There are as many theories of virtual world arts as their are practitioners! A good start would be an academic taxonomy of what the main threads of art practice existing in virtual space. I have been working on a rationale since 2006. One caveat is that this taxonomy is just the result of my research and NOT intended to be the last word on anything, rather a jumping off point for conversation and further learning.
Remediators:
Many artists (the vast majority) strive to recreate physical world art objects and display them in spaces that look like galleries in Second Life. These might be termed “Remediators”, or artists who use SL in a way that ignores the difference in condition between physical space and virtual space. Some people call this “FLart” (flat or first life art) See almost any gallery in SL.
Telematic Performance:
Some artists contend that SL is an inherently performative based medium, that everything we do with the mask of an avatar is performance. These artists tend to come from the Dada, Situationist or Theater genres and overlap with the Contemporary Art world. See ZEROG SkyDance, Second Front, Gazira Babeli, Saveme Oh
Platformists:
Artists who use virtual worlds to create derivative projects like Machinima, music or renderings intended for display and sharing in the material space. SL is a prototyping engine, essentially a tool. See myriad machinimatographers, Avatar Metaverse Orchestra
Mixed-realty:
Artists who strive to create a bridge between material space and virtual space in some way and have the work informed by conditions of both spaces. This has in the past involved bio-feedback into SL and http to LSL and LSL to http control. This also tends to be performative. Micha Cardenas, Azdel Slade, Lizsolo Matilda
Hyperformalists:
Artists focused on conditions native to the virtual space who do not attempt to recreate modes existing in material space, rather explore possibilities inherent to the virtual medium and produce artworks “native” to the phenomenology of the virtual space. See Dancoyote Antonelli, Selavy Oh, Oberon Onmura, Werner Kurosawa
Narrative Realist and Fantasy
These SL practitioners use SL tools to create narrative environments that are sometimes guided experiences and sometimes heuristic. See Dekka Raymaker, Bryn Oh
On Space and Place:
“Simulation of space becomes a real place when we experience it together.”