Real economy thrives in virtual world

SAN FRANCISCO (Reuters) - When Jon Jacobs goes to work, he feeds his monsters, maybe puts in an auction bid on a rare piece of armor, or sells a couple apartments on his personal asteroid.

Just another day at the office for Neverdie, a legendary adventurer, celebrity, and fabulously wealthy entrepreneur in the online world of Entropia.

The twist is that in Entropia’s cash-based economy, Jacobs’ online alter ego brings in more than $10,000 a month in real income, based entirely on virtual items that exist only as bits on a server somewhere.

Now he’s upping the ante after shelling out $90,000 -- in real money -- for a license to operate one of five banks in Entropia as part of a new effort to boost development in the free-wheeling futuristic game.

Here’s how it works: players spend real cash to make or buy items such as weapons or healing kits. Because MindArk, Entropia’s developers, allows only a finite number of such objects, their value rises over time.

But dedicated players who invest hundreds or thousands of dollars to obtain such items often end up holding on to them, afraid to erode their value through use yet unwilling to part with their hard-earned booty.

The banks can loan players 50 percent of the value of an item, which is placed in secure storage until the loan is paid off. It’s a classic mechanism to free up capital to fund other ventures to keep the economy ticking over.

“I think it’s going to invigorate the economy significantly because now everyone can access the value of the items they are sitting on,” Jacobs said..

With daily in-game turnover of about $1 million, Entropia aims to be a model of development for virtual reality, a place full of talent and resources that just needs the right mix of incentives and security to trigger an economic boom.

MindArk acts as a sort of central bank, keeping the currency pegged to the U.S. dollar at 10 to 1 and making sure the universe has the right mix of raw materials and powerful items.

“The thing that makes Entropia different is the real cash economy. We maintain a fixed rate to the American dollar, which gives people the confidence to invest money,” said David Simmonds, director of business development for MindArk.

Last year MindArk launched an ATM card allowing players to pull cash out of the game.

With about 600,000 accounts, Entropia is small compared to other virtual worlds such as Second Life, a booming cyber-utopia where scarcity -- and therefore economics -- has largely been written out of the source code of the universe.

But Entropia’s high-stakes financial model is drawing in other virtual moguls.

“This is where the massive potential is. The fact that people have disposable income inside a virtual world, it’s incredible and it creates all kinds of opportunities for vendors because these gamers are cash-flush,” Jacobs said.

One of Entropia’s earliest denizens, it dawned on Jacobs that it didn’t matter if his assets were illusions. Like diamonds, their value lay in their scarcity.

That convinced him to pull tens of thousands of dollars in equity out of his home in Miami in 2005 and use it to buy an asteroid for nearly $100,000. Players visit the asteroid to hunt, mine, or just drop by its thriving nightclub.

Jacobs said the gamble is paying off, grossing $19,000 in May and putting him on track to pull in $250,000 this year. He estimates his hunk of orbiting virtual rock is now worth well over $2.5 million.

Jacobs sometimes marvels at the fact that people pay hefty sums for things they only know as pixels on a computer screen. But then he looks at the world of modern finance, with its options and derivatives and other instruments far removed from any sort of underlying asset.

“It’s just a market. The same thing goes for the stock market. The people buying and selling every day have no connection to what they are buying and selling, they are trading just to make a profit,” Jacobs said.