Digital vs. Virtual Currencies | Bitcoin Magazine
There’s a lot of misunderstanding around the terms “virtual” and
“digital,” and people often mistakenly use them interchangeably. The
reality is that virtual currencies are a type of digital currency,
meaning that all virtual currencies are digital, but the converse is
incorrect. Cryptocurrencies like Bitcoin are another type of digital
currency, but they are in a separate category from virtual ones. Other
types of digital currency also exist, and understanding which is which
can become confusing.
Digital currencies are exactly what they
sound like: currencies stored and transferred electronically. Any money
based in 1’s and 0’s meets this definition; dollars stored in a bank
account are supposed to be a representation of dollars actually held
somewhere, whereas physical bitcoins are a representation of their
digital counterparts. One could argue that our increasingly cashless
society means that all currencies are becoming digital (sometimes
referred to as “electronic money”), but they are not presented to us as
such.
Real digital currencies have been around for some time. One
of the first was E-gold, founded in 1996 and backed by gold. Another
known digital currency exchange was Liberty Reserve, founded in 2006; it
let users convert dollars or euros to Liberty Reserve Dollars or Euros,
and exchange them freely with one another at a 1% fee. Both services
were centralized, reputed to be used for money laundering, and
inevitably shut down by the US government. Online payment services like
PayPal (founded 1998) function similarly, based on traditional currency,
except with more restrictions and government compliance (ensuring their
survival).
Based on offshore tax havens beloved by the wealthy
and unscrupulous, early digital currencies gave the industry a bad
image. Virtual currencies, by contrast, are intended to be light-hearted
and fun: they, too, have been around far longer than cryptocurrencies
like Bitcoin, and are used primarily for online entertainment in virtual
worlds. “Virtual” can be defined as “not based in physical reality,”
and virtual currencies are those which are not intended for use in “real
life,” or expenditure on real assets. They are, in another word, toys.
Pretty
much all virtual currencies are centralized, with control of the money
supply resting in the hands of the virtual world’s developers. Most
massive multiplayer online games hire trained economists for this sort
of thing, and their power dwarfs that of the American Federal Reserve.
When they want to increase the money supply, they add some new quests
with increased gold rewards. If they want to shrink the money supply,
they add what are called “sinks,” which usually amount to expensive new
vanity items, vehicles, etc. that are purchased from a non-player
character, thus vanishing the money back into the game. A new update can
completely change the game’s economy, and cripple a player’s
enterprise.
Virtual currency developers vary in how much
interaction they allow their system to have with “real” currencies. At
the extreme end of the spectrum, World of Warcraft is very strict;
Blizzard does this primarily to avoid legal headaches, as their currency
would incur taxes if the government recognized it as having actual
value. In order to maintain the perception that their virtual gold is
fake, violating this rule is punishable by a permanent ban, and they
actively search for accounts involved with real-money trading. Many
items bind to an account upon acquisition; since this restricts the free
flow of goods, the net effect of such restrictions is to reduce the
scope of the game’s economy.
Other online game developers want to
promote a deeper and more dynamic virtual economy, such as the team
behind EVE Online. EVE, if you’re not familiar, is a very complicated
online space-faring game, replete with drop-down menus and statistics.
Players construct corporations and empires spanning galaxies, in a
massive game-world where almost the entire experience is built by
players on top of existing economic infrastructure. While there is a
pre-defined set of things a player can do, the variety of their
interactions forms a stunningly complex system. Their biggest war ever
cost over $250,000 in virtual destruction.
The EVE Online
developers still issue ongoing updates as players discover exploits that
throw the economy out of whack, and maintain certain restrictions.
While all items can be freely traded, EVE still has to maintain that its
virtual currency has no real value. Technically, you cannot buy ISK
with dollars, but you can buy game time cards, which can be traded
in-game for ISK. You cannot, however, redeem cards for cash, and while
real-money trading is far more extensive than in games like WoW, it is
technically prohibited.
At the far end of the spectrum are virtual
worlds like Second Life, an online life simulator developed by Linden
Labs. Linden Labs tolerates the exchange of Linden Dollars and
real-world currency, but they still control the supply of Linden
Dollars. One can openly make a living and earn traditional currency with
a successful in-game enterprise; however, Linden Dollars are still a
virtual currency because Linden Dollars are practically never redeemed
directly for real goods or services. Some players may have made a
fortune from it in real estate, but it’s still a game.
Other
digital currencies, meanwhile, are redeemed for physical goods and
services all the time. You can order products via PayPal, for example.
Bitcoin used to be thought of as “Internet money,” but you can now spend
it in person at physical businesses. This makes them similar to
traditional money in that respect, and makes them more “real.”
Cryptocurrencies are designed to be capable of replacing cash, and
there’s nothing virtual about that.
The other obvious factor
differentiating cryptocurrencies like Bitcoin from other digital
currencies is that they’re generally decentralized. No central power
(such as a group of video game developers) has arbitrary control over
the money supply. World of Warcraft, EVE Online, and Second Life all
have servers, which the developers can manipulate at will (or shut off
entirely), but Bitcoin runs on a network of participating computers that
agree to the same standard.
Unlike such centralized currencies,
bitcoins are mined at a mathematically-controlled rate, and their supply
subject only to free market demand. This distinguishes them from
traditional currencies like the dollar, as well, which follow the
decision-making of central banks. The cryptography inherent in
cryptocurrency also makes it more anonymous than any real or virtual
currencies, which are tracked by banks and developers, respectively.
There
are still some unanswered questions. Where does the virtual world end,
and reality begin? Is owning an image in a game so different from owning
an image on a website? The amount of time people spend in online games
will continue to climb as the technology advances, to the point that
many will covet virtual property more than physical. This could lead to
virtual currencies becoming real digital currencies, or traditional and
digital currencies entering the virtual space.
The lines are
getting blurry in the world of currency. As banks go online and plastic
becomes ubiquitous, physical cash is becoming antiquated. Electronic
money has already taken over, but digital currency is taking things a
step further: for the first time in history, people are thinking in
terms of numbers, not coins and bills. Once everyone realizes that the
majority of the “cash” in the world exists in banks’ computers, with no
hard money backing it at all, they won’t see the effective difference.
There’s a lot of misunderstanding around the terms “virtual” and
“digital,” and people often mistakenly use them interchangeably. The
reality is that virtual currencies are a type of digital currency,
meaning that all virtual currencies are digital, but the converse is
incorrect. Cryptocurrencies like Bitcoin are another type of digital
currency, but they are in a separate category from virtual ones. Other
types of digital currency also exist, and understanding which is which
can become confusing.
Digital currencies are exactly what they
sound like: currencies stored and transferred electronically. Any money
based in 1’s and 0’s meets this definition; dollars stored in a bank
account are supposed to be a representation of dollars actually held
somewhere, whereas physical bitcoins are a representation of their
digital counterparts. One could argue that our increasingly cashless
society means that all currencies are becoming digital (sometimes
referred to as “electronic money”), but they are not presented to us as
such.
Real digital currencies have been around for some time. One
of the first was E-gold, founded in 1996 and backed by gold. Another
known digital currency exchange was Liberty Reserve, founded in 2006; it
let users convert dollars or euros to Liberty Reserve Dollars or Euros,
and exchange them freely with one another at a 1% fee. Both services
were centralized, reputed to be used for money laundering, and
inevitably shut down by the US government. Online payment services like
PayPal (founded 1998) function similarly, based on traditional currency,
except with more restrictions and government compliance (ensuring their
survival).
Based on offshore tax havens beloved by the wealthy
and unscrupulous, early digital currencies gave the industry a bad
image. Virtual currencies, by contrast, are intended to be light-hearted
and fun: they, too, have been around far longer than cryptocurrencies
like Bitcoin, and are used primarily for online entertainment in virtual
worlds. “Virtual” can be defined as “not based in physical reality,”
and virtual currencies are those which are not intended for use in “real
life,” or expenditure on real assets. They are, in another word, toys.
Pretty
much all virtual currencies are centralized, with control of the money
supply resting in the hands of the virtual world’s developers. Most
massive multiplayer online games hire trained economists for this sort
of thing, and their power dwarfs that of the American Federal Reserve.
When they want to increase the money supply, they add some new quests
with increased gold rewards. If they want to shrink the money supply,
they add what are called “sinks,” which usually amount to expensive new
vanity items, vehicles, etc. that are purchased from a non-player
character, thus vanishing the money back into the game. A new update can
completely change the game’s economy, and cripple a player’s
enterprise.
Virtual currency developers vary in how much
interaction they allow their system to have with “real” currencies. At
the extreme end of the spectrum, World of Warcraft is very strict;
Blizzard does this primarily to avoid legal headaches, as their currency
would incur taxes if the government recognized it as having actual
value. In order to maintain the perception that their virtual gold is
fake, violating this rule is punishable by a permanent ban, and they
actively search for accounts involved with real-money trading. Many
items bind to an account upon acquisition; since this restricts the free
flow of goods, the net effect of such restrictions is to reduce the
scope of the game’s economy.
Other online game developers want to
promote a deeper and more dynamic virtual economy, such as the team
behind EVE Online. EVE, if you’re not familiar, is a very complicated
online space-faring game, replete with drop-down menus and statistics.
Players construct corporations and empires spanning galaxies, in a
massive game-world where almost the entire experience is built by
players on top of existing economic infrastructure. While there is a
pre-defined set of things a player can do, the variety of their
interactions forms a stunningly complex system. Their biggest war ever
cost over $250,000 in virtual destruction.
The EVE Online
developers still issue ongoing updates as players discover exploits that
throw the economy out of whack, and maintain certain restrictions.
While all items can be freely traded, EVE still has to maintain that its
virtual currency has no real value. Technically, you cannot buy ISK
with dollars, but you can buy game time cards, which can be traded
in-game for ISK. You cannot, however, redeem cards for cash, and while
real-money trading is far more extensive than in games like WoW, it is
technically prohibited.
At the far end of the spectrum are virtual
worlds like Second Life, an online life simulator developed by Linden
Labs. Linden Labs tolerates the exchange of Linden Dollars and
real-world currency, but they still control the supply of Linden
Dollars. One can openly make a living and earn traditional currency with
a successful in-game enterprise; however, Linden Dollars are still a
virtual currency because Linden Dollars are practically never redeemed
directly for real goods or services. Some players may have made a
fortune from it in real estate, but it’s still a game.
Other
digital currencies, meanwhile, are redeemed for physical goods and
services all the time. You can order products via PayPal, for example.
Bitcoin used to be thought of as “Internet money,” but you can now spend
it in person at physical businesses. This makes them similar to
traditional money in that respect, and makes them more “real.”
Cryptocurrencies are designed to be capable of replacing cash, and
there’s nothing virtual about that.
The other obvious factor
differentiating cryptocurrencies like Bitcoin from other digital
currencies is that they’re generally decentralized. No central power
(such as a group of video game developers) has arbitrary control over
the money supply. World of Warcraft, EVE Online, and Second Life all
have servers, which the developers can manipulate at will (or shut off
entirely), but Bitcoin runs on a network of participating computers that
agree to the same standard.
Unlike such centralized currencies,
bitcoins are mined at a mathematically-controlled rate, and their supply
subject only to free market demand. This distinguishes them from
traditional currencies like the dollar, as well, which follow the
decision-making of central banks. The cryptography inherent in
cryptocurrency also makes it more anonymous than any real or virtual
currencies, which are tracked by banks and developers, respectively.
There
are still some unanswered questions. Where does the virtual world end,
and reality begin? Is owning an image in a game so different from owning
an image on a website? The amount of time people spend in online games
will continue to climb as the technology advances, to the point that
many will covet virtual property more than physical. This could lead to
virtual currencies becoming real digital currencies, or traditional and
digital currencies entering the virtual space.
The lines are
getting blurry in the world of currency. As banks go online and plastic
becomes ubiquitous, physical cash is becoming antiquated. Electronic
money has already taken over, but digital currency is taking things a
step further: for the first time in history, people are thinking in
terms of numbers, not coins and bills. Once everyone realizes that the
majority of the “cash” in the world exists in banks’ computers, with no
hard money backing it at all, they won’t see the effective difference.
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