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EVE Online: Its Economist on the Power Virtual Economies

With more than 360,000 players, the massively multiplayer role- playing game EVE Online has one of the largest virtual gaming economies. The outer space entrepreneur game, which was created by Iceland's CCP Games eight years ago, takes the mineral, service, and item trading economy very seriously. It holds a bi-annual economic meeting in Reykjavik run by EVE Online's lead economist, Dr. Eyjolfur Gudmundsson.

Last week I visited Iceland during the economic talks (and the infamous EVE Online Fanfest) to speak with Gudmundsson about what a real-world economist can learn from virtual currency.

When was the first time you heard of EVE Online?
That was back in 2004. There had a seminar here in Iceland on using virtual economies to understand traditional economies and it was about a year after EVE Online launched. It had about 50,000 players at the
time. I thought, if this flies, it will be really interesting, because for the first time you'd have access to almost any behavioral pattern that happens within the economy and understand why people are making different decisions as opposed to real life where that information is difficult to track down.

I was an Associate Professor at a local university here, and two years later they advertised for an economist position. I hadn't played the game at the time, but I got the concept and thought, why not? It has
been an interesting challenge over the past four years.

Where did you get your PhD?
The University of Rhode Island.

Were you into video games before joining CCP games?
Never saw myself as a gamer, but when I thought back... I'd played Microsoft's first flight simulators and lots of strategy games.

Now, you don't play EVE Online, from an ethical standpoint, right?
No, we all do! [CCP Games employees] just play with a different set of rules. We are monitored by a team to make sure we're not doing anything unethical, like interfering with politics. We're there to listen to the community, not participate.

Unlike Second Life and other computer universes, there is no real world currency attached to EVE Online. I have to ask: Why should a virtual currency be taken so seriously?
The only value of any currency is the belief that people have in it. I want to state that there are more people that believe in EVE Online credits than those that believe in the Icelandic Krono, my national currency. So I'm going to maintain right now that my currency in EVE is stronger than my "real" currency (There are 360,000 EVE Online players and only 300,000 people in Iceland).

Right now, Facebook is creating a credit. That's a credit 600 million people believe in. I can guarantee that some people will value that credit more than some national currencies.

What is a key difference between the EVE Online economy and something you'd see in the real world?
Our economy in EVE is more laissez-faire, allowing more free interaction between people. Very limited set of rules and regulations.

You come from a traditional economics background. What have you learned from coming to the virtual side?
I have reconfirmed the basic principles of economics and human behavior. You can rarely have an economy that is so clear of regulations, unpolluted by centuries of historical barriers, and you realize how efficient an economy can really be.

You mean government barriers?
These are government barriers, social barriers, and political barriers. Look at agriculture: It's not a free trade at all, as it is really restricted and bias based on subsidies in places like the U.S. and U.K. It distorts the market. It distorts the message you get when you try to read the market based on the prices.

When you have an environment like EVE, as soon as you make a small change in the game, we see a shift in the market price reflecting that.

Can you give me an example?
We used to have a torpedo and a missile that sold for very similar prices. We decided that they were too similar, so we reduced the rate of the torpedoes and raised the price of the missiles. Instantaneously, on the day they were changed, the price of the torpedo launchers fell and the price of the missile launchers skyrocketed.

What people didn't realize was that we also made the torpedoes more explosive. When people realized that, the price of the torpedo launchers evened out... We even have examples of mineral markets adjusting to speculative information about what might happen. We see the price change.

In the four years you've been with EVE Online, have you found that it mirrors any world economy?
It mirrors the basic principles of economic interaction between people, but not the economies themselves. It has its own economic cycle. In EVE, it is around the game expansions that come out every six months: People get excited when they hear information on the new content, there is a flurry of activity when it is released, and things taper off after. In each cycle, we go a little bit higher in the overall economy.

Tell me about the war against cheaters, codenamed "Unholy Rage" by CCP Games.
We've been fighting illegal activities since day one. It means people selling stuff in the game for real money: You have a spaceship, I have real dollars, and I say "Hey, I want to buy this spaceship, but I don't have any in-game currency," and you say "I'll give it to you if you send me $20 via PayPal." I send the money, trusting you will honor your part of the deal, and the only thing seen in the EVE Online database is that I got a spaceship from you for free.

There are also companies and individuals that are doing this for a living, creating items within the game and selling them for real-world money. It opens the door to credit card fraud, hacking, and other activities. It creates an overall bad experience for the EVE player...

...Because these elements aren't monitored by CCP Games.
Exactly. They also can use hacking tricks to make things go faster than they actually should, which puts additional stress on our servers and hurts the speed of everyone's game. Like any real economy, any
illegal activity starts an imbalance within the system.

[That's one of the reasons] we introduced PLEX, the pilot license extension program, in 2008: To meet the demand of the players. With PLEX, let's say you are a rich player with very little time and I am a poor player with a lot of time. I have a lot of in-game currency, but I still need to pay the $19.99 monthly subscription. Using PLEX, you buy two subscriptions, one for yourself and one for me, and I pay you with in-game currency, so now you have virtual currency to play around with. It curbs the desire to buy things illegally, as you can sell a subscription and get the virtual currency to buy anything you want on the EVE market.

PLEX was the first blow to the illegal operators. Shortly after it launched, we mined our user data, did the research, and banned 6,000 accounts in one sweep. And from the economic numbers, we could see that they were effecting the market from five to ten percent.

It also made a difference in the stress on the server, too, right?
Yes. So we were not only able to make it better from a socioeconomic standpoint, but the environment itself. The server began running at a higher speed, giving everyone a better gaming experience.

Unholy Rage is ongoing, since, just like any economy, if the financial incentive is there, people will just keep trying and trying.

I understand that there is technically stock in EVE Online, but no stock market. What's preventing that from happening?
The corporate structure in EVE is more like an association of people rather than actual companies. You can join a corporation and you technically get shares, but all the economic activity is done by the players themselves. The corporation has very little income as an entity and it is difficult to determine the company's revenue, what is being produced, and so on, so finding a value for it is very difficult. Also, everyone can just decide to leave the corporation and suddenly nothing is there.

The risk of you losing all the money you invest into a company is very, very high, which is why there is no incentive to create a stock market. The structure is simply not there... It is something that we can do, however, and we've been thinking about it for some time. There is demand from the community, but we want to do it in the right manner.

That also gets into another topic: Derivatives. When it comes to EVE, you're talking about tons of minerals, hardware, and other items within the game that are parallel to things like corn in real life, right?
There are more than 6,000 items on the market to be traded, so there is huge potential.

During a talk yesterday, you said banks aren't equipped to work well in EVE. What's missing?
It is easy to cheat. You may say, "Yeah, it's easy in real life, too," but in real life you risk actual loss like going to prison. Without these penalties in EVE, it's easy to establish a bank and then say forget it.

So there is not a big enough penalty.
Well, if there should be a penalty at all. Look at it this way: You trusted someone and he broke your trust. That's the way people are.

But in a social environment like EVE, isn't trust itself a valuable commodity, something that was lost with the in-game banks that have failed?
One of the banks in EVE Online actually structured itself so not one person could steal the whole savings. When it fell, the CEO, who was the most trusted person, left and took just enough for it to collapse. Even when people have tried to build a reliable system, it has failed.

So what can traditional economists learn from this virtual economy?
For myself, the biggest thing is that I have regained my trust that people are able to find the right solution to a problem creatively if you give them the tools to do so and do not restrict them.

Photo courtesy of Public Domain Photos // CC 2.0

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