How it all started
Early attempts at virtual reality can be traced back to the 360-degree murals (or panoramic paintings) from the nineteenth century. These paintings were intended to fill the viewer's entire field of vision, making them feel present at some historical event or scene.
However, the exact origins of virtual reality are disputed, partly because of how difficult it has been to formulate a definition for the concept of an alternative existence
In the 20th century though...
In the 1960s
Filmmaker Morton Heilig took things even further. In 1957, he invented a large booth-like machine called the Sensorama, which was intended to combine multiple technologies to give one to four people the illusion of being in a fully 3D immersive world - complete with smell, stereo sound, vibrations, and even atmospheric effects like wind in the hair. A few years later, in 1960, he honed a version of this idea into a patent for the world's first head-mounted display, promising stereoscopic 3D images, wide vision, and true stereo sound.
Neither technology ever materialized in his lifetime, but they both helped lay the groundwork for the VR revolution to come.
Heilig also patented the Telesphere Mask (1960) which was the first head-mounted display (HMD). This provided stereoscopic 3D images with wide vision and stereo sound. There was no motion tracking in the headset at this point.
The Sword of Damocles (1968)
The first actual VR head-mounted display (HMD) was created in 1968 by computer scientist Ivan Sutherland. Sutherland was one of the most important figures in the history of computer graphics, having developed the revolutionary "Sketchpad" software that paves the way for tools like Computer-Aided Design (CAD).
Sutherland, with his student Bob Sproull, created the first virtual reality HMD, named The Sword of Damocles. This head-mount connected to a computer rather than a camera and was quite primitive as it could only show simple virtual wire-frame shapes.
These 3D models changed perspective when the user moved their head due to the tracking system. It was never developed beyond a lab project because it was too heavy for users to comfortably wear; they had to be strapped in because it was suspended from the ceiling.(Hence the "Sword of Damocles" name, a reference to the Roman myth about a sword which hangs above a person's head to teach them responsibility.)
Sutherland's HMD was a project he described as "the ultimate display." It connected to a stereoscopic display from a computer program depicting simple virtual wireframe shapes, which changed perspective as the user moved his or her head. Because these are superimposed on top of a real background, this could also be seen as the birth of "augmented reality."
Sega VR (1991)
Antonio Medina, a NASA scientist, designed a VR system to drive the Mars robot rovers from Earth in supposed real-time despite signal delays between the planets. This system is called "Computer Simulated Teleoperation".
The Virtuality Group launched Virtuality. These were VR arcade machines where gamers could play in a 3D gaming world. This was the first mass-produced VR entertainment system.
A Virtuality pod featured VR headsets and real-time immersive stereoscopic 3D images. Some of the machines could be networked together for multi-player games. Eventually some of the very popular arcade games, like Pac-Man, had VR versions.
One of the first companies to attempt to launch a VR headset was Sega, which planned Sega VR as an accessory for the Genesis. With development starting in 1991 and continuing for a couple years after, Sega VR was an attempt to squeeze more life out of the company's 16-bit games console. The visor-like look owes a lot to RoboCop and The Day The Earth Stood Still, with a sleek black plastic design that concealed LCD displays, stereo headphones, and internal "inertial sensors" for tracking head movement.
"Sega VR will create the impression that you are exploring an alternate reality," a press release stated. "As your eyes shift focus from one object to the next, the binocular parallax constantly changes to give you the impression of a three-dimensional world." Unfortunately it was never released - with one (somewhat amusing) explanation being that Sega worried the virtual effect was too realistic, and people would wind up hurting themselves while immersed.
Oculus (2010)
In 2010, 18-year-old entrepreneur Palmer Luckey created the first prototype of the Oculus Rift. Boasting a 90-degree field of view that hadn't been seen previously in a consumer and relied on a computer's processing power to deliver the images. This new development boosted and refreshed interest in VR. It raised $2.4 million on Kickstarter a couple years later, before the company was purchased by Facebook for $2 billion in 2014.
Luckey's decision to sell the company before shipping any prototypes to Kickstarter backers stirred up controversy from early supporters.
Since then, hundreds of companies have been working on their own VR headsets. These include market leaders such as HTC (makers of the HTC Vive), but also Google (with its enormously popular Google Cardboard), Apple, Amazon, Sony, Samsung, and others.
With plenty of marketplace competition, the addition of various innovative controllers for allowing interaction with the virtual world, and a wide range of intriguing use-cases for the technology, it seems that virtual reality's time may finally have come at last.
More on the history can be found here