SecondLife: Revolutionary Virtual Market or Ponzi Scheme?

[Comments reopened.  Deutsche Bemerkungen begrüßt.]

Follow up article on the Linden dollar is here.

In 2005 I began working as a venture consultant for some entrepreneurs and investors trying to develop a fairly ambitious “real-money-trading” (RMT) business idea. My work resulted in my collection of a large amount of RMT market data for most of the popular massively multiplayer games and virtual worlds. Although the new venture was never pursued due to my analysis of the true RMT market, one game caught our particular interest: SecondLife, operated by Linden Research Inc. (privately held, San Francisco CA).

Unlike the makers of nearly all other online games, the operators of SecondLife not only allow and encourage the exchange of game currency for real money, but they actually facilitate it. As early as 2005 I began noticing a rumbling in interest-focused blogs about the exploding market that was SecondLife. Touted as a pioneering future Metaverse on the industry’s most informed blog, TerraNova, an array of journalists, academics, and company executives have claimed that SecondLife boasts an economy complete with in-game banks, multiple currency exchanges, a floating currency exchange rate, and a burgeoning in-game commerce and business base.

The Virtual Economy

Although many people were introduced to the idea that commerce and trade within virtual reality worlds could represent real world money profits by BusinessWeek’s cover story on infamous SecondLife resident and self described “Land Baroness”, Anshe Chung, industry followers had long realized the potential of RMT. Shanda Entertainment (SNDA), operator of the most popular and successful games in Asia, for example, had committed to a strategy of harvesting RMT profits long before Linden Research set up shop. Nonetheless, financial publications such as The Economist and The Financial Times began catching on, running articles about RMT – often citing SecondLife as the phenomenon’s leading model. One Financial Times article, referencing a university professor who makes his career by studying “virtual economies”, suggested the size of the total RMT market was $1bn USD in 2005, and would grow to over $7bn USD by 2009.

And SecondLife was at the forefront of where money was being made. Or, so one would rationally conclude from the buzz. When BenchMark Capital backs a company like Linden Research, it’s safe to assume otherwise smart investors are expecting huge potential market payoffs.

The idea of SecondLife’s economy is simple. It’s just like a real world economy, except it takes place entirely within the company operated game servers. Customers from around the world connect with a sort of super-browser, which renders complex graphics, video, stereo music and other useful utilities not unlike a web browser. But the difference is that SecondLife is a virtual world. More like a Hollywood representation of the web than today’s mundane reality. Customers take on avatars which represent their presence in the virtual world. 

As these avatars interact, commerce is conducted. One starts SecondLife with some fairly mundane clothing, for example. Upon entered the world, a new customer is immediately assaulted with a variety of clothes, jewelry, shoes, hair styles; and that’s only the tip of the iceberg. But nothing is free, not even in virtual reality. New customers are allocated a few “Lindens” or L$ (SLL being the standard trade abbreviation). Most new customers quickly blow through these starter L$ as they dress up their avatars. 

New L$ are distributed to customers as they pump real money into the virtual world. Nearly all customers utilize the game’s built-in “buy money” feature, which allows them to charge their credit card or PayPal account “micropayments”. Micropayments are a popular, proven business model first established in the mobile-phone market. All SecondLife does is extend this concept to a virtual reality game world. 

Multiply all these micropayments among Linden’s claim of millions of customers, tens of thousands of which are online at any given time, and SecondLife supposedly represents a very real economy generating hundreds of thousands of real dollars of commerce, daily.  Linden self reports an astonishing L$314,101,463 were earned in December 2006. That’s $1,163,338 USD of value by Linden’s average “exchange rate” of SLL/USD. But more about exchange rates later.

What are People Buying?

Reading BusinessWeek, or studying Linden’s or various other SecondLife blogs, it appears that the largest business of SecondLife is land speculation. Anshe’s claim to have earned over $1m USD from SecondLife is primarily related to her virtual land brokering business.

Another important source of SecondLife commerce is people “playing dress up” with their avatars. Buying clothes, earrings, new faces, or other more private body parts represents a great deal of the readily visible commerce outside of virtual real estate brokers.

Of course, anyone lingering in the world of SecondLife for more than a passing glance quickly discovers the real engine to the SecondLife economy: sex and gambling. A healthy share of micropayments are pumped into the system as customers engage in pulling the virtual slot lever or patronize one of the myriad virtual sex workers. 

But it’s Still an Economy, Right?

As opportunists and capitalists, we’re not particularly bothered by indications that SecondLife generates most of its economic “wealth” through a rampant virtual real estate bubble which makes San Francisco, Marina District condo look like a bargain. Nor are we particularly bothered that the virtual playground provides a safe harbor for what is effectively the phone-sex industry reinvented. And internet gambling, despite the US Federal Government’s recent protestations to the contrary, is inevitable. So why not profit off of it? And how better, than in a utopian Ayn Rand open market capitalistic metaverse?

Of course, it’s not all that simple. And what’s true of the real world turns out to be true of the virtual world: if it sounds too good to be true… 

The Test

In order to participate in a legitimate economy, there are a few basic prerequisites. SecondLife has the appearance of a virtual “securities and exchange commission”, virtual banks, virtual currency exchanges, and even virtual venture capitalists and REITS.

In July of 2006 we took a look at two in-game banks which allowed SecondLife residents to deposit their L$, and earn interest on the balance. These are private banks, run by other players, not by the game company itself. I discovered that the interest rates being paid by these banks, when calculate by interest-rate-parity against the USD, were mispriced allowing for a whopping 2,786.32% return arbitrage opportunity. Over some months we sunk the better part of $10,000 USD into SecondLife, borrowing from banks, lending to banks, and entering into various types of virtual financial arrangements with virtual businesses.

The first problem we encountered was one of counterparty risk. Put simply, you can seldom trust those with whom you’re doing business in SecondLife. Even supposedly well established, well regarded business citizens are prone to defaulting on any obligations which prove inconvenient. Whole banks will disappear over night, along with your L$ balance. Private businesses will simply refuse to make good on financial contracts. And individuals, pretty much all of whose real world identities are carefully guarded anonymous secrets, sometimes even will openly default, without recourse.

Justifications for default and non performance are usually wrapped in pseudo-libertarian internet political rants, or SecondLife political hyperbole. The simple fact is, if you arbitrage a bank for over 2,000% return because they don’t understand financial engineering, don’t expect to be able to collect come payment time.

But, that doesn’t mean it’s impossible to make L$. In fact, we were able to make quite a few L$ in a very short period of time, despite disingenuous counterparties.

Enter the second problem, the L$ exchange markets are effectively rigged. At any given time over the past year or so, the SLL/USD exchange rate has hovered between about 250 and 300. That is, for every L$300 you earned, you could expect to get $1 USD. Now recall, there are supposedly hundreds of thousands of real dollars being spent daily; over L$250,000,000. Between Linden's official exchange market and the private exchanges, all appearances suggest a large volume of L$ daily exchange trade.

The catch is, however, these headline rates only apply to small amounts. For small time buyers and sellers of L$ -- be they virtual Johns paying up for sexy avatar escorts, or small time digital jewelry makers cashing out a couple hundred real dollars – this works well. Most of these people will use Linden’s official LindeX exchange, anyway. LindeX is actually not a virtual currency exchange market so much as it is an open auction, anyway. This means LindeX is not particularly useful for big trades.

The private exchanges, however, are owned by the businesses which sit at the top of the SecondLife economic pyramid. The “Virtual Land Baroness” owns the largest such exchange. So it is not surprising that our attempts to trade our L$ for $ USD were met with confiscatory market reflectivity. Or, put simply, every time we attempted to transact more than a couple hundred dollars, the SLL/USD rate would spike to levels approaching or even greater than 500. Example: mid July 2006 SLL/USD was 293.0/279.2 bid/ask on the primary open exchange. Our attempts to trade L$650,000 resulted in settlement bids of 350-450. Interestingly, these trades tended to net returns of right around 4%, which was the prevailing dollar deposit rate.

The Ponzi Scheme Epiphany

As we scratched our heads trying to figure out if there weren’t a more clever way of disguising our trades, or perhaps creating our own in-game banks and exchanges in order to arbitrage the other direction, it suddenly dawned upon me.

This game was just a pyramid scheme.

SecondLife is not a dramatic taste of our future, in which markets are virtual, currency is free from government control, taxes are non-existent, and normal people can become real millionaires simply by clicking their mouse a few times.

SecondLife isn’t even a simple virtual economy, with legitimate buying and selling, and opportunity for those who would compete.

No, SecondLife is a classic pyramid scheme. Or, more of an Amway-like pyramid: partially legitimate, partially ponzi. Sure, there are plenty of legitimate SecondLife customers who just like to go there to get their kicks, spend a couple dollars, and be on their way.

But, the buzz isn’t that Joe Sixpack can sit at his computer and gamble a little before bed with a smashingly attractive avatar. The buzz is that Anshe and others are making real millions. And a short visit to the world of SecondLife will reveal the frighteningly large portion of residents who “know someone who makes his or her living” doing something in SecondLife. Just the other night I had an interesting conversation with someone claiming to be a single mom of three, who spends her days turning virtual tricks and arranging for E-Bay payments through SecondLife L$. She didn’t seem to have any idea why her mysterious benefactor would pay her a commission to simply arrange PayPal transfers. More cynically intelligent readers will immediately recognize these transactions for what they are.

Again, the fact that tax evasion, organized crime and money laundering exist in the virtual world doesn’t distress me all that much; these things exist in the real world, and have for a pretty long time. The distressing part is what this single mom said later; the same thing one will hear over and over from SecondLife residents: she was just doing the cybersex and E-Bay stuff to fund her virtual jewelry store. She was a jewelry designer, and had already opened a little shop in a virtual mall. And, to her amazement, she’d already made over L$50,000 after only a month (about $185 USD). I didn’t bother to point out that she hadn’t counted her expenses for renting her virtual shop or accounted for taxes, let alone the fact that she was earning less than 1/100^th of what she could get just flipping burgers in the real world. [This statement was an error.  I should have said "let alone the fact that she was earning much less than she could get..."]

SadLife

And that’s the story of SecondLife. Like the paid promotion infomercials that run on CNBC, sadly SecondLife is a giant magnet for the desperate, uninformed, easily victimized. Its promises of wealth readily ensnare those who can least afford to lose their money or lives to such scam in exactly the same way that real estate investor seminars convince divorcees with low FICO scores to buy houses sight unseen with no money down.

Even some corporations have dedicated marketing budgets to creating a presence in SecondLife. While few will shed a tear for the frivolousness of these companies’ spending, such adds a false legitimacy to SecondLife. Interestingly, no legitimate, real world corporation has earned net profit from SecondLife activities.

That’s because there are but a very tiny handful that profit off of the SecondLife economy. A handful of casino owners, large scale virtual land flippers, and brothel owners are responsible for nearly all of the real money extracted from the game. And they continue to attract new recruits to the bottom of the pyramid.

After all, Anshe Chung herself started out as a virtual whore, so you too can become a SecondLife millionaire, right? [I apologize to Anshe for what was a very poorly considered statement.  I deeply regret any ill will it has caused.  Please consider it retracted.  I also thank Prokofy for enlightening me to some of the bitter realities experienced by those on top of Second Life's economic order.]

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Read the ValleyWag version of this article.

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Retractions and Corrections:

Acknowledging an error in my original article: A “burger flipper” does not earn 100 times more than a Second Life income earner, at least not as I intended express. I double dipped on my analogy and merely meant to demonstrate that a “burger flipper” earns significantly more than a similarly skilled Second Life income earner.

When I typed “market reflectivity” I meant to type “market reflexivity”. I am sorry for any problems this caused in those seeking definitions.

Comments

[Chip Midnight]

I apologize if I come off like I'm trying to browbeat you, Randolfe. It's not my intent.

I think the reason your article and others like it bring a strong response from many SL participants is that we get tired of being portrayed with simplistic stereotypes, and having the work we do considered just an aspect of a game (or worse, a perversion). The fact is that people like myself exchange value for value. I create goods that people find entertaining and in exchange they pay for it with money they've earned elsewhere by providing value, either within the Second Life space or at their regular job. The same is true of those who provide services. In that sense the SL economy is just an extension of the real world economy, and the fact that it takes place in a virtual space populated by avatars that uses an intermediate currency shouldn't make that any less self-evident. Yet it does. People continually conflate SL with a game, but SL isn't a game. It's simply a venue.

I'd be surprised if some of the things you participated in inside SL aren't Ponzi schemes, but SL is a big place, and like a big city you can't paint the entire population based on the activities of a few. SL is no more self-contained than the web itself. It's just a different kind of venue for interaction and exchange. It would be like calling the entire internet a scam because there are scam artists on it.

Take care.

[Ordinal Malaprop]

Yes, it is tiring to continually read the endless cycle of irrational puffery and the inevitable backlash, being stereotyped one way or the other. I don't want to appear to be irrationally hostile in response but sometimes one does get annoyed (and being able to actually argue rather than being faced with "lol" posts makes it more likely that I will respond I'm afraid).

The long-term SL residents that I have met, including those running substantial businesses, either in- or cross-world, have been almost universally very aware of and sensitive to the issues of SL, and they're never short of criticism where justified - you don't get to that point without being aware of your surroundings. However, statements such as "the game was just a pyramid scheme" are guaranteed to be greeted with at the very least a weary sigh.

(I think you were also unfortunate to have had this post picked up by Valleywag, which put it in an immediately negative context.)

[Anthony Reisman]

Ok, I've read most sides. This article, the Electric Sheep article, and comments here, at ValleyWag, and ECS. I believe that much of this has to do with the difference between how everything is portayed in the media and the reality of it. I think that the effort to appear larger then life in the media is to bring more people in so that the whole system can sustain itself. As Randolfe stated earlier, the only way for the market to actually become liquid is to have a lot more investors then there are. I've seen arguments for and against Randolfe's analysis, and I think he's defended his ground pretty well, showing that he at least knows the subject matter. What I would really like to see though, instead of more attacks, defends and counter-attacks is what you (Randolfe) think it would take for it to move to some sort of stable although different economy. What steps do you think LL should take, what kinds of people and what skills need to be established. Does LL need to hold open discussions. Do SL banks need to have verifiable information before lending.

I think it would benifit everyone that if you are going to criticize the system, then come up with some solutions too.

Just my opinion.

[WannaBe BurgerFlipper]

"she’d already made over L$50,000 after only a month (about $185 USD). I didn’t bother to point out that she hadn’t counted her expenses for renting her virtual shop or accounted for taxes, let alone the fact that she was earning less than 1/100th of what she could get just flipping burgers in the real world."

Sooo.. shop expenses for mall space.. let's see, that usually is around 150 a week, so 600 a month.. little over $2. Oh no, she's gonna go broke. LOL!!

You tell me where I can earn $18k a month flippin burgers. I'm there.

Tell ya what.. I'll do you one better. Tell me where I can make more than $400 a month just by creating a half dozen small (256x256) textures in that time (no, I won't say what those textures are used for... this ones mine, get yer own) and I'll be there instead. An hour or twos work for $400 (and steadily increasing by aprox 50% every month)? Yeah, that's what I do in SL. Most of that goes to my bank account, but I do keep fun money, to spend, about 15k a month for my rent (I will not tolerate cheap mall spaces plus I have quite a nice personal sandbox) and toys.

[Mikyo]

So you thought your financial expertise would enable you to make a killing by bankrupting the Lindens? Sorry Charlie, 'pay to play' means that YOU pay THEM, not the other way round.

[randolfe_]

An hour or twos work for $400 (and steadily increasing by aprox 50% every month)? Yeah, that's what I do in SL. Most of that goes to my bank account, but I do keep fun money, to spend, about 15k a month for my rent (I will not tolerate cheap mall spaces plus I have quite a nice personal sandbox) and toys.

This doesn't sound like a pyramid scheme or HYIP to me at all. Not one bit. Really, you've discovered a new paradigm where sustainable wealth is really obtained that easily.

Sorry, but these are the sounds of a bubble/scam/racket, take your pick.

I already corrected my "1/100" error earlier, had you bothered to read.

[randolfe_]

Mikyo

Well put. Somehow I missed that part of the promotion amid all the financial media gushing about the wonder that is the Second Life Virtual Economy.

[randolfe_]

Anthony

I think it would benifit everyone that if you are going to criticize the system, then come up with some solutions too.

That is a good suggestion. If I follow this subject, I'll consider offering some ideas and hosting debate on them in a future article.

I somehow doubt LL is prepared to play the part of honest central banker. For starters, not fixing their own LindeX by undercutting open orders with virtual seniorage might be helpful. Or, if they want to play it that way, allow low-friction transactions so brokerages can facilitate shorting L$, and get rid of the artificial breakers. Of course that would lead to a Soros scenario in record time.

I'm not so sure I'm going to follow this, though. I am personally convinced this whole SL-thing has a relatively short half-life, regardless.

[Gwyneth Llewelyn]

I should apologise in advance if I sound naive, baffled, and confused. My area of expertise is most definitely not economics, much less stock market exchanges.

I've read your article here and on Valleywag, as well as some ranting here and there on other forums, blogs, and other online venues... and I'm still confused. When people are talking about abstract concepts — "is SL a capitalist utopia?" or "is there such a thing as a free lunch in SL?" or even "SL is about social interaction and that's what their funders are investing in" — things make sense to me. People are talking about philosophical concepts, personal opinions, and their particular view of Second Life. All that's fine and well.

Your article, somehow, seems to provide a lot of information — the result of a serious research, conducted by economics specialists (hedge fund managers) — and extrapolates a few conclusions out of this research. However, in my ignorance, I fail completely to understand the relationship between the study that was conducted and the conclusions that "SL is a pyramid scheme."

So I tried to focus on some of your more conclusions. Let's start with one claim:

In July of 2006 we took a look at two in-game banks which allowed SecondLife residents to deposit their L$, and earn interest on the balance. These are private banks, run by other players, not by the game company itself. I discovered that the interest rates being paid by these banks, when calculate by interest-rate-parity against the USD, were mispriced allowing for a whopping 2,786.32% return arbitrage opportunity.

This fantastic claim is very likely made by Ginko Financials, a resident-run operation with high risk, no warranties, no securities, no guarantees, no regulation, and all sort of disclaimers to the effect. The mere fact that no single customer of Ginko did ever complained about the scam is meritory, of course, and raises a few eyebrows — it seems to be clear that Ginko is, in fact, some sort of pyramid scheme where effectively everybody wins (for a time; Nicholas Portocarrero, Ginko's owner, believes to be able to continue to make payments for a decade). The controversy around Ginko has raged for a long while, with all sorts of accusations and discussions, and even Anshe Chung tried to run a defamation campaign to shut down Ginko. It didn't work, but, yes, any resident who has been in SL for over 6 months knows about the controversy.

In absolutely no occasion has Linden Lab endorsed or commended Ginko, or promoted their services, or used them as an example of the high yield of return of investment. In fact, they have even posted notices to the contrary — on their forums (just Google for it). Claiming that Linden Lab "actively encourages" those types of activities is rather a bit hyperbolic; this would be like claiming that Linden Lab actively supports sex and gambling in Second Life, never mind that both these activities are, indeed, enjoyed by a large number of their users.

The jump to this conclusion seems to steer people into the direction that Linden Lab is operating a "pyramid scheme" — when, in fact, the "pyramid schemes" (if there are any, and I'm prepared to believe there are) are done by the users of Second Life. Similarly, no one can complain that Linden Lab is harbouring a virtual sex operation, or a safe haven for gambling. It's true they provide tools allowing both — but these tools were deployed to allow anything to be developed in Second Life. The choices have always been given to the users.

It would be nice to see some links pointing to articles where Linden, or Linden employees, have publicly announced their "virtual economy" as yielding high returns on investment and using Ginko as an example. I couldn't find any links to the effect in Google.

The second point is also a bit misleading:

[...]the L$ exchange markets are effectively rigged[...]The catch is, however, these headline rates only apply to small amounts.

Ok, so far, so good. Let's assume that the LindeX is rigged and only works for small amounts. What, exactly, happens to large amounts? (I'm assuming values over US$10k)

Your claim: LindeX is actually not a virtual currency exchange market so much as it is an open auction, anyway. This means LindeX is not particularly useful for big trades.

Why not? It is an open auction. My lack of knowledge doesn't permit me to jump to the conclusion that open auctions only "work" for small trades. I would like to understand exactly why not.

Instead, it seems that to be able to trade "big", you have to do it on the private exchanges instead. And here you claim [...]our attempts to trade our L$ for $ USD were met with confiscatory market reflectivity. Or, put simply, every time we attempted to transact more than a couple hundred dollars, the SLL/USD rate would spike to levels approaching or even greater than 500.

Ok, let's take a deep breath here. Please bear with my ignorance — what exactly is a confiscatory market reflectivity? I don't know — and neither does Google, so I'm glad I'm not the only one — but all I can understand is that if you have too many US$ to offer, compared to the total volume of the exchange, the rate you get is worse... even I can understand supply, demand, and volume.

I'm not sure how many exchanges Anshe operates these days, but one of the most well established is SL Exchange. On a day, about a million L$ get exchanged there. Which is not too bad. But... on the LindeX, 300 times as much get exchanged per day.

It would be rather obvious for me (and I do well know that sometimes common sense does not apply to economics, but...) that if you're willing to enter a small exchange which only has, oh, perhaps, 5 million L$ to offer, an offer of a "few million L$" (you mention US$10k, or about 3 million L$) would certainly make the market collapse... and give you an awful rate of exchange in return.

I fail to understand the point. This is the expected behaviour on an open exchange — or at least it was, when I had my economics classes. Where exactly am I missing the point?

To recap:

Linden Lab is operating a "rigged" exchange, since it's "an open auction", and "doesn't work well for big trades". To make "big trades", you tend to suggest to go to the tiny private exchanges instead, but then complain that the market collapses due to your flooding of L$ there... and, as a conclusion: it suddenly dawned upon me.

This game was just a pyramid scheme.

I'm baffled on how you start adding apples to oranges and suddenly the result comes out in onions. However, I blame my own ignorance. Probably, this makes sense to an economist. For the layperson, however, your experiences in trading on the LindeX and on the small, private exchanges, do only reflect how a market behaves, and the conclusion that "Second Life is a pyramid scheme" doesn't follow. At all.

However, to substantiate your claim (and now we are abandoning the realm of the research conducted by your friends, the hedge fund investors), you produce anedoctal evidence. The buzz is that Anshe and others are making real millions Indeed they are — a few of them. Around a thousand or so even make a living out of it — but certainly not millions (the economy is not able to sustain millions of millionaires, it's way too small yet). On your comments after the article, you claim the fact still remains that getting real money out of the game is a privilege reserved for those at the top.

It was time for me to think a bit of what exactly your claims are (no matter what evidence you present to support them), and I think that I only understood the following:

Second Life is a pyramid scheme, since only a few at the top of the pyramid (ie. a few thousands, and not several millions) are able to generate enough L$ and successfully sell them on the many exchanges to make a considerable RL income out of it.

Put it that way, the picture becomes clearer. As said, Linden Lab claims (as seen on the their own economics page) that about a thousand people make over US$1000 in cash every month. Your reasoning is that "only a few" are able to do so, and thus, a) Second Life is a pyramid scheme, where only a few are able to live out of SL, while the rest of us have no chance; and b) Linden Lab is making false claims of having a fantastic and marvelous economy, when the fact is precisely the reverse — the economy is "rigged" to favour only the ones at the top.

Well. We have to move to anologies here. Linden Lab does not claim that "everybody in Second Life is a virtual millionaire". What they claim instead — unlike what happens in a regular pyramid scheme — is that anybody has equal opportunities to become a virtual millionaire, which is quite a different claim!!

Let's do the following thought experiment. Let's imagine, for a moment, that Second Life did not have 3 million users, but 300 million users (ie. 100 times as much). And that the L$ would be worth 1 US$ (ie. roughly 300x). In effect, assuming a linear progression, this would mean that the volume of transactions in Second Life would be around US$ 30 billion a day (not bad compared to the NYSE's US$ 75 billion or so), and that a thousand people would make over 30 million US$ per month (not bad, considering that there are 400 people on the Forbes list who have over a billion US$ in the US).

What this small thought experiment shows is that Second Life's economy is roughly similar (not equal!) to a country one hundredth the size of the US and with a currency 1/300th the value of the US. Like in the US, everybody can be a billionaire — there are equal opportunities for everyone! — but that doesn't mean that all Americans are billionaires and that the US are somehow making false claims to immigrants "selling" them the "American Way of Life" as a dream.

Instead, what your article completely fails to point out is how these thousand people make any money. Only a small part are effectively day traders. Most are content producers — labouring hours and hours behind their computers to squeeze those micropayments out of other users, and adding them up nicely to get their income. Most of the users are simply not able/interested enough in working that hard.

So, a system that allows people, if they are willing to work for it, to profit from their own developed content (as well as some day trading, I admit), and even make a living out of it, and that does not discriminate but gives equal opportunities, is, I believe, nothing like a "pyramid scheme", where early adopters are always on the top, profiting from the new users. This simply doesn't happen in Second Life. It's obvious that the longer you're a user, the broader your contact base will be, and the higher your reputation will be — but how is that different in the real world? How many hard-working people, starting from zero, become billionaires at 18 (assuming they don't inherit their money but have to work from scratch)? More likely, as they age into maturity, and broaden their contact base, and develop their skills (business and social ones), the older they become, the more experience they gather, the more likely they are to effectively become billionaires — admittingly, with much luck, but definitely with a lot of hard work.

Linden Lab's Second Life can only be criticised to give the (false) opinion that it is easy to become rich and famous. It's not. Discarding the obvious counter-examples (scams, cheating, in-world pyramid schemes run by other users), which you have also discarded for the sake of honesty, working to be able to make a RL living out of Second Life is far from easy. It requires quite a level of commitment, many skills — technical, business, social — a lot of time, patience, and a successful business model. If the point of your article was to criticise Linden Lab for making it sound "too simple", I have to side with you on that criticism — in their enthusiasm showing the few cases of "virtual millionaires", LL tend to overhype the hard way of making money, and frustrate people when they understand that running a successful business in SL is, in fact, as hard as running one in RL. Many think it's just "easy money".

However, there is a world of difference between claiming that people can, indeed, make money in SL (under the above assumptions), and stating, backed up by "research done by economics specialists", that "Second Life is a pyramid scheme". If you have that evidence, in my opinion, it was not presented in a way that it supported your conclusions. You can make a very solid case against Ginko being a pyramid scheme (or, more correctly, a Ponzi one) — and even so, many have done so in the past, so it's hardly a feat — but Ginko is neither Linden Lab-sponsored nor Linden Lab-endorsed. You can also complain that the private stock exchanges are far too small to allow successful day trading; or even that the LindeX doesn't allow people to invest "millions of US$ per day" to get, say, a 1% daily return on the trading (it's also far to small for "millions of dollars"). All these are, indeed, valid claims. None of them are, however, solid support of the original claim that "dawned" on you that "Second Life is a pyramid scheme".

If SL is a pyramid scheme, so are the United States of America (or any other country in the world).

After all, we're not all billionaires in the real world, are we? But we all have equal opportunities, access to a free market, and the freedom to chose our jobs and do our businesses.

Linden Lab doesn't claim more than that.

[Cyde Weys]

Excellent excellent write up, Randolph. I couldn't resist writing about it on my own blog, though I must admit, I didn't do nearly the kind of research into trying to make money in this game that you did.

[WannaBe BurgerFlipper]

"This doesn't sound like a pyramid scheme or HYIP to me at all. Not one bit. Really, you've discovered a new paradigm where sustainable wealth is really obtained that easily."

Nope, no pyramid scheme involved whatsoever. I just create something that many people want. My products are inexpensive, and most people that see them don't hesitate to purchase. It is indeed sustainable, just as long as LL stays in business, SL stays online and there are people there and they need things to customize their av.

You can say whatever you like about what I have said, it will not make me a liar. I'm totally enjoying my SL, and making a bit of pocket change to boot. From your words I can only guess that you wish you could say the same. The difference between you and I is that it looks like you are looking to find a way to game the economic system, while I totally ignore that and simply sell products. Makes life simple for me.

[Cyde Weys]

WannaBe: I looked at making some stuff in-game for sale as well, and concluded that the resultant hourly wages are less than one-tenth of what I am worth. It's simply not worth it for me to get involved in this stuff. I'll play games for fun and I'll work for money - but I'm not going to "play" Second Life for money when the returns are so low and the fun isn't so high. What these hedge manager guys were doing was trying to find another way to make money in the game, but it didn't work either. The "virtual economy" as promised hasn't materialized.

[Michael Teplitsky]

Ah, I see the fan-boys came and a flame war ensued. Well, this is what happens when you dare to question the "divine perfection" of someone else's latest idol. Especially if the hoi polloi believe that it is their key to easier money.

Just out of curiosity, Mr. Harrison, did you receive any threats yet? I certainly hope not, but I wouldn’t be in the least surprised.

[randolfe_]

did you receive any threats yet? I certainly hope not, but I wouldn’t be in the least surprised.

No, but I certainly don't wish to invite any either. To their credit, many of my critics have been civil even if I believe they are still wrong. To date I haven't been forced to remove or censor any comments.

[matt]

great article. funny that these people "acuse" you of trying to make money instead of being creative, while at the same saying SL *is* a real economy -- dont they realize thats what people aim to do in real economies!?

[Cytra]

I would like to agree with everyone who says that Second Life is not a pyramid scam. I have a clothing business in Second Life that is doing very well. I started with $50USD, and now net over 30k a year pre-tax, all in half a year. I am a house wife, with one kid and a bebe on the way, and making more than flipping burgers. I did not start out as an escort. Before doing the mom thing, I was a business major and I can tell you that running business in Second Life is not any different than running business in the real world, other than cutting overhead costs. Those who treat Second Life as a real but different business model are the ones who succeed. As long as people are willing to pay for a virtual life, I will always have a market to sell my goods. As long as people want to brush their teeth, Crest will have a market to sell their toothpaste.

[Cyde Weys]

Cytra, which virtual clothing business are you running? I take it you use external programs to make the textures and such that are used on the clothes? How many hours a day would you say you spend doing this?

[David]

"$185/month x 100 = $18,500, no? Booberkit was generous in converting this sum into British pounds, as today's exchange rate is 0.50616 British Pound to 1.0 US Dollar, equalling ~£36,550."

The maths is all backwards here - $18,500 @ a rate of 1:0.50616 = approx. £9,364

[tjrsfca]

(Musing aloud) If Linden Labs is futzing with the exchange rate then a) this is not the libertarian utopia we are led to believe it is, and b) they are profiting from it under false pretenses! If that is the case - oh my!

Can you comment more on that? Is there stronger evidence to suggest Linden is manipulating the exchange rates to line their pockets? Or is this just a liquidity issue?

[tjrsfca]

(more musing)

...and if it's a liquidity issue, as some have posited then Linden Labs have an entirely different problem. Namely, there aren't that many people pumping that much money into the game and the "make millions" marketing buzz is all hooey and the entire experience is basically online sex and gaming. Wait, you already said that.

[Chip Midnight]

tjrscfa, have you ever even set foot in Second Life? I'll assume from your comment that the answer is no. Certainly gaming and sex take place in SL, but they only a tiny part of what there is to do in Second Life. There are concerts (Suzanne Vega, SugarCult, to name just two), lectures and roudtables (Laurence Lessig, Cory Doctorow, Arianna Huffington, and many many more), debate societies, book clubs, libraries, art exhibits, games of all kinds (RPG's, Shooting games, sports, board games, skydiving, strategy, and on and on), and a myriad of other things to see and do. The ignorance of your comment is very telling.

It's funny how those with extensive experience and profitable businesses in Second Life are written off as "fanboys" or the "SL faithful" while displays of complete ignorance of the breadth and depth of Second Life are considered reasoned. The original blog post is a perfect example. Those with an existing bias against SL (the vast majority of whom have never even tried it)will hear what they want to hear and ignore the volumes of conflicting dialogue. That seems to be a cottage industry these days.

[randolfe_]

Gwyneth Llewelyn,

Thank you for your careful analysis. Much of your comment deserves a separate response, which will be forthcoming.

A couple of quick things:

* Market "reflexivity", not reflectivity. I have placed this correction at the bottom "corrections" section of my original article. Sorry for the confusion.

* I am not familiar with Ginko Financial's strategy or balance sheet. Ginko did not default on us so far as I am aware.

* I question the motivations of Anshe or any other -- what shall we call them, oligarchs? -- to shut down Ginko. I very much doubt this was some altruistic act of community preservation. Rather, Ginko probably threatens to create an avenue by which Anshe's L$ profits can be arbitraged as she attempts to cash them in for $USD. If Anshe really has $1mUSD worth of L$ holdings, those holdings are only liquid at material levels insofar as she has the ability to collect $USD in trade. Her private exchange is the logical manner in which to accomplish this. However, Ginko gives others the ability to run both ends of her trades, thereby arbing her every time she tries to trade at a preferential exchange rate. (In other words, she'd be stuck with a more efficient, lower spread, more accurately priced exchange rate).

* My suspicion is that Anshe and others do not use the LindeX to trade because they have access to good advice. LindeX is a losing proposition for large L$ movers for the simple reason that Linden themselves sell huge quantities of L$ -- which they create at will -- on that exchange. They sold something like $740K in December, most of which they priced at a rate below (more SLL per USD) all the visible open orders. How would one move sizable transactions through such an exchange without forfeiting a large portion of profits to LL? Not so much in transaction fees (although they are significant) but moreover in terms of the "arbing" LL is perpetrating on large sellers?

* Analogies between any real world economy, be it Mayberry, Uganda, or the US and SecondLife are invalid. SecondLife has no sovereignty, and is itself subject to US sovereignty.

* Value earned/created within SecondLife is trapped therein (except in smallish quantities, which some people clearly think are not smallish -- on the order of a couple thousand dollars in the best cases). Such value is only extractable/exchangable within the confines of either (a) the LindeX which I described some of the flaws of above, or (b) a private exchange owned and operated by one of the oligarchs.

* No authority exists to harmonize and enforce the rules by which these exchanges of L$ for $USD are executed. Therefore, asymmetric information creates an uneven playing field whereby all substantial money flows (those in excess of whatever is self-determined to be distributed) will forever accumulate to the first-entrants. The US economy is not so, nor is any other open-economy system, because there are mechanisms to level the playing field and allow for market/capital efficiency.

* When you join a system in which you trade real dollars for credits, which are only redeemable at the discretion of those controlling the system -- and they themselves profit greatly from similar exchange -- there is a risk of brushing up against the pyramid scheme (more accurately HYIP) label. Theoretically, such schemes need not be pyramid ponzi. In fact, I'm not sure HYIPs are technically illegal in the US because they always _could_ be legitimate in theory. The problem is that no single example exists of one not turning out to be a pyramid in the end (sadly, after having collapsed).

* Linden prints something on the order of 198,449.261SLL or $740,500USD in one month. Those L$ are almost exclusively to new entrants or to sustain existing participants. Somewhat like real estate investors buying more marketing materials from their system operators.

* Someone is exchanging lots of these L$ out for real money. Perhaps 1,000 individuals are for $1,000USD, as you and LL imply (although I think they're really measuring L$ equivalents, still largely untranslated). That's $1,000,000 which someone paid to buy L$. Add in Linden's L$ sales, and even ignoring the big players we're getting close to $2mUSD.

* By my quick guess, there should be between 3-5million residents of SL to support that type of growth in the money supply without also seeing some nasty inflation, probably hyperinflation. But the opposite is happening, and now it seems there are far fewer than 3m real users.

* There's a missing piece to this equation, unless, the equation is one of simple equality, which will occur once the music is switched off.

* You could call this simply a bubble. Bubbles and pyramid schemes are similar, you are correct in that assertion. The distinguishing factor, however, is that a pyramid is a game run where the outcomes are known ex ante, a bubble is not certain (or even recognized as one sometimes) until ex post.

* I'm willing to at least say that _at best_, Second Life is a fairly transparent bubble. It's just hard to say that when the lions' share of the profits are going to the producer and a tiny group of market manipulators.

[randolfe_]

Chip,

have you ever even set foot in Second Life? I'll assume from your comment that the answer is no. [...]

It's funny how those with extensive experience and profitable businesses in Second Life are written off as "fanboys" or the "SL faithful" while displays of complete ignorance of the breadth and depth of Second Life are considered reasoned. The original blog post is a perfect example.

Really, your assumptions do you no justice.

I was a Second Life resident for over 2 years, mostly casually. But I was heavily involved in the DJ circuit and actually had a respectable following for a while. There were probably only a handful of DJs spinning my genres of music.

You come off as a "fan boy" because you instantly recoil to any criticism, even well placed. There is a very legitimate question in "does LL set the SLL/USD rate and benefiting from that effort themselves?". If the answer is yes, I'm afraid that your business is being duped, even if you are profitable.

And if you're arguing that the bulk of the volume of money flow is due to Susan Vega concerts and spectators of uberwealthy CEOs playing computer games in the snow at Davos, and not casinos and virtual escorts, then I have a pixelated bridge to sell you. Hell, I'll even toss in the DWG/DFX wireframe.

[IBOFightback]

"Partially legitimate" - what, is that like "partially pregnant"? Feel free to give your opinions, but I recommend you don't use analogies you don't understand. I haven't played Second life, so I can't comment on that, but i do know that Amway no more resembles a Ponzi scheme than does any other legitimate business or enterprise.

[randolfe_]

Cometh the Amway defenders. I hope others see the similarities in the way Amway-true believers recoil at the slightest criticism, even when founded.

Amway was investigated and fined in 1979 by the FTC for business practices which closely resembled prohibited pyramid schemes. Amway was fined, and allowed to continue operations only after modifying a number of business practices. They've been in and out of trouble for their multi-level/network marketing tactics ever since.

They were a prohibited pyramid scheme in China until a few years ago. They are targeted by numerous anti-cult/cult awareness operations.

Most B-School students study the Amway/Nutrilite case(s), often in the context of organization structure or ethics.

[Prokofy Neva]

I think what you mean to say, Randolfe, is that your particular caper, trying to "invest" in this popstand, was the pyramid scheme -- or a racket of some kind.

It's a small, synthetic world, and the foreign exchange market has circuit breakers on it. You tried to break the bank, and not even like Soros in England with the pound, but like somebody trying to just buy Malawi or something.

If your point is to poke holes in the SL balloon, you should be looking wider and deeper. The whole business of land auctions where people are sold servers which are then devalued by the glutting of the market by Linden Lab, or rendered useless by the griefing of other residents should be examined. What's the plan when LL open-sources the whole thing? Give their money back to the people who bought land that is now as valueless as toilet paper, since anybody will be able to roll out their own anywhere? NOT.

Market reflexivity and volatility is big there. But in your entire piece, you failed to mention the most salient feature of this economy: that like Yeltsin in Russia before the krakh in 1993, the Lindens print money, and sell it -- boatloads of it. Last month, they sold one million US dollars printed out of thin air. That's a lot of game currency. Residents trade a million US a day -- but of course a lot of that is mirror payments, i.e. bouncing rentals or slot machines or whatever.

My critique of your piece has more to do with your failure to mention a single name, name a single business or source or fact. Who are these guys you say control the market? And why is the currency market the only place you looked? Buying 10 islands and carving them up and flipping them would have been an interesting experiement to make with $10,000 US too.

The lamest part of your article is the slam on Anshe as a "whore" -- her brief period as a call girl wasn't at all how she even began to make her millions. You can't make millions in the sex trade. She made it in hard work in the land and rentals development sector.

Further comments in my piece here:

http://www.secondlifeherald.com/slh/2007/01/valleymeme_and_.html

[randolfe_]

Prokofy,

Fair criticisms. I regret the way my point about Anshe came across, but I don't revise content as a policy. I loathe those -- and I was affected by many during this -- who just spontaneously change history by modifying their original statements as if they were original. I have to stand by my original work.

My point on Anshe was that it sets a Horatio Alger story of sorts in a way which draws in a lot of would-be virtual millionaires, of course most of whom end up just turning virtual tricks. That in addition to the fact that no more millionaires (although I contend Anshe is not a liquid millionaire in reality) are likely to be minted by this system.

I don't consider flipping real estate hard work; not in the real world, certainly not in the fake world. Others disagree. It is my bias. Much of my blog is dedicated to the very real real-estate bubble, and all the social/economic costs we all bear because of get-rich-quick real estate flipping. (I also write about this at length elsewhere). So yes, this is a bias I have.

Not naming names. I knew before I released this post that would be the weakest portion of my account. I'm surprised it took until comment #76 for someone to attack it. Nonetheless, I have to be careful about naming real-world or virtual names for two primary reasons: (1) my client was a self-styled hedge fund manager with whom I signed various covenants. He agreed to let me go with this, but would really rather not broadcast to his clients something which many of them wouldn't understand or appreciate (yet would have wildly applauded if he'd been successful). (2) Avoidance of unwanted legal intrusions. I don't have access to WSGR; some of these folks do.

I did write about the fact that Linden Research is printing huge sums of money and selling them (by undercutting other orders) on their own LindeX exchange. I believe it was more like $740K in December.

I have another whole article prepared which is written largely about that topic -- which was also one of the main reasons we couldn't/wouldn't use the LindeX nor could we pull a Soros. I'm considering whether to release that article though. I'm afraid it might solicit an even angrier reaction and result in an official response since it would make direct implications. Frankly I don't really want that headache.

Digression: actually it's not possible to pull a Soros for a number of reasons, not the least of which being lack of ability to short. But there's a deeper issue: the flow of currency is going the wrong direction; more is going into the game than coming out. LL is managing the peg by selling, not buying Lindens. If and when that reverses, and if there are any open exchanges, I doubt I'll even get a chance to click a mouse before someone else bankrupts the "Linden Central Bank" and/or breaks the peg.

Why all this money is flowing in is the core of this original article. My contention is much of it is speculative, whether long time residents want to accept that reality or not. Much of it is growth spurred by recent media, which has attracted everyone from big corporations to would-be real estate flippers, to get-rich easy/quick types, to even the occasional hedge fund seeking extreme alpha.

[Prokofy Neva]

Randolfe,

Anshe takes in a minimum of $102,000 real-life US dollars a month on Paypal, after tier fees are paid. And the figure is far higher because that's only a low estimate for island tier, not land sales or the actual rentals and content sales and currency sales and everything she has going. So your concept that there is no liquidity here isn't rational. She, like other big rentals agents takes her payments outside of SL, outside of the Lindex, offshore, in Paypal, in U.S. dollars. Somebody who can take in a minimum of $1,230,000 per year, with a small studio staff in China and a number of workers inworld paid in Lindens is something that in my book could well be a real millionaire.

If this isn't typical -- and it sure isn't -- what of it? If you spend 24/7 on this game and don't bill your hours, sure, you can make a buck. Probably several thousand do. Read the statistics pages.

When people talk about Horatio Alger stories, they forget that in fact what is involved here is WORK. Hard scut-work. The most money in SL isn't even made in land or the sex biz. It's made in content. That's where you find skins maker or dressmakers or widget makers that are popular who can make $50-60,000 a year after tier -- and that doesn't mean they've paid themselves slave wages. There are only relatively small numbers; and room for only a narrow band of people atop this pyramid -- pyramid as in hierarchical society not scam -- but that doesn't mean it isn't real, and won't broaden out.

No, it was a million that LL sold at that month's rates. And I don't see a line in your article about this at all.

I don't see why you should fear angry reactions if you have truths to tell. Truths are important. But not truthiness. This is only part of the story of SL you are telling. And not even a terribly interesting part.

You keep forgetting about the circuit breakers. The Lindens watch the Lindex like hawks, there are guys who get out of bed in the middle of the night. They will not let it be broken. But they might let it be "fixed" if the right set of "fixers" came along -- people to whom they'd essentially like to "bequeath" SL.

I don't see growth in real numbers of actual profit-making *inworld* businesses (as distinct from metaversal agencies which get paid outside the world for doing things tied to RL).

Look at the lists on the statistics page. Are there 50 avatars at most (alts are rolled into one unique account in this part) that make more than $2000 a month? No.

There are a few dozen baby barons, a half dozen serious big-time barons like Anshe. It's a tiny sultanate Trashkanistan in the desert that has only the prospect of oil. And lots of wild horses, Westerns, and women. Nice desert flowers, too.

[randolfe_]

Prokofy

I should have been specific, I wrote about L$ sales by LL on the LindeX in my follow up comments, not in the original article. "There is nothing to fear from the truth" may be so in Second Life, but it isn't in First Life. As someone who's run multiple real world businesses and been ensnared by the realities of our legal system more than once, I have no interest in repeating such a grand distraction if it can be avoided. The truth will prevail, even in First Life; but settlements without admittance are almost always cheaper, unfortunately.

Insofar as Anshe, or anyone else for that matter, settles payments in real world convertible currency, I have no contention or debate about their ability to run profitable, lucrative ventures. I responded to the first couple of commenters to that effect. In fact, I even advised one SL operator that the best position would be to collect USD from clients, pay workers in SLL, and diversify into other media services using Second Life as an anchor. I think that is a smart business plan.

But that isn't the message being pushed, broadcast, echoed, and coveted by and large. Instead I read "quit your job and make more money in Second Life". I just saw a new one today, linked right on the scroller on the Second Life home page.

You know, if I was allowed to pay real world casino workers in blue and red chips, knowing damned well they'd spend a good number of them after finishing their shift before heading home, that would be a good business plan too. An illegal one, but a lucrative one nonetheless. Now if only I could get the chip:dollar rate to float according to my own ability to stamp out more chips...

One serious question puzzles me though, rereading your last post again carefully: You reference the economic stats page to demonstrate there are 50 or less "operators" earning over $2,000 per month. More like 12 minors, 6 majors. Chip Midnight, also quite vocally a SL expert and apparently widely interviewed and referenced by the media (by his own account), commented numerous times above, citing the exact same economics statistics. He insists there are at least 1,000 operators earning over $1,000USD realized (as in converted). That's $1,000,0000USD by math as I learnt it. And all going to what would be microbeaniebabiebarons by your measure.

Now if I plug numbers to get back up to the oligarchs, and add in Linden's printing L$, whew! I am much more comfortable believing your numbers than Chip's (and Chip is by no means alone in his claims). Your numbers don't require that I suspend belief and assume that Second Life will be measured as a percentage of US GDP by year end 2008.

And for the record, I rather liked the purely entertainment social time I spent in Second Life. In my world, I don't get to experience things like spinning my odd assortment of eclectic, rackety industrial music to an appreciative audience all that often (ok, never). I'd never have even come back to look at SL as a financial engineering opportunity had I not started reading about it in terms of national GDP comparisons and multi million dollar money flows. I might have come back to spin some classic Einstürzende Neubauten, though.

[Chip Midnight]

Randolfe, I think you're missing one of the most important aspects of the L$ economy. Rather than acting as a self contained fully fledged economy (which it isn't), it acts as a hedge against liability. By allowing users to convert L$ to real currency but declaring that the L$ itself has no actual value, Linden Lab effectively removes themselves from having to police the activities and content of their users. If they set the value of the L$ then they'd be open to litigation.

If Ginko turns out to be a ponzi scheme, or the US goverment tries to go after Second Life casinos, or people selling phone sex, or whatever other dodgy things people can do, Linden Lab can point to the fact that the L$ has no official value, effectively removing themselves from liability or the need to act as a censor.

Their intent for Second Life from the beginning was to allow their users total freedom to create whatever they want and engage in whatever activities they want. The L$ economy allows them to provide that freedom while protecting themselves from it at the same time. Would that hold up if it was seriously challenged? I don't know. But I believe that protection from liability has far more to do with the way they structured the economy than any very minor profit they might make by printing money, which they do only to maintain a predictable exchange rate (and it seems to work).

Many of us worried when Linden Lab announced that they intended to begin injecting L$ into the exchange that they'd be devaluing the L$ at the expense of those who depend on it for part or all of their income. That simply hasn't turned out to be the case. The exchange rate used to fluctuate wildly but since Linden Lab started more actively controlling the exchange, the exchange rate has remained amazingly stable, which is of great benefit to everyone who regularly cashes out L$ by selling them to other users. It also points to the fact that they manage the economy to benefit content creators and service providers and not to make it useful to day traders. It was never designed for that.

To the fanboy comments. Yes I recoil at stereotypes and falsehoods like the comment I was responding to (namely that Second Life is nothing but gambling and sex). It's offensive, and makes it obvious that the poster has no idea what they're talking about. It wasn't aimed at you, though I mentioned your original blog post because it too is a gross oversimplification.

[randolfe_]

Chip,

If Linden is selling L$ on the LindeX, especially if to "stabilize" exchange rates, then they _are_ setting the exchange rate, de facto. That they don't publish their target is not really relevant. We aren't talking about minor quantities, either. I measured around 3/4 million $USD in December; Prokofy assures us it was actually over $1m USD. That is very significant.

The L$ has no value? I'm not a lawyer, but I will tell you having created quite a bit of intellectual property with license agreements in my time that TOS and EULAs do *not* exempt or protect in the way you describe. Just because a corporation says something is so, even in a legal agreement, does not make it so. Ultimately, a court, judge and jury will decide. Many EULAs contain any number of unenforceable clauses.

Use the common sense test:

* Linden creates L$, facilitates trade of $USD for L$, and advertises this as an attribute of their product, Second Life.

* Linden implies, and has occasionally even stated (probably inadvertently) that players "own" what they create in Second Life. Their EULA states the contrary.

* Therefore, the only monetization value a rational actor understanding and obeying the EULA can place on anything related to Second Life is the ability and rate at which they can sell L$ for $USD.

.
.. All of the comments I've received insisting upon the value of this Second Life business or that Second Life service, as a measure of ability to monetize is only related to the value L$ hold at any given time.

L$ are a store of value. They are a currency with value, regardless of Linden's EULA insisting otherwise.

Differently, WoW gold, while also a currency and store of value, are not sanctioned and are more akin to tokens traded in an underground economy -- say kilos of dope. Still a market, but not one which is very likely to get its operator directly into trouble for openly facilitating and promoting. Still, I suspect even WoW could spawn legal and regulatory issues. Even the owner of a bar has a responsibility to do his best to prevent the back room from becoming a mob boss' front office.

--

Please rationalize your insistence that the Linden's self-reported economics produces $1,000USD for 1,000 Second Life operators ($1,000,000m USD realized monthly) with Prokofy's assertion the number is actually less than half that dollar volume, allocated among a maximum of 18 operators, based on the same economic statistics.

[Chip Midnight]

SL participants own the intellectual property they create, not their virtual land or virtual objects. Linden Lab has never stated otherwise. What it means is that if you create, say, a new card trading game like Magic the Gathering in Second Life, you own the IP, which would be the unique rule set you created. IP is not virutal assets. There's a big difference. They have never stated otherwise. If anyone in the media has ever stated that participants own their land and objects it was from ignorance, not misinformation.

I understand your objections to the L$ as a shield against liability. Like I said I don't know if it would hold up if challenged in court. Nevertheless, that is one of its primary functions.

As for Linden Lab selling L$, there's nothing to rationalize. The fact is that the exchange rate is very stable and has been ever since they took a more active role in managing the economy - far more stable than it had ever been previously. Do I need to explain the benefits of a stable exchange rate to an economist? You postulated that Second Life suffers from runaway inflation, or hyperinflation. Again that's simply not true, nor is it backed up by any of the facts or with any data, unless you care to produce some. No? I didn't think so.

[Ordinal Malaprop]

Yes, LL do try to fix the exchange rate with L$ sales - they are quite open about this. They are more concerned with the interests of the majority of participants (who wish a stable exchange rate, for selling or buying) than the minority interests of currency speculation. At the end of it all they are in the business of maintaining interest in their virtual world, and most people simply wish to make nice things and sell them, and/or buy nice things and use them.

SL is probably utterly rubbish for anyone wishing to play the currency market; I'm not sure, since that isn't something I'm interested in personally and have not researched too much, but I wouldn't be surprised, given that outright fraud isn't even against the ToS. I am quite prepared to accept this particular judgement (and perhaps even welcome it).

What I object to is the characterisation of the whole of SL as a pyramid scheme or other con. For service providers and content producers - the vast majority of participants, including Anshe, for whom I have no particular love but her company does actually do work for people, not just land-flipping - I simply do not see how this is the case, and that proclamation does not seem to have been withdrawn or modified.

[randolfe_]

Chip,

I did not assert there is high inflation or hyperinflation in Second Life. To the contrary, there are apparently deflationary forces which serve to facilitate LL selling large quantities of L$ on the LindeX. There could be a lot of reasons for that, but the most straight-forward would be growth in users, which we have come to realize is off by at least an order of magnitude from the numbers we're fed to work with.

I'm asking you to tell me that Prokofy is wrong about the winners of the L$/$USD exchange economy. Is it 18 for a total of a half million or 1000 for over one million? That is what I mean by rationalization. Apparently you are both experts, both reading the same LL provided economic data, and yet you're making drastically different claims about what the SL economy even is, in the broadest of quantitative terms.

LL fixing the L$ is indeed beneficial to you guys and other similar SL operators. Well, maybe. I am the first to recognize the impact of unwanted volatility. But the real question from an economic/financial perspective is exactly how LL is smoothing out volatility. Are they merely masking it, delaying it until it is released in greater force later, or are they managing it?

Of course, we have no idea. Even those immersed deeply in the Second Life economy can't seem to agree.

I'll write much more about how the fact that you don't actually have financial claim on your L$ currency, which is your store of value like it or not, undermines your notional business value. In short, your business isn't worth nearly what you think it is, even as measured by expectations of future free cash flows.

[randolfe_]

Ordinal

I'll withdraw my assertions about the Second Life "economy" as soon as can be quantitatively demonstrated to me to the contrary. Thus far, that has not materialized.

This shouldn't be all that difficult if I'm just some crackpot who doesn't get it.

All I know so far is large sums of real money transfer accumulate to Linden Research and 6-18 major operators. And there seems to be little agreement about even how much beyond that gets passed to those lower on the ladder. So unless I own the LindeX and run the game, or I have a ridiculous amount of L$ and set up my own exchange, I can't monetize profits beyond what Linden or one of those 6-18 operators decides I should be allowed to get?

I'll agree, enough with all the philosophy, analogies and hyperbole. Just show me how it works and why I'm wrong in reasonably verifiable, widely accepted figures. If I'm wrong, I'll gladly retract my mistakes and move on with First Life.

[Cyde Weys]

Hey Randolph, two more salvos in this little kerfluffle.

First, Terra Nova accuses you of totally misunderstanding what Second Life is. They rebut the claims of a ponzi scheme strongly. I've responded to them, trying to find some middle ground. Long story short, it may not be a scam, but it still isn't amenable to large-scale investing, and is thus a virtual economy worth ignoring rather than investing in.

[Cyde Weys]

Haha, nevermind, looks like you're well aware of the post on Terra Nova.

[Chip Midnight]

Okay, found the quote where you talked about hyperinflation and you did indeed say that the opposite is happening. My apologies. I disagree that it's happening, but then being like the majority of exchange users, I only care that Linden Lab manages to keep a stable exchange rate which is a huge improvement over the way it used to be.

Now you state "I'll withdraw my assertions about the Second Life "economy" as soon as can be quantitatively demonstrated to me to the contrary. Thus far, that has not materialized." I suggest you take a debate class. The burden of proof falls on the one making extraordinary claims. That would be you. You haven't proved your case and when asked to name the people and activities in which you participated in Second Life your response is a lame excuse about why you can't.

What does it matter how many people are cashing out 2k or more a month? Second Life isn't about trying to become rich by doing nothing. A far more useful statistic is the number of people who over their expenses since Second Life is a hobby for the vast majority of its participants, and a hobby that pays for itself for a sizable number of them. You're the one trying to defend the claim that Second Life is marketed as a get rich quick scheme. It isn't and never has been, and your only justification for that would seem to be that lots of people are writing about Anshe. No claims have ever been made that her story is common. The fact that it's so uncommon is what makes it newsworthy in the first place. If people extrapolate from it that they can invest large sums of money in Second Life and do the same thing, whose fault is that? I'd say it's their own, aided by the media's tendency to oversimplify and sensationalize.

You say "All I know so far is large sums of real money transfer accumulate to Linden Research and 6-18 major operators. And there seems to be little agreement about even how much beyond that gets passed to those lower on the ladder." What ladder? You're still attempting to paint SL as a pyramid scheme while failing to take into account that most participants in Second Life don't sell goods or services. They're simply consumers. If they buy goods and services and a small number of business who are providing them are very successful that doesn't equate to anyone being defrauded. It simply points to the fact that a few businesses have very successful goods and services.

[randolfe_]

Chip,

With all due respect, I'm not going to break disclosures because some anonymous person calling himself "Chip Midnight" challenges me to do so.

I assure you I'm well versed in logical discourse and various rules of debate. I suggest you explore the concept of "falsifiability".

My claims are falsifiable, so do so.

I also notice you continue to dodge the one quantitative question I have continued to ask you. You used the figure of 1000 by $1000, and now you claim that isn't useful rather than risk challenging another respected Second Lifer. Until you're willing to either go on the record or at least answer to specifics, I suggest you reconsider labeling others "lame".

[randolfe_]

Cyde,

Feel free to send a trackback.

Naming the person you were investing on behalf of isn't pivotal to your argument, so using that to justifying vaguery is simply a straw man.

I'm not arguing the figure of how many people are cashing out a lot of money because it's completely beside the point, which you still seem to be missing. Most people in Second Life are consumers who simply spend money on goods and services with no expectation of return on investment beyond the goods and services they purchased.

SL isn't an investment game. It's not a game at all, nor is it represented as such. A lot of people DO make money enough to cover their expenses and earn a little extra. That figure is probably in the thousands, and is a worthy justification for Linden Lab's claim that people can and do make money in Second Life. How about posting some of the outrageous claims and misrepresentations you seem to think Linden Lab keeps making?

The number of people who are pulling out a lot of money is only important if you think SL is an investment game, and that the money they're pulling out was somehow defrauded from others. That's your argument which I and others have been attempting to explain is a complete falsehood based on a fundamental misunderstanding of what SL is and purports to be.

Linden Lab has never encouraged land (or any other kind of) speculation. They just don't discourage it, and some people have made quite a lot of money doing it. What they have actively encouraged (after the practice started becoming common, not before) is the land rental market, mostly due to the fact that many people wanted zoning rules and landlords like Prokofy and Anshe can provide that, but then we're back to services, not investment.

The bottom line is that Second Life's econmy is about goods and services. Period. What you attempted to do is certainly possi