on drive mode, accept ride, message rider, cancel ride, among others.

Different categories or subgroups of users may use certain functions more than others. On Instagram and Twitter, companies use the promote function to boost their posts more than individual users, but these functions are all accessed through the same single type of user account.

In the following column, next to each user type, list of all the functions that the user can take on your platform.

Assign Permissions & Constraints

Not all functions are accessible to all users. A number of permissions and constraints are put in place by the creators of an application, and usually individual users are able change some permissions and constraints can be set by editing their settings.

Certain functions are possible but discouraged. For example Uber drivers are dinged when they reject rides that they’ve been matched to, and riders are dinged when they cancel a ride that has arrived and been waiting for a while.

In more complex applications and games, certain functions and permissions are unlocked only once the user either submits required information, makes a payment or earns their way to a certain level. These are conditional permissions, and they should also be mapped and defined in this document.

Examples:

· Instagram users can edit their settings to allow or limit interactions.

· Uber Drivers and Riders have very well defined, rigid functions with limited ability to set permissions and constraints themselves.

· Games can get extremely complicated with varying levels of skills, permissions and constraints that can be set, earned, bought and lost during gameplay.

In the third column next to each individual function, write down a detailed description of the associated permissions and constraints. The description should include details such as:

· Is the function allowed or not?

· Can the user tweak the settings at all?

· Is it conditional? If yes then to what?

· Does it depend on something else?

· Can permission be bought or earned?

· Are they interacting with someone else through this function or is something interacting with them through this function?

6. The User Value Grid

The objective of this step is to specify how users create value. I’ve include a sample User Value Grid at the end of this step. You should create your User Value Grid once you have defined each sub-section discussed below.

Users create value by engaging in a set of actions on a platform. The specific actions that each user can take are defined in the User Profiles document that you created in the previous section. Multiple user types will engage in divergent actions and therefore create different forms of value.

Define Types of Value

Value will be closely related to the functions available and how they are used. Begin by mapping out the functions.

There are two categories of value that emerge on a platform or virtual environment; planned value which developers have created by design, and unforeseen value that is created by users acting unexpectedly.

Unforeseen value is extremely interesting as it is created when users or groups find creative new ways in which to create value through the platform. Often these uses take the founding teams by surprise.

Each function usually has quantified known value and in many cases unforeseen value. For example, having a million followers on Instagram will give validation to the account owner that they are posting popular and in-demand content, the unforeseen value may be that the account owner can now charge others for posting promotional content on their account, or sell their account altogether for real money.

Define How Each User Type Can Create Value

Value can be created on every platform. It is your responsibility as the platform developer to clearly define how value can be created in the environment you’re building.

Value flows directly from the functions that you have made available for the users, and in many cases, combinations of different valuable activities create their own niches and cult fan bases.

Sticking with the social media example for a moment, a twitter account with 10,000 users has a certain value associated with it, while a twitter account with far fewer followers but with a blue tick for a verified profile has another type of value associated with it. If these two types of values were combined the combined account (ie 10,000 users + a verified blue tick) would have a far higher value than either of the two accounts by themselves.

When you design your user value grid create leave some space by each function to discuss all planned and possible unseen value that is created. You could also create a new document dedicated to exploring the combinations of value that may be created in your ecosystem. Also explore the value that is created by multiple user types using different combinations of functions.

Define How Each User Type Can Buy Value

Value can be earned and value can be bought. As I mentioned earlier, value is often traded on unsanctioned auction sites that the platform creators aren’t even aware of.

Several platforms and games allow their users to purchase value within their own ecosystem itself.

Call of Duty’s game developers decided to call their in-game market ‘Black Market’.

For example, a user who posts engaging content on a social platform and builds up a fan following of 10 million other users can then sell their user profile to someone for a significant amount of money.

Define how users can buy value because that will help you properly define how to create an exchange and keep a pulse on the economy of your platform, sanctioned and unsanctioned.

Define How Each User Unlocks / Wins Rewards

Now that you have had a chance to think about the users, functions and types of value it makes sense to start defining and mapping out rewards. Rewards are an extremely important strategic component of virtual economies as they serve two critical functions:

1. Rewards can strategically be added or removed from a virtual environment to curb inflation or tackle deflation

2. Rewards can be used to encourage or discourage types of economic activity on the platform

Some rewards can be dependent on other factors in the environment, such as time spent on the platform, rank or hierarchy, while others can be open to all participants.

Users who are willing to spend more on the platform and high loyalty to the ecosystem should benefit by receiving certain types of rewards. Other rewards should encourage and incentivize idle users or conservative players to ramp up their participation and involvement in the system.

Think about all of the rewards that will exist in your virtual economy and then map them out for each type of user.

The format for a basic User Value Grid.

7. How Value is Exchanged

Once value has been created it will be traded. If your users can create and exchange value easily on your platform this will really help your platform grow. Happy users that gain from this virtual economy will spread the word and encourage others to join your platform.

Let’s spend some time thinking about how we foresee value being exchanged and how we would like users to trade value in an ideal scenario. Will your platform support the exchange mechanisms as a free benefit for users, or will it charge a percentage or flat fee for certain transactions?

We can make in-app environments and tools available to our users in order to enable the productive exchange of value. The tools and strategies in this section will include: digital & fiat currencies, in app stores, shops & auctions.

Currency Exchanges

Value is most commonly exchanged in return for currency. You should give your users different currency options to choose from. It could be regular dollars, a cryptocurrency or even an in game or in app currency. In-game and in-app currencies are a great option as long as there is a convenient place where people can easily trade this currency for dollars. Perhaps a dollar backed in-game token or stablecoin is also something that you could experiment with when thinking about in game currencies. The great thing about digital money is that it can be programmed to be moved, released, traded or rewarded when certain milestones or conditions are met. This makes it perfect for gig-economy platforms, competitive gameplay and other gamified environments.

The interface of a cryptocurrency exchange.

Store

Consider including a store somewhere on your platform which is enticing and dynamic. Your store could include things that you as the app developer are selling or it could be a place of barter where other users can also list items or rewards which they have earned within the environment. The latter would be a marketplace or an auction area rather than a traditional store.

Will your store be available all the time, or will it be open only for certain times in a particular location or level? Will there be a single general store or multiple specialized stores? Are you only going to allow offers in shop or can users engage in trade with each other anywhere in the platform?

Timing & Exclusivity

A well-designed offering will include timing and exclusivity based on each user’s loyalty, time on platform, spending habits, level, experience and other characteristics.

Not all items should be available to all users. Goods should be available based on properly thought out metrics & hierarchy depending on type of business or application you are looking to build.

Offline Transactions

I suspect there will still be some exchange of value offline regardless of how optimized the in-app exchange mechanisms are, and that’s okay. It would be of benefit if you did some research now and then to see where the offline transactions where happening and what the nature of these transactions are. Once you have more data to work with you can think about how to try and bring these transactions back on-line or somehow position your virtual economy to strategically gain from these offline transactions as well.

Well Informed Users

The key to having a robust economic system on your platform is well informed users. Find ways to inform your users how they can exchange value on your platform. Whether you do this through messages within the app, emails to your users, or intelligently designed pop-ups during gameplay is up to you. But make sure that your users know:

· How they can buy or sell

· What they can buy or sell

· Where they can buy or sell

· How each item they buy or sell can benefit them

8. Mapping Relationships & Interactions

You can try and build a map of the relationships that you think will form while you’re building your platform but you should regularly revisit this document and update it once your platform is up and running with multiple users. Things will change and evolve fast and it will help if you have a clear map outlining the intricate relationships on your platform.

The Virtual Economy Triangle

Most successful virtual economy platforms will connect two or more types of users and service providers. There are three types of individuals or organizations involved here:

1. The platform itself

2. Third party service providers on the platform

3. All categories of users on the platform

You will gain significant insight if you map the permutations and combinations of transactions, communication and interaction that could occur between these three parties.

Guilds & Specialized Groups

Guilds can fulfill the role of a market or a resource allocation mechanism in the economy: given a set of resources (armor, healing, guiding newer players, and so on). produced, the guild structure and rules determine how they are distributed among members and possibly outsiders too. Guilds can sometimes even replace the market itself — which is the usual resource allocation mechanism. Even though a marketplace can exist, in many cases players may choose to use an alternative mechanism — the guild.

Guilds and specialized groups are usually formed by influential players and groups through methods of organization that may or may not be enabled by your platform. On large platforms guilds and specialized groups are formed pretty fast. For example, cryptocurrency miners have formed groups on various networks and they have organized themselves into large mining pools. Pet lovers have organized themselves in groups and communities on Facebook.

AntPool is a prominent bitcoin mining pool. Source: Bitcoin Magazine.

Collaborations

Groups and users can find many mutually beneficial reasons to collaborate. Collaboration will occur between a diverse set of groups and users and it will give you greater insight into your platforms ecosystem were you to map it out and monitor it. Collaborations are most commonly seen in large MMORPG games. Where specialized groups with certain sets of skills work with other groups or individuals for a common aim even though their personal interests or incentives may vary.

Allowing Serendipitous Relationships

Serendipitous relationships are those which can occur by chance in a beneficial way. Relationships such as these are often the most valuable aspects of a platform. A select group that may have discovered a unique way to create and capture massive value purely by chance will be highly engaged with your platform and spread the word far and wide for others to join.

Patterns and trends will emerge once your virtual economy platform is up and running. Closely monitoring user generated value and having the design flexibility necessary for moving quickly and optimizing the platform to allow for serendipitous relationships to flourish should prove to be beneficial to your virtual economy.

9. Economic Planning

Having comprehensive economic planning and governance mechanisms in place is essential. Platform economies may experience inflationary or deflationary pressures and are often prone to abuse by different types of users. Having a well-defined arsenal of tools and strategies defined for each scenario is important. The economic and governance systems you set in place will depend on the nature of the platform you are building.

Structure & Governance Mechanisms

If there are rules and complex issues that the entire platform’s community needs to agree upon every now and then, you should create a governance mechanism on your platform. A lot of blockchain platforms have robust governance mechanisms where the community partakes in discussions before key decisions are made votes are cast regarding the direction that the platform will take. Governance decisions should be different from economic decisions, because lumping both together often results in abuse by well organized groups of users.

Economic decisions to keep inflation at bay, monitor and encourage competitiveness of the platform and incentivize users to engage with the platform in positive ways should be made by the designers of the platform. Highly evolved and complex platforms should consider hiring an economist. Several tools can be used to monitor and regulate the economic health of your platform including forms of tax, incentives, releasing new dimensions of your platform as well as balances and sinks.

Balances & Sinks

Creating the right balances and sinks mechanisms will be important for any platform environment. A balance is a place where users earn money, rewards or value on your platform. Sinks are places where users can spend value, money or rewards on your platform.

These are key tools that will help you regulate the inflationary or deflationary pressures on your platform.

Real Money & Virtual Currencies

As previously mentioned, you can monitor virtual currencies or in-app points, but real currencies will inevitably be used to exchange value on your platform. People will start trading value from your platform offline for real money. It’s better to be aware of it, collect all the data you can and then plan your next economic moves on the platform.

10. User Benefits & Incentives

Incentivizing your users for higher engagement and rewarding them for being on your platform are two important growth strategies for your platform. If you can do this in unique and interesting ways, the users will be your greatest cheerleaders. This section has a few best practices and tips on user benefits and incentives.

Start with a Positive Balance

When a new user is starting off, they should do so with a positive balance. Games have perfected this: a new player starts off with a set of lives or a number of points or tools that they can use in game play while they learn the basics and try to get the hang of the game. It completely changes the mindset of the user if they are rewarded with a positive balance right at the start. Things don’t seem so gloomy when you have some resources to play around with when you begin. You can also do this by offering a grace period of a few weeks where new users don’t pay fees or taxes on their transactions or earnings. The magnitude and nature of the positive balance you choose will depend on the nature of the virtual economy you’re building.

Focus on User Earnings

A happy user is your greatest asset. If a user is gaining significant value from being on your platform they will tell everyone they know to get on it. A great strategy is to help ‘Create Platform Millionaires’. Ebay and Facebook are examples of platforms where regular users are able to build million dollar stores or large publishing businesses. A user making money or receiving perceived value will drag others onto the platform.

Focus on User Fame & Promotion

A certain type of user places a lot of value on fame. Creating ‘Platform Superstars’ is another strategy you could experiment with. A user gaining recognition or a following on a platform will promote it. Influencers and superstars will help you build a critical mass of users, especially in the early days. YouTube and Twitch have used this strategy to great effect.

Twitch is a live streaming video platform.

Incentivize Each User Type to Participate

Social platforms so far have incentivized their platform stars well but they have largely ignored their passive users who don’t really create much content but who spend lots of time consuming content on these platforms. A few blockchain enabled publishing platforms such as Flixxo and LBRY are doing a great job of incentivizing all user types to engage with the platform. This will most likely be a big trend going forward.

11. Best Practices

In this section I’ll outline some helpful points and best practices to keep in mind as you think about creating a virtual economy for your platform.

Build Around Your Core Interaction

The key to creating a virtual economy is keeping your core platform interactions at the heart of your design and then building everything else around it.

Core platform interactions serve as the anchors of the application. Uber’s core interaction is connecting drivers and riders. Instagram’s core interaction is photo and video sharing. In the game World of Warcraft the core interaction is enabling users to explore the landscape, fight various monsters, complete quests and interact with players and non-player characters within the game.

Platform Design

Platforms are usually built according to certain design principles. The core business interactions of an application dictate what functions it should enable.

For readers who are trying to build virtual economies on top of their existing platforms it is important to keep your platform’s design principles in mind while working through the steps defined in this post.

For the readers who are in the process of conceptualizing their platforms while reading this, you have the freedom to design your applications after you’ve completed the steps defined in this post. However, it may be beneficial to create a few basic platform design principles now and adhere to them while going through the steps. These self-imposed design principles will give you a frame of reference while thinking through each step.

Iteration

Virtual economy design and management is an iterative process. The first time you go through the steps you will have a blueprint to create a virtual economy which suits your platform and business model. There may be some loose ends and unresolved design and architecture issues your first time around. As you create a virtual economy and experiment with it for a few days, you’ll generate a lot of data and get a lot of feedback. You should refer to this data as you work toward optimizing your virtual economy in consecutive iterations.

To manage a virtual economy and ensure that it is buzzing along at a healthy pace you will need to closely track a few key metrics. Identifying which metrics to track and defining an acceptable range for each metric should be done early on.

Interoperability

Interoperability is a trend that is really emerging in the world of blockchain platforms. In a sense, interoperability exists between every platform when we use dollars to exchange value on a platform, but platform designers can purposefully build in interoperability on their platform with other worlds. It’s a double-edged sword of course: you want to regulate your virtual economy in a way that it is safe from inflation or deflation and complete interoperability between other platforms could possibly destabilize your environment. Controlled or closely monitored interoperability would be a prudent strategy. Where limited points of interoperability are defined and monitored. These points can be specific exchanges or marketplaces.

Accessibility

Making your platform accessible to everyone reduces the friction of onboarding new users. Some people prefer using their laptops while other prefer their phones or tablets. Designing your platform so that it can be accessed by all devices and still provide a consistent experience is key. Millions of users who haven’t been on the internet before will be active users in the near future. With the advent of 5G, data consumption and streaming is set to grow across the world, even in geographies that have historically low digital consumption.

UI & Design

Again, your platform’s UI & UX will completely depend on the nature of what you’re building. Simplicity in design is a timeless feature, the importance of which cannot be overstated.

Additionally, Augmented Reality and Virtual Reality is already a reality and is set to grow exponentially. This will have significant implications for advertising, retail and media. It wouldn’t hurt platforms to experiment with AR & VR features.

Augmented Reality Objects displayed in a room, viewed through smart phones and tablets.

Freemium

The Freemium strategy may or may not work for your platform. Freemium is when its free to enjoy for all users but for access to extra features and levels they have to pay. Games often have these features where a lot of gameplay is free but then special levels or armor must be purchased in game. Businesses and publishers looking to gamify some of their offerings could experiment with this feature as well.

Design for Value Exchange Mechanisms

Value exchange mechanisms are the different ways in which users can exchange value. It could be through messaging or it could be by following another user. It could even be micro-transactions or a larger economic exchange of value. The more regular the exchange of value, the higher user engagement will be. Implement and embed value exchange mechanisms seamlessly in your environment.

Conclusion

In order to succeed in building a robust virtual economy you must:

· Recalibrate your virtual economy often

· Iterate over and over till you optimize your platform

· Communicate with your users regarding changes, features and updates

A virtual economy is a live thing and needs to be maintained daily.

I hope you found the information and ideas presented here to be valuable and actionable. The points covered in this post are just fundamentals to get you started. There is no recipe for really complicated and dynamic situations, but if you gather data, use the right metrics and think strategically about every decision, you will create a vibrant virtual economy.

I’m passionate about creating a future in which everyone can meaningfully participate in an economy. I believe that data and experiences from virtual economies will enable social scientists, economists and policy makers to improve our real-world economies and possibly advance universal basic income research.