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Redefining Nationhood:The Emergence and Expansion of Virtual States in the Digital Era

Updated: May 12

In an era where AI and digital technology blur geographical boundaries, the distinction between digital and physical realms is increasingly diminishing.

As labor shifts to digital platforms, the control of time in a virtual space becomes an extremely valuable commodity. 'Digital land,' representing the collective attention and labor of individuals in these virtual spaces, emerges as a new paradigm for control.

These technologies precipitate a significant shift in global economic structures, epitomized by the rise of virtual nations. This transition continues to challenge conventional notions of governance and trade, redefining them within the context of emerging digital sovereignties.

The impact of virtual nations on global trade dynamics is profound, presenting both traditional and emerging economies with unprecedented challenges and opportunities.

A critical analysis of these developments, offers insights into the evolving nature of international economic interactions, security, and political power in the post-digital age

The Emergence and Expansion of Virtual States

In the contemporary landscape of global politics and economics, the traditional notion of a nation-state, characterized by geographical boundaries and a centralized government, is undergoing a significant transformation. This shift challenges the centuries-old concept of the nation as a distinct, geographically defined entity. It is crucial in our break down of current literature on this matter to reference the works of Richard Rosecrance in 1996 and Martin Carnoy in 2001 first.

Their interpretations, now over two decades old, not only highlight how long the concept of a virtual nation has been in discourse but how their visions of a virtual nation have expanded significantly. It is important to note, the term “virtual nation” holds many meanings beyond just digital, as will be explained below.

Rosecrance highlighted the initial transition from traditional, land-based national economies to more virtual, networked forms of economic organization. He observed that

" Maintaining comprehensive, vertically integrated production structures was becoming prohibitively expensive, prompting a shift towards outsourcing and reducing physical assets like land and machinery."

This shift marked the beginning of the virtual state - a state where economic outsourcing and access abroad became as crucial, if not more so, than domestic economic control. In Europe, for example, Switzerland emerged as a leading virtual state, with a significant portion of its production capacity located abroad, reminiscent of the colonial structure prior but with a slightly different definition of statehood.

The evolution of the virtual state can be seen in the contemporary context where traditional concepts of control and power, once rooted in physical geography, are now exercised through digital platforms and global networks. This reality is underscored by the significant role of human capital in these virtual states.

As Rosecrance noted, efficient high-value services have become as crucial to a nation’s success as traditional manufacturing sectors once were.

Carnoy added to this discussion by highlighting the changing nature of work and individual identity in the context of these emerging virtual states. He pointed out that

"Information networks have led to the individualization of workers who, regardless of their geographical location, are increasingly defined by their knowledge and skill sets rather than their long-term job roles."

This reorganization of work, focusing on decentralized management and differentiated tasks, has further facilitated the transition towards virtual states where traditional class identities and national attachments give way to more fluid, global market identities.

Rosecrance’s assertion that the world’s wealth is increasingly composed of human capital, further reinforces this transition of market identities. It should also be noted that a nation does not need to be rooted in purely physical elements to begin with,

“Identity can be rooted in language, ethnicity, and religion, but also in understandings of what the political, social or economic essence of one's country is”.

The shift away from the importance of land and physical resources, as noted by both Rosecrance and Carnoy, signifies a dramatic reversal from traditional theories of power and politics.

The nations once ranked by their stock of natural resources are now competing with those leveraging human capital and knowledge-based economies.

Carnoy's insights into the transformation of the state are particularly relevant. He envisioned a state constituted by shared institutions, marked by interactive decision-making processes that extend from individual families to private businesses, non-governmental organizations, provinces, and up to national and international institutions.

Though the need for manufacturing or production still exists, it has become increasingly more decentralized.

As Rosecrance summarized, economic relations between these states resemble

“nerves connecting heads in one place to bodies somewhere else”.

This is exemplified perfectly upon examination of the effects of the El Nino weather system as far back as 1972.

This shifting of weather and water led to less nutrients and less anchovy harvest in Peru, while simultaneously also causing a peanut crop failure in West Africa, this led to a massive demand for soybeans in the United States.

This is due to the fact the main substitutes for soybean meal were, fish meal and peanut meal, without those being accessible for farmers, demand shifted quickly to US soybeans. Upon first glance these seemingly distant and “disconnected” places and events are quickly seen to be virtually connected economically.

Moving further into the 21st century and building off of these concepts laid down by the writers above, it can be seen virtual economies no longer constrained by geographical boundaries, are reshaping the global landscape in cultural and political ideologies as well.

A tangible example is that of the Pacific Island nation of Tuvalu.

Confronted with the existential threat of climate change and rising sea levels, Tuvalu's approach to preserving its sovereignty and cultural heritage is through the nation's transition entirely into the virtual realm.

Tuvalu's Foreign Minister, Simon Kofe, made a significant announcement at the COP27 climate summit, highlighting the country's plan to become the first digitized nation within the metaverse—an online realm that leverages augmented and virtual reality (VR). This initiative aims to safeguard Tuvalu's invaluable assets—its land, ocean, and culture—by moving them to the cloud.

Tuvalu's initiative follows similar digital explorations by the city of Seoul and the island nation of Barbados, which ventured into the metaverse to provide administrative and consular services.

The idea is to incorporate not just interaction and social connections but continue the shift into full scale virtual environments to buy goods and services.

However, Tuvalu's move is unique in its scale and intent. Spanning a group of nine islands and home to 12,000 people, Tuvalu faces a dire future with up to 40% of its capital district underwater at high tide. Seven governments have agreed to continual recognition, yet the path ahead remains uncertain and foreshadows the complexities inherent in redefining nationhood in the digital era.

This raises a question, what happens when governments do not recognize this sovereignty while many citizens attempt to force or create it virtually, either consciously or unconsciously?

The best way to understand what is meant by this statement is by highlighting the current informal “virtual nations” in the present day.

Consider, for instance, the intricate tapestry of a contemporary urban neighborhood.

Here, residents coexist, their homes often mere feet apart. Yet, paradoxically, many remain strangers to each other, with interactions limited or entirely nonexistent.

Political yard signs or flags, create invisible boundaries, delineating spaces where interactions are either welcome or tacitly discouraged.

Despite physical proximity, ideological distances widen, a phenomenon increasingly influenced by the digital communities each neighbor subscribes to.

In such environments, organizations, interest groups, and virtual gatherings flourish, enabling individuals to collaborate and connect beyond their immediate physical location. This phenomenon is so pronounced that neighbors with vastly different political views might live parallel lives, navigating entirely different ecosystems of information, cultural norms, and social networks, all curated through online engagements.

Their physical locality becomes secondary to the virtual nations they subscribe to, underscoring how the internet and online communities are not just reshaping interactions but laying the foundational blocks necessary for virtual nations.

One may look on a neighborhood like this and assume the world has become less connected and more disharmonious, but the dynamics of nations on the surface remain the same. Ideologies, connectivity thought them and the conflict that stems from them are just as present as they were in ancient times, the only difference is the “boundaries” in which we perceive these nations.

If this concept still seems implausible, consider the numerous individuals and groups steadfast in their conviction that Biden was not their legitimate president. They continued to view Donald Trump as their enduring leader and representative figure and were not centralized to any specific region or neighborhood. Joined together by the virtual connections of information, social media and NGOs.

The emergence of digital communities that evolve into what one could call virtual nations can be seen in online platforms where this political ideation and activism occur. These platforms, while not nations in the conventional sense, exhibit many characteristics of a nation, such as self-governance, shared values, and even economic transactions.

Unlike traditional nations, they are not bound by geography but by shared interests, ideologies, and online activities.

This evolution of nationhood speaks to the transformative power of digital technologies, particularly as we witness the rise of entities or groups that transcend physical spaces yet wield significant influence in both the digital and physical realms.

This leads to the question, does a nation even need to control physical locations to hold power?

If a populace is subscribing to its politics, buying its goods and contributing to the income and resources of a government/nation/NGO because of the digital control over their attention and virtual footprint, has control shifted from physical borders to digital ones?

How would more structured and purposeful virtual nations run?

What structures would they have?

Virtual Structuralism

This section will be focusing on systems that are well over a decade old, this is intentional. The complexity of modern virtual economies found within social media platforms, virtual currencies, and video game companies makes an analysis of these modern structures beyond the scope of this article.

However, the understanding that systems of virtual economics and trade have not only existed but been profoundly successful in the decades prior, allows for an easier baseline in which to grasp modern virtual systems abilities.

In 2008, Beijing Cyber Recreation District's (CRD) ventured into virtual gaming realms, notably in Entropia Universe. The main goal was the creation of a 'virtual China' within the Entropia Universe, capable of hosting 150 million avatars or virtual citizens.14

The project's capacity to support 7 million concurrent users, with ambitions to generate over $1 billion annually in commerce through the already present systems within the Entropia Universe servers.

In parallel, the sale of virtual banking licenses in Entropia Universe, involving real-world banks and financial establishments, filled the gap of games like these only making profit from the player while simultaneously allowing the player to “earn” and generate an income from the virtual world they play in.

This venture, pairing the digital world with physical economic structures, bridges the virtual gaming economies and real-world financial systems in a more structured way.

Looking at video games and the acts of trade and interaction within them may be the best way in which to understand how these virtual nations would work at scale. The virtual nation of Norrath in the game EverQuest provides a fundamental case study.

With a diverse e-citizenry and a GDP comparable to that of real-world countries as far back as 2002.

“The Gross National Product of EverQuest, measured by how much wealth all the players together created in a single year inside the game. It turned out to be US$2,266 per capita. By World Bank [2001] rankings, that made EverQuest richer than India, Bulgaria, or China, and nearly as wealthy as Russia. It was the 77th richest country in the world. And it didn't even exist…"

When Castronova checked the auction sites, he saw that a Belt of the Great Turtle or a Robe of Primordial Waters might fetch $40; powerful characters would go for several hundred or more. And sometimes people would sell off 500,000-fold bags of platinum pieces for as much as $1,000.

The economic activities within EverQuest were based on the sale of virtual goods through virtual markets like Ebay or other forum-based sites, connecting a labyrinth of trade, taxes and currency exchanges with it.

Moreover, the experiences of online games like Ultima Online reveal that the same issues which plague physical economies also arise within these virtual ones.

The incident of inflation caused by a programming bug that allowed users to “duplicate” gold led to the massive inflation of gold value within the game, and the subsequent introduction of a rare red hair dye was used by the developers to leach gold out of the system through its value in order to stabilize the economy.

This in many ways mirrors real-world economic governance issues, albeit, with virtual twists. This scenario highlights the implications of governance decisions on the virtual citizenry and the economy they are within.

The use of online gaming platforms for professional and policy applications by governments and industries further illustrates the serious potential of virtual environments.

These platforms are not just for entertainment; they increasingly serve as arenas for experimenting with new forms of governance, economic models, and social interactions.

In this context, Carnoy's previous insights on the integration of digital and physical realms become particularly relevant.

“An entrepreneur working at home can access masses of information about markets…without relying on intermediaries. Students in schools can exchange email with students in a distant country instantaneously, bringing them together in real time and space”.

This interconnectedness forms the backbone of virtual nations, where geographical boundaries are no longer the primary determinants of community and governance or even of interaction.

If individuals are spending their time or “labor” within the virtual “land” or platforms, then those become the areas contested for control by state actors. The networks, digital platforms and computers they are run on is where the desire for control shifts.

Wherever the most valuable resources lie, is where the greatest conflict will arise. The question of cyber warfare, virtual trade wars and more now comes to the forefront.


The initiatives of entities like the Beijing Cyber Recreation District in Entropia Universe and an analysis of the virtual economies of games such as EverQuest and Ultima Online have highlighted the economic viability, complexity, and governance challenges within virtual nations. These virtual environments, once considered mere platforms for entertainment, when looked at from a political or economic perspective, invite an understanding into intricate economies and societies with their governance structures and social norms.

The case of Tuvalu transitioning into the metaverse to preserve its sovereignty and cultural heritage give real world credence to what most would consider science fiction while simultaneously addressing the potential and necessity of virtual nations in the face of existential threats. This move, alongside similar ventures by Seoul or Barbados, demonstrates the growing recognition of virtual spaces as legitimate realms for administrative, social, and economic activities. The emergence of virtual nations also raises critical questions about the future of governance and power.

As digital communities evolve into virtual nations characterized by shared interests, ideologies, and online activities, they challenge our traditional understanding of geographic and political borders. The rise of these entities points to a transformative era where digital technologies redefine the very essence of nationhood, citizenship and trade.

Overall, the shift from physical to virtual nations is not as much a “shift” or technological or economic phenomenon, but rather a profound evolution in how we perceive and interact within our societies.



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New York , 2019

Carnoy, Martin. “The Demise of the Nation-State?” _Theoria: A Journal of Social and

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Chandran, Rina. "Seoul, Barbados Check into Metaverse as Governments Eye Virtual

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Keating, Joshua, Fake China “Net Effect: How Technology Shapes the World.” Foreign

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Kofe, Simon. "Tuvalu | The First Digital Nation." Tuvalu TV. [Year of Speech].

Patel, Raj. Stuffed and Starved: The Hidden Battle for the World Food System.

Brooklyn, N.Y.: Melville House Pub., 2007.

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“Net Effect: How Technology Shapes the World.” Foreign Policy, no. 166 (2008): 92–93.

Thompson, Clive. "EverQuest: 77th Richest Country." The Walrus, May 21, 2003.

EverQuest: 77th Richest Country (

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