This dissertation is a study of social interaction in virtual worlds and virtual world design. A virtual world is a synchronous, multi-user system that offers a persistent spatial environment for iconically represented participants. Together, these form an example of social interaction design. I have applied an arena perspective on my object of study, meaning that I focus on these socio-technical systems as places. I have investigated the persistent qualities of social interaction in virtual worlds. What I have found is that virtual worlds are as real as the physical world. They are filled with real people interacting with each other evoking real emotions and leading to real consequences. There are no fixed boundaries between the virtual and physical arenas that make up a participant’s lifeworld. I have found that participants in virtual worlds are not anonymous and bodiless actors on a level playing field. Participants construct everything needed to create social structures such as identities and status symbols. The qualities of social interaction in virtual worlds cannot be measured against physical interaction. Doing so conceals the qualities of virtual interaction. Through the concepts of levity and proximity, I offer an alternative measure that better captures the unique properties of the medium. Levity is related to the use of avatars and the displacement into a virtual context and manifests itself as a kind of lightness in the way participants approach the interaction. Proximity is my term for the transformation of social distances that takes place in virtual worlds. While participants perceive that they are in the same place despite being physically separated, the technology can also create barriers separating participants from their physical surroundings. The gap between the participant and her avatar is also of social significance. As a theoretical foundation for design, I have used Michael Heim’s writings and practices as a base for a phenomenologically grounded approach, which provides an alternative to the dominating perspectives of architecture and engineering. Based on an explorative design project and the earlier mentioned findings regarding social interaction, I have formulated a model for virtual world design called interacture. This model takes the interaction between participants as the fundamental building material and the starting point of the design process. From there, layers of function and structure are added, all the time balancing the design between fantasy and realism. I have explored the possibilities of using ethnographic studies as the foundation for a participant centered design approach. I have aimed for an inside view of my object of study both as an ethnographer and as a designer. One outcome of this approach is that I have come to understand virtual worlds not just as places but also as processes where the experience of participating can change drastically over time as the participant reaches new stages in the process. In conclusion, the method of integrating ethnography with design and the understanding of social interaction as the fundamental building material is woven into a general approach to the study and design of socio-technical systems called social interaction design.