Avoid hyperinflation! This was the salient piece of advice for running a virtual economy that I got from Bill Grosso's talk to the April meeting of the SDForum Emerging Technology SIG. The talk was entitled "Virtual Worlds and Real Metrics". Bill is CTO of TwoFish, a startup that provides virtual economies to online worlds. Bill has an undergraduate degree in Economics, so he has both academic knowledge and the practical experience of seeing the insides of virtual economies in online worlds.
In case you are wondering what a virtual economy is, two leading examples are found in World of Warcraft and Second Life. Both are massive multiplayer online (MMO) worlds. World of Warcraft is a fantasy game based on combat where players receive rewards for gameplay. The economy greases interactions between players and allows them to exchange rewards. Although it is not the primary point of the game, the World of Warcraft economy is estimated to be larger than many small countries around the world. Second Life is an online world where you can establish a second life for yourself. Like all the other aspects of Second Life, the economy is intended to provide a virtual reflection of a real economy.
Although it is attractive to think that virtual economies are like real economies, Bill spent quite some time disabusing us of this notion. Unlike real money, virtual money may have different costs in different localities, sometimes you get a bulk discount on large purchases of virtual money and in some cases old money may expire. Another issue is that money does not circulate in the same way are real money. In the real world money, once set free, circulates from person to person, business to business. In a virtual world, money is usually created by the game, flows through a player and then back to the game. It seems that the degree to which money circulates between players is a good measure of how "real" the economy is in a virtual world.
For measuring money velocity, virtual worlds do have an advantage. In the real world, statisticians estimate the money supply, then estimate the total number of number of transactions in the economy and divide one by the other to get money velocity. In a virtual world, the man behind the curtain sees into every players wallet and every transaction. The calculation of money velocity is exact. Moreover, by linking demographics and other knowledge to players you have a Business Intelligence analytics wonderland, precise reports on every aspect of the economy that can be used for all sorts of marketing purposes.
Hyperinflation has been and always will be a pitfall of virtual economies. It can come from bad design of the virtual economy, but is it more likely to come from players finding and exploiting bugs in the game, and there are always bugs in a game. Eternal vigilance is the price for avoiding hyperinflation, so the analytics reports are an important part of managing this part of the economy as well.