Virtual inflation and crypto NIMBYism

Day 8: 30 Days of Crypto-modeling

This is part of 30 consecutive series of posts related to understanding and modeling cryptocurrency-related economic activity. We are sifting through hype and speculation to find quantitative insight.

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Virtual world economics is fascinating because you can engineer virtual worlds and after they are up and running, it is easy to run experiments.

In the previous post, I talked about how games like Roblox make players want to buy and spend virtual currency in their games.

Games like Roblox that sell in-game currency don't require newbies to buy anything to get started. They ease them into buying currency by first giving them plenty of free things to do. As they do specific tasks, the player earns in-game currency. The player then discovers that the virtual cash unlocks more enjoyable experiences in the game. Soon, they find themselves desiring virtual money and the virtual assets that the money can purchase. That creates virtual demand.

Those early tasks that onboard you into the virtual economy include things like cutting treats in a virtual forest or slaying low-level monsters. For example, in the popular MMORPG World of Warcraft, killing low-level monsters is a low-risk way to earn "gold", the name of the World of Warcraft currency.

The trouble with killing monsters is that they respawn (because if all the monsters stayed dead, the game would cease to be fun). That means there is a bottomless supply of gold, leading to inflation in the virtual economy.

The World of Warcraft developers solve this by creating "gold sinks," meaning game mechanics that remove large amounts of cash from the game to stabilize the in-game economy.

In this way, the game developers behave like central bankers, arbitrarily making monetary policy that might hurt some players while helping others. One can see how this would inspire crypto metaverses that empower the community to make its own monetary policies for their virtual economy.  

In the metaverses, monetary policy is made by the community of players. The policy-making mechanism is called a decentralized autonomous organization or DAO. Members of the player community vote on the monetary proposals up for adoption.

Certainly, a DAO could create a monetary policy for a virtual that controlled inflation. But can they do so in a way that is still fun for new users? The early adopters making big long term investments on virtual assets in the metaverses bet that the games will eventually become popular, and some demand-side economics will support their investments. This outcome can't happen unless the user community grows. It won't grow if new users find themselves priced out of having fun.

One approach is to take a page from Roblox; enable players to get paid to make collectible game assets. In Roblox, content creators make games played in the virtual world. The developers can charge players for in-game items, paid in “Robux”. Some of the metaverses provide the ability to build in-game artifacts that can sell on NFT exchanges.

But this is still a high bar for onboarding new casual gamers.

Moreover, given the technolibertarian bent of the crypto community, I'm inclined to think DAOs would be more biased towards protecting property owners over encouraging creativity. These DAOs would work like virtual neighborhood associations, enforcing virtual NAMBYism.