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It was originated in Warcraft 2. In the game when you die to a computer, it was supposed to say, "You got Owned" but one of the designers messed up and put in "P" instead of "O".
It originated from a custom map used in that game Starcraft (sweet game back in the day) where at the end it was supposed to sa "*winner* owned *loser*" but the designer mistyped "own" for "pwn". And it spread quickly across the gaming world as the new word, I guess