The Linden dollar Game

On Schemes Resembling Objects of Intersecting Trilateral Sides upon a Polygonal Base

In a previous article I asked some very tough questions about the Second Life virtual economy.  That article provocatively proposed a case as to why I believe Second Life's much hyped economy resembles a pyramid Ponzi, or more accurately a type of high yield investment program (HYIP) scheme.  After posting that article I was partially convinced by many respondents that Second Life probably is not a Ponzi scheme as a precise legal definition -- at least probably not in most jurisdictions.  Indeed, after learning more about HYIPs, and in particular HYIP Games, Second Life and the game's system of "virtual currency" satisfy many of the attributes of such schemes.  More about HYIPs later.  First, some background:

Brief Background

I covered the background of Second Life in some detail in my previous article.  Second Life is a type of online computer game often referred to as a Virtual World. Virtual Worlds, while marketed as computer games and produced by computer game developers, are thought by many to represent the natural evolution of the web.  In fact, there are probably myriad noble and interesting applications of Virtual Worlds to things like education and community collaboration.

What I am concerned about here is only the virtual economy or virtual marketplace aspect of Second Life.  It is the claims of real gold in the Second Life virtual hills that has caused most of the recent media hype around the game.  The makers of Second Life, Linden Research (privately held; San Francisco; funded by Benchmark Capital et. al., "Linden Labs", "LL") themselves actively encourage this view of Second Life, judging from self-promoting links on Linden's own official Second Life website:

• Second Life: It's not a game Fortune's David Kirkpatrick reports on why IBM's Sam Palmisano and other tech leaders think Second Life could be a gold mine. 
• I got my job through Second Life Looking for work? Your best bet may be an interview in virtual reality. Fortune's Katie Benner explores the cutting edge of corporate recruitment.
• Starting a Second Life Business Find out what entrepreneurial opportunities the virtual world of Second Life has to offer.

Where There's Smoke...

In that now infamous article I concluded that Second Life's supposed economy wasn't a whole lot more than a typical pyramid scheme, where most of the money paid in by new recruits ends up realized by the organizers and a handful of early entrants.  I was promptly assured by any number of the Second Life faithful that I was wrong, and that there were literally thousands upon thousands of real, financially valuable businesses making money, providing jobs, growing at astonishing rates, and redeeming their virtual Linden dollars (L$) for real money.

I challenged the Second Life community to offer forth a typical, average business for quantitative financial analysis.  In fairness, a handful of apparently honest folks came forward with offers to participate; even one of the most well known of the "virtual oligarchs" (one of those in the handful of players at the top of the virtual economy) signaled some interest in the project.

Things took a hard turn when I was forced to cancel that project along with most of my Second Life public discussions and debates.  Perhaps I can discuss the particulars later, but suffices for now to say that many in the Second Life community have zero tolerance for critics and criticism.

Nonetheless, I did become more curious after the severe anti reaction I received. Especially so when even seemingly objective researchers and academics took a see-no-evil attitude, dismissing my analyses without serious treatment.

Even though I played the game myself on and off for more than two years, up until the middle of last year, I was still surprised.  The economic part of the game was always there, but never as a source of practically religious devotion.  What the hell is going on in Second Life?

Redeemable Virtual Tokens

The L$ is often referred to as a virtual currency.  In fact, it is not a currency at all.  It is a micropayment token system.  I have been around micropayment systems for many years in their application to mobile phone carriers.  The Economist (Feb. 17, 2007) features a cover story that includes discussions about micropayments vis-à-vis digital cash. 

Most justifications for why Linden Research had to create the L$ center around micropayment issues.  In reality, telecoms, Apple iTunes, Microsoft, and others have proven that floating an independent currency is not requisite to enabling a functional micropayment system.  I myself am partial to the iTunes batch-billing approach, keeping payments denominated in real currencies.  Even the more prepaid-credit approaches taken by Microsoft in the Xbox Live Marketplace avoid the complications of currency management introduced by independent, pseudo currencies like the L$.

Regardless of the reasons, the fact remains that the Linden dollar is objectively not a currency.  In Linden's Terms of Service agreement, sections 3.3 and 5.3, Linden clearly states that players have no financial or legal claim to their L$, and that L$ are a consumable entertainment product which can be revoked or deleted at any time, without reason.  Not quite up the standard of a fiat currency.

But Linden Research does promote, market, and manage the L$ as if it were a legitimate, independent fiat currency.  They operate an official "virtual currency exchange", the LindeX, on which players can either buy L$ with real money or redeem L$ for real money deposits to their PayPal or bank accounts.  And the redemption rate, or as they call it "exchange rate" implying the Forex equivalent of that term, is floating.

The Wiki on the Linden dollar asserts (emphasis added):

Residents may purchase L$ directly through the client, or convert between Linden currency and U.S. currency through either Linden Lab's currency brokerage, the LindeX Currency Exchange, or other third-party currency exchanges. The ratio of USD to L$ fluctuates daily as Residents set the buy and sell price of L$ offered on the exchange, and fluctuated between L$240/USD and L$350/USD between October 2005 and September 2006.

Virtual Interventionists

There are all kinds of macroeconomic tangents I could take at this point.  Without straying too far, we can safely say that Linden Research has taken on the role as "virtual central banker", and "virtual treasury", in minting and distributing their own "virtual currency".  (The Second Life economy is built upon a system of "sources and sinks" which, while sometimes cited as a monetary control lever, really more represent the virtual economy's fiscal policy.)

The exchange rate is not freely set by supply and demand; it is not a floating exchange rate.  In recent months, Linden Research has sold relatively large amounts of L$ themselves on their own LindeX market.   

Clearly a form of seigniorage (selling newly minted currency for net revenues), Linden claims they do this in order to manage L$ / $USD volatility.  In other words, they want to keep the redemption rate stable, right around the L$250-L$300 per $1USD range.  Currency intervention.

More economically astute readers will immediately recognize the conceptual and logical hazards and complications this implies.  Managing exchange rates of currencies is something which is extremely difficult, and terribly expensive to do over any period of time.  The lack of theoretical limits to how weak or strong various interests wish for a virtual currency to become only further complicates an interventionist strategy.

So, Linden Research is selling L$ which they print themselves.  Players buy the L$ with real money, but they don't really own the L$ they bought. And, Linden Research uses the LindeX pseudo-Forex exchange market in order to stabilize the redemption rate of these virtual L$ tokens.  So, will Linden be so willing to buy back L$ when demand falters?

Growth, Growth, Growth

Linden has boasted unbelievable growth numbers, even proudly displaying them on their Second Life home page.  In fact, Clay Shirky didn't believe the numbers, and challenged them in myriad forums (earning him fierce sometimes slanderous attacks from the Second Life faithful).  Eventually, Linden acquiesced ("Overcounts", Shirky) and provided more thoughtful statistics which showed that Second Life, while indeed growing rapidly as measured by first-time-visitors (account creations), in fact has only about 200,000 active users (those investing more than a week of time into the game).

From my perspective, these overcounts and growth exaggerations further aggravate my initial HYIP claims.  Simply, Linden Research cannot count on perpetual growth, given their own reported statistics, to support the L$ / $USD redemption rate.  They will have to start buying back a lot of L$ in the near future.  Or, more likely, the L$ will just devalue rapidly, leaving everyone with money left in the game S.O.L.

Not Just Words

I love narratives as much as any other blogger.  But, the proof is in the numbers.  I've taken the liberty to put Linden Research's own data through my analysis grinder, and I offer my results.

I created all these analyses from Linden Research provided data, using Microsoft Excel, Crystal Ball, SAS and my hp 49 g+.  Click the graphs to see the full size versions.

Conclusion:  The L$ to $USD redemption rate depends upon unrealistic growth assumptions.

The growth (charted in the previous section) depends upon the assumption of an exponential growth curve (yielding a coefficient of determination of 0.70).  Inspecting the actual forecast values clearly demonstrates the flaw in this assumption.

Supporting the current regime in which Linden Research is always a net seller of L$ in order to support (i.e. weaken) the L$ compared to the $USD, Second Life must register around 45 million unique players by the end of 2008; a growth rate of 40% per month by that point.  (Using an exponential growth formula, with conservative initial conditions.  This matches historical growth with R-Squared = 0.70).

Note, this is a ceteris paribus analysis. Linden Research could, and most certainly would attempt to use "virtual fiscal levers" with its series of controlled sources and sinks to strengthen the L$ in the face of diminishing growth.  I maintain, however, that these efforts will probably succeed only for very short durations and, like taxation in real world economies, ultimately produce far worse unintended negative outcomes.  For example, attempting to support L$ strength by forcing in-game deflation would almost certainly result in a serious "virtual recession" by depressing the game's "virtual commerce".

Growth is too volatile to count on going forward.

Absolute player growth, as measured by unique players and by registrations, produce equally volatile growth curves.  

At best, real growth trends experienced within Second Life are sporadic and barely predictable.  In this example, a 2nd order polynomial fit function still only produces 50% predictability.  Such growth is consistent with the type of media-induced hype that has caused a recent influx of new Second Life users, but which may be a short lived effect.

Growth of hours per player (unique) is even more volatile, and does not yield reliable regression predictions.

Summary statistics from Linden Research provided data for Unique Players, Registrations and User Hours, for reference:

Hours per total unique player is weakening even while hours per new player is beholden to spikes in media hype.

Take note of the consistent decline in hours per total unique player, barely breaking even from mid 2005 until only last month (January 2007) in an amazing reversal.  Historical trends predict future months will return to hours per unique player declines.

Hours as measured by allocation only to incremental new players produces more stable results.  Media cycles are more readily visible in this view also, as are periods of system downtime.  Summary statistics, for reference:

Most troubling, L$ Spend per Unique Player is weakening.

This again returns to the conclusion:

This chart shows the rapidly declining L$ purchased per new player as total unique players has grown exponentially.  L$ purchased per all unique players has also declined, although less rapidly, implying that most economic activity is supported by existing players, with growth in total L$ spending coming purely from new players trying the game, then abandoning it shortly thereafter.

One other bit to consider in the context of the above graph is the trend towards seigniorage. 

Unlike economies in the real world, the Second Life economy is strictly zero-sum. Therefore, every real $1 USD extracted from the game comes from someone who put a $1 USD in, whether directly from new users buying L$, or indirectly through internal "sinks", which amount to little more than the redistribution of players' future $USD redemption potentials.

High Yield Investment Programs

After reading and viewing the data and charts in this article, make up your own mind about similarities between the Second Life L$ based economy and a HYIP game.  The following are attributes of HYIP schemes and games.

• It is theoretically possible for a HYIP to be legitimate, and not a pyramid Ponzi scheme.  To date, however, all HYIPs have turned out to be Ponzi schemes.
• HYIPs are normally offered over the internet. 
• Entry costs (initial deposits) are very low, often less than $10USD. 
• HYIPs usually utilize e-currencies or virtual currencies, making it possible to accept very small investments and easily cross jurisdictions and other boundaries.
• HYIP virtual currencies usually introduce psychological "breakage" by being denominated in sub-penny units, making inbound investments, internal activity and unrealized gains feel larger to participants.
• HYIP participants strongly encourage and self-enforce thinking of internal activity only in virtual units, not in $USD translated value.
• HYIPs disclose little about internal strategy, management, or operations.  They often publish financial data, sometimes large amounts of detailed financial data, but they almost always refuse to do so in a meaningful, methodological manner which can be verified.
• HYIPs usually present emotional appeals, appeals to faith, promises of financial freedom, or promises of a new economic reality with active members best positioned to benefit financially. 
• HYIPs often claim returns of greater than 1% per day [that is an order of magnitude per year. Some Second Life banks offer 1% per day interest, incidentally; Many Second Life "businesses" boast 50% per month revenue growth].
• Three types of people typically enter HYIPs: 
  1. Naive, unwary, and ignorant.  These are most HYIP recruits.  They are usually recruited or referred.  They are attracted to the HYIP as a source of income, often one which they are desperate to have.  Once the HYIP fails, this group is often considered to be undeserving victims.
  2. Gamblers. A smaller group are those who know the HYIP is inherently unstable. Some even see it as a Ponzi scam from the start.  But, they calculate that they are early enough or can outsmart the game and earn returns nonetheless.
  3. Cheerleaders and shills.  Some in this group are the organizers or first entrants.  Others are those who've realized small profits from the game, and seek to grow the game in order to push themselves up in the pyramid structure, thereby amplifying their returns.
• Most HYIPs are positioned as low or no risk opportunities, being that little money is needed to start, and time invested is not considered a cost.
• HYIPs are zero-sum games by definition.  All realizable returns come from real money investments. 
• Forum, blog, and email list users will gain trusted reputations, ensuring others they have indeed been able to withdraw real profits.  They will quickly surround, counter and drown out any criticisms to the contrary.
• These games are not defensible as lotteries (although some have used this legal defense) because the odds of winning returns cannot be calculated ex ante.
• Public forms which endeavor to monitor HYIP games and warn unwary investors are nearly always overrun by cheerleaders and shills.
• The mainstream media often mistake HYIPs as legitimate, lacking understanding of internet communications (and thereby ascribing credibility to testimonials by cheerleaders and shills).

It is often argued that the Second Life virtual economy does not qualify as a HYIP type of structure because the nature of internal commercial activity largely involves productive endeavors.  By productive endeavors they are generally referring to virtual item design and creation.  At a detailed level, these are largely graphics design, 3-D computer modeling, computer art, and script programming activities.

I maintain this is false.  While lower-level players may earn some returns, by and large their investments into the game (both capital and labor) are trapped and not monetizable at fair market redemption rates.  Two detailed responses to the productive endeavors objection:

1. It is unclear how much of a percentage of the virtual economy is driven by these "productive endeavors" versus the online gambling, sex and real-estate markets.  The first two are clearly not productive endeavors and likely constitute a significant portion of the internal L$ economy. The latter is by definition not creating financial value because players have no financial claim on their virtual property -- they have no effective virtual property rights under current US and California laws.  Further, there exist no supply or production function restrictions which would enable long-term price stability of virtual real estate.  Over time virtual real estate will be worth only its marginal cost to provide as a product (disk space, electricity, router depreciation, etc.).
2. Productive activities produce real returns for players only insofar as they are able to redeem L$ cash flows for real money -- players have no financial claims on anything which resides on Linden Research's servers or network, including Linden dollars (only on limited forms of conceptual intellectual property). The continual weakening of the L$ by Linden Research is a mechanism by which potentially realizable financial gains instead accrue to the game's organizers, and to others with a similar ability to run their own L$ - $USD redemption exchanges.  Therefore, these players, even while feeling they are engaging in productive endeavors with positive financial returns, more serve to enrich those at the top of the game while also acting as testimonials to attract new game entrants.

Cult Second Life

I learned a valuable lesson my first go around with the Second Life faithful.  Second Life is not a game to many involved.  It's more of a cult.  I attempted to honestly engage all of my critics. Unfortunately, I learned that such is a wasted effort when dealing with the blind faith that afflicts Second Life True Believers.  In the end, it's not all that much different from trying to talk rationally with someone about Amway, Herbalife or Robert Kiyosaki.

OK, one thing really annoyed me.  A few supposedly prominent Second Life blog authors dismissed my first article because I was anonymous.  In fact, I was not and never have been.  But they, like pretty much everyone else in the Second Life universe, were.  [Shouted Elaine Benes style through a hand megaphone] "You're Anonymous!"

And a Disappointment...

I was particularly disappointed by some in the academic community, as a response to my original article.  I understand and appreciate the intense interest among academics in Second Life.  Indeed, many are interested in aspects of sociological, communications, pedagogical, and cultural phenomena related to the Second Life Virtual World.  I cannot speak to these topics with any knowledge or authority.  However, I am baffled by the response from some "virtual worlds economics" authorities.  One response in particular dismissed my first article as "so obviously wrong it was hardly worth discussing".  Further, it went on to claim that harsh criticisms such as mine threatened to destroy the very future of Virtual Worlds.  And, finally, we were told that Second Life is really a lot like fictional "Mayberry", and not the brutal world of markets and numbers I suggested.

That response stretches the credibility of its author.  If one guy can knock over Second Life or the future of Virtual Worlds in general, then they are hardly deserving of our attention.  And, Second Life is "so obviously not Mayberry", on so many levels, that "it's hardly worth discussing".  I cannot help but wonder what vested interest one has in Second Life in order to resort to wholesomely painting it as the black & white home of Any Griffith.  Just a few obvious shots (the Second Life echo machine's endless repeating of the Mayberry analogy set these up for me, even if they are easy targets):

• Mayberry never printed their own money.  No one spent Barney Bucks at Walker's Drug Store.
• If Mayberry started printing Barney Bucks, Andy would have arrested them for counterfeiting.
• There weren't all too many prostitutes and call girls hanging out at the Mayberry Hotel.
• Myer's Lake was not a big casino where people sat around playing rigged Tringo games and got paid to sit in chairs pulling rigged slot machines.
• Explicit interspecies sexual role playing wasn't seen as mainstream behavior, not to mention ageplay.
• Tax evasion, money laundering, gambling, sex trade?  No, all Mayberry had was a tad bit of moonshining from time to time.
• Eventually Wal-mart would have put Weaver's Department Store out of business, despite the protestations of any authoritarian artisan community or overtly anti-capitalist Bourgeoisie.

Corrections and Press Policies

I will make corrections, as discovered by myself or readers, to the original article by annotating such within the original work.  These notations will consist of bracketed annotations "[]" and strikeouts "strikeouts", as appropriate.

Unfortunately I cannot accept requests from "mainstream media" for interviews or commentary.  I will respond to emails which request clarification or explanation about something I have written, although I much prefer use of the open comments section on the blog site.  Mainstream media is defined as newspaper, magazine, radio and television.

Disclaimers

• I have no connection to Linden Research, Benchmark Capital or any other of Linden Research's investors.  Nor have I intended to imply any such connection exists.
• I have no connection to any competitors of Linden Research.
• I have received no compensation, cash or otherwise, for this article and associated research.
• I provide this information free, and do not restrict its usage except to reserve normal author's copyright.  In other words, please don't rip it off and present it as your own work.
• All information contained herein are the opinions of myself and not necessarily the other Capitalism 2.0 authors.
• All information presented here as metrics, quantities, and data are, to the best of my knowledge, based upon factual information as provided by Linden Research.
• I do not make any statements about the integrity of data provided by Linden Research.
• "Forecasts", "Predictions" and "Extrapolations" are statistical methods which endeavor to make rational statements about the future by using properties of historical data.  As with all such things, past performance is no guarantee of future performance.
• I provide all this information to readers free of charge, and without other consideration.  Any decisions made based upon this work [are the sole] responsibility of the reader.

Comments

[Petey]

I was entranced by this article, randolf. Thanks for all this information. You've confirmed, with numbers, what I've felt to be true for some time.

One rebuttal that I foresee from the cult crowd is that the drop in value per unique user can be attributed to more registrations, especially more registrations of alt accounts (unlikely to have value attached to them) or of people who simply registered and grew frustrated and never came back.

But if those points are asserted to your argument's detriment, it also presupposes the still largely unacknowledged (among the MSM) truth: Second Life is not, after all, serious business.

[Rod]

I'm no economist, but I think this is a great article. I'll confess that when I heard someone describe making money in Second Life I had this sudden vision of a giant craft fair enclosed in a bubble with tool booths at all the exits. While many people make money selling crafts, it doesn't strike me as a solid foundation for a real economy.

[Tom]

One rebuttal that I foresee from the cult crowd is that the drop in value per unique user can be attributed to more registrations, especially more registrations of alt accounts (unlikely to have value attached to them) or of people who simply registered and grew frustrated and never came back.

That is a vey good point. It would be interesting, then to see how the numbers scale with "daily unique logins". That number is not directly published by Linden Lab, but can be reliably derived from the 7, 14, 30, 60-day unique login data they do publish.

By plotting the published uniques and fitting a curve to the data (a power-law fits the data with R^2 greater than 0.99), one can extrapolate to t=1d to get a very good estimate of the one-day unique logins.

Digging a little deeper, we can also get a good estimate of the growth rate of daily unique logins (the average rate of increase over the time horizon T goes roughly as exp{0.017 T}), and find that the average time for daily unique logins to double is around 130 days. This indicates that simply compounding the 1-month growth rate along the curve will cause one to dramatically overestimate the true population as a function of time.

Randolph, I've got this information tabulated as far back as the beginning of October. I'd be happy to tidy it up and pass it along if you'd like to add another dimension to your analysis. Feel free to drop me a line if you'd like to discuss.

[randolfe_]

The fact is that there are less real dollars being spent on L$ per user, whether measured as all unique users, registrations or incremental new users.

There could be any number of reasons for this. It also is not unexpected; it's part of a typical adoption curve. As more mainstream customers come on board, they often contribute less margin per head.

But the L$ masquerading as a convertible currency complicates things.

Ignoring why there is less $ spent per player as # players grows, there has to be an ever accelerating number of new players or there will be a decrease in demand for L$, and thus an ever weakening L$.

Or, Linden will benevolently start buying back L$ from players [running virtual businesses] in the game looking to cash out L$.

Or, the SL L$ economy will shrink -- virtual recession/depression.

Two of those three outcomes mean that those with L$ based "wealth" will get screwed. As with HYIPs, timing is everything.

[IAmEric]

I would be interested in discussing these issues with you. I strongly disagree with your arguments and thought we had made some progress towards a compromise position over at Terra Nova, but I see you've returned to your extreme views. If you're interested in a serious discussion, could you give some assurance that you are not merely trying to create a "buzz" and traffic to your web site? I'm not really sure where your motivations lay. On the face of it, it almost seems like you're setting up straw men just to knock them down. I'm not sure what you think you have contributed that is new and I'm not sure how much you have bothered to read what others have said before you.

[Alan Fleming]

Interesting article. I'm not 100% sold on it because it assumes the key base metric is total user numbers. I get the (unsubstantiated) feeling that the more important metric is active users in-world - how do your stats look if you use that as the base assumption? I'd love to know.

[randolfe_]

Eric,

I have read everything, including a lot of barely comprehensible hate mail, and considered all viewpoints to the best of my ability. That is, by the way, in stark contrast to the our last discussion's host over at TN. Apparently he doesn't need to bother with evidence questioning that which he already knows to be true.

My compromises have been acknowledged in this article. I never intended to acquiesce on my contention that "virtual currencies" in the mold of the L$ are unnecessary, ill-advised, and perhaps intentionally self serving.

Tell me, please. Why exactly does Second Life need it's own currency? Why not just let people spend and keep real money without being forced to surrender it to the game's good will?

[randolfe_]

Alan,

That is a good point, and in light of Tom's earlier comment, I think we can explore this line of analysis. If Tom's model can accurately interpolate the unique daily logins, and we can make some assumptions about hours per login session, maybe we can make some informed statements about concurrency trends.

That would also enable us to further confirm or disconfirm whether increasing L$ demand is churn-based instead of value-based.

[randolfe_]

On Motives:

Just to diffuse the typical allegations, I just checked the ad-revenue meter.

Your current earnings balance: $2.14

Seriously, if anyone can tell me if/what I've gotten wrong about context ads I'd be grateful. I'd just like to break even on bandwidth costs.

[Cyde Weys]

Randolph, I've been experimenting with Google AdSense as well and I've written a bit that you might be interested in. The basis synopsis is thus: you need to be a largish site to actually make money off advertising. If you're a smaller site, you just aren't going to get the site-targeted ads, and so you only make money when someone clicks on an ad, which for a small site is very rare. My AdSense earnings are just under $7.00 :-/

[Allen Sligar]

Interesting analysis, I'm going to have to agree with Alan though, a position posited on exponential growth curves invalidates your conclusions in some respects as an illogical economic outcome.

You'll have to go after a harder target and that target is daily concurrent users, $ spent, time spent in game.

You should then be able to extrapolate a mean $/user/time ratio and predictively model what stabalization methdology would be required to maintain L$/USD stability over time based on:

1. Registered users
2. Conversion rates (number who adopt SL and participate
3. Extrapolate "what type" of user they need to adopt, i.e. They need someone to convert to a paid subscription basis and spend X amount of time X and engage in X amount of economic activity to achieve price stability, without dilution (printing thier own currency).

Also there are two areas that would provide more relavence:

1. LL controls prices through supply/demand mechanisims on a marco scale via land creation

2. All VW currencies devalue as the population declines (demand). I brief study of MMOG's and RMT should illuminate this point. This is why gold farmers move from game to game, and allocate resources based on where the highest returns are (highest demand curve).

Note supply is never an issue here because supply is unlimited or rather inelastic, whereas demand is premised on popularity.

In summary as long as SL maintains a stable and incrementally growing number of concurrent users, who maintain a reasonable level of economic activity and LL continues to maintain a high value/scaricity for land prices. They should maintain price stability.

All this is premised on maintaining SL popularity. And not unlike any other MMOG, which engages in marketing to obtain the largest number of users possible.

Therefore SL is merely engaging in legalized RMT.

Anyhow good run down, as an objective observer (I see value in SL as a VW, and an economic experiment, albiet one with many caveats) I think your getting as close as your going to get with public data.

However there is one thing I think you and Shirky need to realize, its highly unusual for any game company to release numbers, hard numbers or otherwise. I think LL should be commended for that, even when you disagree on thier business practices you should at least aknowledge their taking this step and going where no other game company would dare step foot.

In this, it serves as a good experiment as well, does transparency lead to positive or negative outcomes?

Thats the take away on a larger scale that every other game company watching this debate is going to learn. In essence this effects VW/MMOG's going forward.

[Ordinal Malaprop]

"Honestly engaging" in general does not tend to mean "dismissing all of their points out of hand and continuing to characterise the entirety of SL as an investment opportunity for people who don't want to do anything, and a bad one at that". I have no interest in getting into this again.

Suffice to say that if you can dissuade people from entering SL to make money, you are very much serving my interests. Please, anyone reading this: do not enter SL to make money. Stay away. It is a _rubbish_ way to make money. Assume that, once you join, every dollar you invest will achieve zero financial return, and you will have the right attitude.

[randolfe_]

Allen,

Your points are well taken. I whole heartedly agree that concurrent usage, probably as measured by hours per unique login per period, is the ultimate key to long-term price stability.

It sounds as if we can build a reasonable model based on the data Linden has provided to that end.

But, you hit on a key point I have found through my writing on this subject is missed by many of the Second Life cheering squad: it is a game and its price stability as related to the value of the L$ is dictated by the popularity of the game. In my first article I probably received over 20 emails complaining that I even dared to call Second Life a game.

The previous poster is a case example. I do not dismiss any of the non-game things people cherish Second Life for. I simply stated that I cannot speak to these subjects with any credibility, so I don't. I am only talking about the Second Life *economy*, not all the other stuff. Borrowing the vocabulary of a Terra Nova professor, Second Life's other attributes could be the Bees Knees, but all I care about in this critique is the L$ Economy. And, it is the L$ Economy that the media keeps echoing over and over (see Forbes online today, for example).

I do commend Linden for releasing numbers; were I advising their management, I would recommend releasing practically nothing. But then again, were I advising them I'd have them using real-money and a batch-payment processing micropayment system and not playing pretend nation builders.

[Economic Mip]

Fairly new to the whole Second Life argument, but I see the Linden as being a very unstable currency. consider this: the official exchange rate of Zimbabwean Dollars per US dollar is 250:1. Yet this rate is unrealistic, and caused an absolute lack of credibility in the currency and government behind it, something bound to happen to Linden Labs.

I would also be interested in your thoughts on whether people from Iran and North Korea playing in Second Life is a violation of US embargoes against those countries.

[Dave]

I suspect that the L$ may be more stable than you expect, or at least that it is capable of surviving to have a 'soft landing'.

It is very likely that, in printing L$ to stabilize the exchange rate, Linden Labs is making a tidy profit, or seniorage. The questions to be asked are:

1. Is it likely that there would be a 'run on the bank', as large numbers of people try to get out of L$ in a short period of time?

2. If there was a run, would Linden pay to maintain the value of the L$, or devalue it substantially (to, say 2000), or would they devalue it a little and try to hold things together?

3. Absent a run, is there any reason to doubt that Linden Labs has the ability and self-interest to maintain a semi-stable L$ versus the US$?

I think that the answers are:

1. Depends on mob psychology.
2. Maybe. Depends on the psychology of Linden's investors.
3. I think that they can hold it together.

After all, from the point of view of Linden Labs, this is kind of like a gigantic versions of 'Sim City'.

[Mark Herpel]

I liked your first article and the information you provided. I did not agree with it, but it was great article and interesting reading. I don't doubt that its gone for good.

There is such a thing as too many numbers and you are displaying them above. (lex parsimoniae) Keep it simple, HYIPs are frauds they say one thing and deliver something 100% completely different. That is not the Linden dollar or SL. You can apply all the math theory and projections you wish but it won't change the concept...get back to basics, HYIP=FRAUD/SCAM/BIG LIE, no matter how many people think they are playing or investing-> its a fraud. The Linden Dollar is a virtual game currency, now you may want to quantify that label with lots of explainations and wiki links, but whole concept of online currency is new to the world these past years and none of those will labels stick, at least not for a few more years.

If there were 100 or 200 'agents' exchanging the L$ and USD the 'exchange rate' would be more level and the market more liquid. Its not fair to compare the L$ to any HYIP/Fraud or Ponzi, that is not accurate. Its more like an OTC stock in that there is no super large liquid market of buyers and sellers so the more you sell the faster the price or rate falls. Simple market reality. Give it time.

Mark

http://www.digitalmoneyworld.com

[randolfe_]

Mark,

HYIPs are not frauds by definition. It is only ex post that they are Ponzi schemes. While one is in operation, it is not necessarily illegal or fraud. That's the whole problem/debate around HYIPs.

The problems with the L$ are not simply liquidity, and I strongly suspect you also know that. There is no shortage of people like me who attempted to deliver such liquidity, only to find out that "currency management" only cuts one direction.

I have a simple question for you. How can there be liquidity without arbitrage, the very thing that literally hundreds of Second Lifers emailed or commented to me was the whole reason I didn't "get it". Even one guy above said something about the problem being "people who think they can make money by doing nothing". Apparently liquidity is not a goal of either LL or SL players.

Incidentally, liquidity is seldom honestly pursued by organizers and leaders of HYIPs either.

And one final question. I have yet to hear any compelling reason why Second Life or any other similar platform needs its own independent currency. I'm really waiting to learn that I've missed some huge fundamental reason that batch payment processing or non-redeemable payment credits are not sufficient, even though they work fine for platforms thousands of times larger and more active. Why does having an avatar mean I need to have cartoon money too?

[Petey Awful]

"Why does having an avatar mean I need to have cartoon money too?"

Because, randolf, as long as you have the illusion that it's all Monopoly money you don't feel quite so ashamed at spending real money on your little virtual world.

[Dan]

Most importantly I'd like to say keep going! Your posts are interesting and I for one enjoy reading carefully considered ideas from people with opposing views. The world is nothing without free and open debate.

I'm not an economist unfortunately so can't get to the bottom of all that I've read here. However I will say this, SL is many things to many people. If there are those that wish to seek out profit I wish them nothing other than the best of luck. However for many the $L is indeed simply a micropayment, something we use to fuel our 'entertainment'.

I spend most of my time in-world designing, building and scripting objects for use in the education side of SL, a side in which I believe SL has great potential. As with much of the education community I endeavour to share objects freely, another valuable side to the world (although not the economy).

For me whether you love or loathe SL (including the 'economy') it is simply the notion of such a world and its inherent potential that is worth celebrating. SL won't be here forever, but nevermind, what surpasses it should be much better :-)

[randolfe_]

Dan,

I hope I've made it clear that I don't take any issue with all those other great aspects of Second Life. There are many good things going on there, just as there are some not so great things -- just like in the real world.

My singular issue is how the media has become a hype-tool for the SL "economy". The real story is Web 3.d or distance education or the evolution of how we all communicate. But all the promoters fan into the media machine is "virtual gold mine" crap.

And the SL economy, as it is structured, is a perversion. It doesn't have to be that way, and I don't know if it's intentionally that way or just accidentally that way, but that's the way it is. And the SL economy status quo cheerleaders are cynical, self-serving, or worse.

Those who *really* care about the SL platform, potential, and promise shouldn't be rallying around defending this regime. They should be demanding its immediate reform.

[randolfe_]

I earnestly repeat my question. This is not rhetorical.

Cynical reasons aside, what legitimate reason compels Linden Labs to need an independent, convertible currency?

Are any e-currencies or virtual-currencies ultimately legitimate? Can someone provide an example that doesn't involve conspiracy theories, supernational one-world fantasies, or just a desire to have money that isn't easily tied back to the gambler/launderer/etc. ?

[Interfect Sonic]

Those are some bad R^2 values. Anything under about 0.8ish should be thrown out, and you have some as low as 0.5. Maybe you should use some different trend line functions?

[Unacceptable]

Nazi Linden Labs and SL players must accept criticism and allow players to evaluate the truth behind their clams through in-virtual-world experimentation and surveys. Legal action must be needed here.

[randolfe_]

Interfect,

The RSQ numbers are terrible in some of the graphs. This was intentional to show the data is volatile and not likely to yield reliable extrapolations.

On one of the Second Life "official" blogs an author questioned why I halted at 2nd order curve fitting; he suggested I should have used 10th order functions.

I'm sure more statistically inclined folks see the flaw in simply finding the function that connects the dots. I'm not sure I'm even comfortable defending a 2nd order model if really taken to task.

And, I didn't really go all out and build a full fledged hypothesis testing model. My analysis here is strictly simple regression, mostly because I lacked the time (and interest) to try to fully test a number of multiple regression models and work out all the multicollinearity.

[wotevar]

Your article is as irrelevant as it is amusing. Such concern for silly monopoly money from someone so uninformed about Second Life that he calls it a "game"...

The Linden-dollar is irrelevant. I've never bought or sold a single L$.
I do my business in real money, for I wholeheartedly believe that the promise of Second Life is not about the fake money, but rather about its technology.

I do not care how many people there are in SL. I don't really know many of them. I don't bother with silly marketing projects. My clients want to use SL as part of their workflow, integrated with their core business, to get an ROI.

All of those silly content companies popping in and out of existence will be dead within a year if they don't realize that there's more to the internet than advertising.

I would still make just as much money if I had a single copy of the SL client and server, even if nobody else used it in the entire world, and there was no builtin money feature.
SL is a content development tool. It will continue becoming more and more of one, and less of a community or world.

[Michael Webster]

Randolph;

Help me out here, because I am pretty sure that I am missing the argument. (But actually accept the conclusion: why should there be a cartoon currency instead of micropayments for entertainment?)

Suppose we have a monopoly game with 7 players, everyone pays a $20 entrance fee, the bank is fixed and the winner of the game gets everyone's money, less say 10% for the house.

Nothing wrong with that. It is a zero sum game, with funny money, but a fixed real/funny payout, 0 for most and $126 to the winner.

Now suppose that we let people cash out in the middle of the game, and give them their expected value based on their position, less some cash out fee. Still nothing wrong.

Next let the bank print more money inside the game to facilitate trades and building during the game. Again, we are changing nothing to the basic structure of the game or payout. My monopoly money, if a I am winner, is formally devalued, but nothing about the basic bet has changed.

Next, the bank not only prints more money but adds new people to the game, perhaps as limited partnerships with the existing players. The bank receives new real money, prints more cartoon money and receives its house share.

Again, I don't see a problem with this more novel monopoly set-up. Fraud has not been imported by any of these rule changes.

As far as I can see, the Second Life game is sufficiently like the novel monopoly set-up.

Where have I gone wrong in my reasoning?

[Prokofy Neva]

It's interesting how you've laid it out, and you're right that there are various paid LL evangelists and unpaid cultic shills all over the SLogosphere, but there's also the "backlashistas" who become cultic and obsessed about backlashing on SL, even when presented with legitimate growth numbers -- like the 57,000 premium accounts which is a number that has boomed (since June 2005 when it was 5,000), or the numbers of people who have spent at least $1 inworld, i.e. in January, 187,000, which is your real, publicly available number, if you find the 3.5 million to be absurd (we all do).

I particularly enjoyed your remarks about Mayberry. No, Mayberry didn't have prostitutes or ageplay or gambling and it also didn't have things like rental agents who fraudulently sell land on islands, evict the tenants, and re-sell the land again, with impunity.

And no, Mayberry's banks didn't print money like Yeltsin printed the ruble in Russia, leading to the krakh or ruble crash in 2002-2003.

But Second Life is still a lot more like Mayberry than you seem to want to give it credit for, with thousands of people interacting, buying, selling, socializing, learning, etc. as they would in Mayberry.

It is important to remember this is a synthetic economy. It is something that is more than just some Internet gold-selling hype page, and much more than just a mail scam. It's a world.

The Lindens put up the notion of the "licensed game token" instead of fiat currency precisely to avoid not only claims by governemnts for taxes or 1099 forms for employees or whatever, but to avoid a demand that they have to buy back that currency on demand.

They don't. There is nothing in the TOS that can be construed that says LL has to buy back any of the Monopoly money in your account.

The interesting thing is that even before there was a LindEx, anonymous avatars kept their own thriving forex going at Gaming Open Market, now defunct (and GOM'd, as the saying now in the vernacular has it -- co-opted by LL). And at its peak, before LL announced its competition, it had rates of $4.25/1000 without any of the manipulation you see now on the Lindex (indeed that's how the price could rise -- people valued it).

As for the absolute numbers of hours going down, Raph Koster has written about this: when you start a game/world, the early adapters spend long hours leveling up or mastering the tools and in the case of SL, are the ones who created a lot of the content, scripted items etc through long hours.

The generations of people who come later are more casual. So they might log on for only 2-4 hours to socialize and dance, not 10 hours to animate the dance poses that make a chorus line.

(I'm still hunting for the articles where he says this but it's definitely on his site at www.raphkoster.com)

Raph Koster is no Kool-Aide drinker of the SL brand. His response to this article reminds us of *value*. The "labour theory of value,* in fact.

People labour, level up, make stuff, and others value their labour and product and pay them for it. It's an economy. It may be a crude and synthetic economy, but it's meant and understood as and participated in as an economy and a world, not an "investment scheme".

Randolfe, your writings remind me of Russia again. People in Russia do stuff like dig in the cold dirt and produce some wilting cucumbers they sell at the metro for 5 cents and survive -- long labour, little pay. Or they are relatives of the party boss who used to control the carbide factory and they somehow get their hands on the plant and its products and they become oligarchs and make a fortune. Or they are propped up by the high price of oil now. Or whatever. There's huge volatility, there's huge scheming and corruption and syntheticism everywhere.

That doesn't mean the old babushka digging the cucumber and selling it and the person buying it are taking part in a scam run by ex-KGB agents. Nor does it mean that, say, Harvard gurus who unwisely engage in inside dealing and get involved in loans-for-shares as an "investment" (for which they're found liable later) are somehow the norm. They are just one racket that appeared among many around the phenomenon called "The USSR has the largest firesale in history".

People coming on this economic "miracle" might make a bundle or might lose their shirts, depending on things like their proximity to the mayor's brother-in-law and their ability to buy/bribe for the right license.

But none of that takes away from the reality of the lady who can now sell her cucumber, wilting that it may be. It doesn't take away from the hundreds of women now with international modeling careers, even if their lesser sisters are victims of sex-trafficking. It doesn't take away from the thousands of legitimate Russian businesses that manage to get started in the Wild East environment, whether book publishers or processors of fruit pate.

My point is that Second Life is that kind of complex organic thing, even though it has the rigged and synthetic and corrupt and misleading factors of a Russia in the 1990s, and the government in it is also printing and selling the currency.

It's a far more complicated -- and therefore optimistic -- story than you've rendered it. The servers are more likely to collapse before the economy does. But that's why the people will be able to pick up and just move to new servers put out by this company again or another.

[Prokofy Neva]

>SL is a content development tool. It will continue becoming more and more of one, and less of a community or world.

wotevar, whenever I see this kind of tekkie platformist talk, I have to ask, ok, the people in this world are all just load testers for your august software making experience, their economy and lives are mere beta testers for your fabulous coding career, but then...what?

So you took this content-creating-tool. You...then have to ultimately make...content. And then...who will buy it?

Or you think you'll just perfect it and sell it or hand it off to other people who will do all that messy making of worlds and communities that you scorn.

But how will they do that completely shorn of any context to the development itself? Why won't they get to have any say in, or participate in the development of the tools, as they would in a real-life government drastically affecting their lives?

It's that narrow-band perception of the tools and platform as a neutron bomb that regularly removes all the living people on the platform for the sake of the development of the security device that is one of the most nauseating aspects of the formation of the Metaverse.

I don't think you can make a content creation tool in isolation from its users in that fashion, and yes, that means you have a world.

[randolfe_]

Michael,

I think the simplest answer to your very reasonable analogy-question is:

Your situation has a known, well understood end-game in which all "losers" get no payout. I do not think this is largely believed, understood, or communicated by the SL economy advocates.

You also assert it is a game, which I largely agree with. But that contention alone will get stuck in endless arguments with the SL community and related researchers.

An earlier commenter posited a very simple equation: These games hold value while they are popular. When they lose popularity, they lose value. If you can get the SL opinion leaders to agree with that, acknowledge it, and preach that message, I'm on board with your analogy.

[randolfe_]

Prokofy

Again, thanks for your contributions. I hold you in particular regard for being willing to debate these topics in a reasonable manner. I must credit you with the term "authoritarian artisans", which I used in my article.

In light of my last comment to Michael, I would contend that if Second Life did not use L$ monopoly money, but instead a conventional micropayment model with real money, then the economy's "value" would be exportable and capable of surviving an "end game" scenario. Someone else could take the bits and reassemble them on new servers, or the whole thing could open source. A lot of other dynamics would change, but people would retain their presumably realized profits, and not be forced to relying on the external economy for realization.

I like all your Russia analogies, but I think there is a fundamental difference. Russia was an independent economy, even during the default era. Second Life is a dependent sub-economy, which is incapable of producing realizable value.

Or look at it like this. The Russian from Novosibirsk sells her wilted cucumber for Russian currency. She spends that money at the market, and gets to eat borsch that night. She has produced and realized value, without needing to resort to exchanging her many rubles for a single Yankee dollar to accomplish that.

(OK, so I know that dollars and euros comprise(d) a whole underground currency market, as happens in every hyper-inflation situation, but you get my point.)

[Eloise Pasteur]

As the person refered to in this comment:
>On one of the Second Life "official" blogs an author questioned why I halted at 2nd order curve fitting; he suggested I should have used 10th order functions.

For the record, despite your quotes around official, Second Life Insider isn't run by Linden Lab, nor to the best of my knowledge funded or supported officially by them. You might also like to check the gender of your personal pronouns.

You went on to say:
> I'm sure more statistically inclined folks see the flaw in simply finding the function that connects the dots. I'm not sure I'm even comfortable defending a 2nd order model if really taken to task.

Actually, since we're in a forum where discussing things in full detail is encouraged the reason I suggest 10th order poly's is your R-squared values are low enough that I don't trust your extrapolations. Raising your R-squared so I did would take some higher level of polynomial, and I'm enough of a statistician to know that his its own issues. The trouble is, you go on to make a series of points that rely on your extrapolations, and you make them without caveat. The academic writer that I was trained to be objects to such loose writing.

Finally, deep down in your comments, you publish your caveat:
>The RSQ numbers are terrible in some of the graphs. This was intentional to show the data is volatile and not likely to yield reliable extrapolations.

It leaves me wondering just why you make such strong assertions about the data supporting your point of view, when, under pressure, you say that they don't yield reliable extrapolations.

I still wonder if you're right. I just don't trust the data that you claim support your argument, and find it all to easy to dismiss the argument you present when you are using extrapolations that fit so poorly to the actual data.

Debating opinion is fine, and good. Claiming your opinion is supported by your data when that assertion is more than questionable raises questions about you having an axe to grind again I'm afraid.

[Tom]

"Actually, since we're in a forum where discussing things in full detail is encouraged the reason I suggest 10th order poly's is your R-squared values are low enough that I don't trust your extrapolations. Raising your R-squared so I did would take some higher level of polynomial, and I'm enough of a statistician to know that his its own issues."

Population numbers are clearly the result of a stochastic process. Using higher-order polynomials in an attempt to get a higher R^2 is about the worst thing one can do in such a case. It's much better to try to find some reasonable mean behaviour and try to quantify the variation around the mean by calibrating the random behaviour.

In any event, R^2 isn't always a reliable measure of goodness of fit and shouldn't necessarily be the deciding factor in tuning a model.

I mean, we could always use an N-1 order polynomial fit to our N data points and get a perfect R^2 = 1. Would that be a good model to extrapolate from? Doubtful.

[randolfe_]

Eloise

My apologies on mistaking your gender. I inadvertently mixed you up with the guy (I think guy) from Reuters. I offer in my defense, however, I can hardly keep track of who's a guy, girl or furry when everyone has superfictional names as such. I got beaten up last article for refusing to use gender pronouns (which I did to intentionally highlight commenters' anonymity).

The RSQ of the exponential growth extrapolation is .7018. Not a great RSQ, admitted. But not irrelevant either. To be honest, I kept the power law down because poking around with higher orders caused the growth to explode faster. Originally, using a 4th (or 5th, I forget now) order growth curve I found that by 2008 there would have to be over 200 billion account registrations. I decided to take a lower RSQ to be conservative. It is fair to criticize that.

That explanation also applies to the terrible RSQ value in my composite "graph" of 0.5234. When I turned up the powers I got a gloomier outlook. I took some qualitative license, but still published the numbers so people like yourself could take detailed issue, as you have.

My analysis is far from perfect. I have already gained insight from this thread's comments that are contributing to my experimenting with another contributor to create a more comprehensive statistical model, based on concurrency and logins per time series.

By the way, my qualitative conclusions about spend rates were based on the more conservative dollar per total unique users, thereby addressing the growth-of-existing users versus churn-users. That RSQ was 0.886. Not terrible.

[Addendum: my apologies also on mistaking your blog entry as "official". It was a third party in my last article's comments who referred to Second Life Insider as 'official'. I should have verified that.]

[randolfe_]

As Tom points out quite eloquently, there is an assumption the underlying virtual-world population is a lognormal stochastic process.

I think the related pdf and cdf curves can be safely assumed.

We're really just arguing about the sigma of the lognormal pdf, I suspect, in regards to curve fit.

[robusticus]

Randolfe,

I think you lost a bit of credibility when you said, in effect, "Unlike SL, WoW is a market economy"... I stopped paying attention at that point.

I just got the impression it was sour grapes because you can't be a land baron.

[robusticus]

That comes off a bit harsh... what I mean is, I think alot of academics appreciate your method, the level of detail, but some of your premises are very wrong.

What do you think of Entropia and DKP systems?

[inside SL]

Interesting article. Now you can vote it here

[randolfe_]

Robusticus

I think you lost a bit of credibility when you said, in effect, "Unlike SL, WoW is a market economy"... I stopped paying attention at that point.

I don't recall making that statement. Can you cite a reference? I don't talk much about WoW.

[randolfe_]

I think alot of academics appreciate your method, the level of detail, but some of your premises are very wrong.

To date none of those academics have shown the slightest interest in testing those premises. Just saying they are very wrong does not make them so. But then, a certain breed of academic will fiercely defend their position to a point of religiosity.

If you'd like to debate the premises, fine. I'm not interested in broadening the scope of this discussion beyond SL and its L$ economy in this thread.

[robusticus]

"And by the way, the value of things in WoW, EQ, etc. are also set by the market."

On this discussion:

http://terranova.blogs.com/terra_nova/2007/01/sl_economy_misu.html#comments

While I respect your desire to limit the scope, there is real value in commparison of various virtual economies.

[randolfe_]

Robusticus

Yes, I recall that discussion now. Thanks for the link.

I was making a theoretical statement about supply & demand and price functions. Everything in WoW and every other non-sanctioned RMT environment is valued by a market process. That market is just driven by a number of externalities. The "internal value" of monetary units in WoW et. al., however, is not anything like the L$. I recognize that, and wasn't intending to make that parallel.

I would love to make comparisons to various virtual economies. I require more data before being willing to make analytical statements to that end, though. I cannot make an intelligent statement about Entropia, for example, except as theoretical arm waving.

[randolfe_]

Perhaps a good place to start is helping me to overcome this basic premise:

Virtual Worlds do not require independent virtual currencies to be successful. Micropayment systems are sufficient.

A corollary is then:

Micropayment systems based upon and denominated in real-world currencies are preferred to the implications of managing an independent virtual fiat currency.

[robusticus]

Doesn't Visa charge 3% per transaction? Not sure if/how Apple and MS have gotten around that.

Also, when purchasing something in SL you can do it in USD, for an unfavorable rate. Similar to how VanCouver businesses take green money... just at a 25% rate premium over the banks. I thought that was a bit funky, myself.

[Tom]

Also, when purchasing something in SL you can do it in USD, for an unfavorable rate.

If you're referring to people transacting for land etc. via PayPal, that is specifically outside the realm of this analysis. USD transactions certainly aren't part of the in-game economic structure Linden has constructed.

[Eloise Pasteur]

Having had a chance to catch up - I'll bite on your two statements three posts up, in summary:

1) Micropayments are sufficient and viable
2) Micropayments are preferable

I don't know enough about how micropayments are managed to comment in detail. One obvious thing that springs to mind: mobile phones, the Apple Store and Microsoft almost certainly move much, much more money per day than SL. Is there a scaling factor that makes it viable for them whilst not for SL? There may not be, but it is an obvious question.

2) As I've commented on SLI, LL makes a nice chunk of change from selling its currency to users. Probably US$80,000+ this month, more next month (assuming the market doesn't crash). How that relates to their overall cash flow I don't know - but it's pretty much pure profit unlike their income from tier which clearly goes against salaries, bandwidth costs and hardware costs.

If you're wrong, or even if you're right but LL manage to keep it going for a bit longer before a big shake up (they are more than capable of that after all), there's suddenly quite a lot of green coloured reasons for managing the economy this way.

[robusticus]

Tom,

No, I was referring to the $.50 sports cars.

You can impulse buy any item with a card, it converts the price of the item to USD and that is what is charged, at a rate that is much lower than the exchange.

[randolfe_]

We could, and perhaps I should run an entire thread or series of threads on micropayment systems. It can get very detailed. A couple of points:

Mobile carriers do batch billing to the customers and a percentage of provisioned services/content to providers.

iTunes does batch credit-card charging, using a pretty nifty algorithm that figures out when to optimally bill your credit card. They don't bill you for every little $0.99. They are also working with Visa to integrate batches, making the entire subject moot.

Microsoft's points are just like a Starbucks or Jamba card. Points are dollars. Just pre-paid and pre billed in a larger batch. There is no notion of a points / $USD exchange rate.

Paypal itself enables microtransactions so long as you can find a venue in which you can trust your counterparty. SecondLife could be entirely PayPal based if they wanted to be, and the markets would be like a 3d eBay with more point-of-sale type of transactions (eBay is heading that way too, only in 2d web format).

But in all of these platforms, I as a merchant trying to engage in commerce am always in ownership of my earned cash flows. In some cases I have a contractual agreement with the platform provider (Cell Nets and iTunes) to pay me may cut of sales/provisions. In others I am receiving tokenized dollars that are exactly equivalent to dollars, backed as such, and at least partially guaranteed by the tokenizer (both voluntarily and increasingly by regulation).

[randolfe_]

Linden engaging in seigniorage -- that is printing money for profit, is a very dangerous situation.

1. They are reaping a cash flow that is not sustainable. They cannot base a business model on this, and I'm quite sure they haven't in what they presented to investors.

2. The money they extract this way isn't free. It's a zero-sum game. That money is coming directly out of every single in-game merchant's pocket.

Common sense says "no, it's coming from people demanding L$ and buying stuff". But, Linden should print only exactly as many new L$ as there is growth in net demand, leaving zero for seigniorage.

Printing for profit weakens the L$, and thereby robs all those trying to realize L$ cash flows of the true value of those L$.

I say this appears crooked because I'm convinced they won't be willing to engage in the inverse once supply of L$ exceeds demand, as the game growth slows (and thus my original article).

3. If Linden doesn't buy back L$ to maintain strength then in-game merchants now pay the other half of Linden's "free" inflation money. They pay it by selling their L$ into weakness.

4. Eventually this pisses off enough people, and the Torschlußpanik starts.

5. Meanwhile someone less interested in all the minor yet cherished aspects of the SL platform -- like people accuse me of being -- builds a competing "virtual world" that isn't a virtual world at all, but 3.d eBay, corporately managed, and appropriately restrictive. *But* fully trustable, efficient, and capable of supporting earnest commerce.

[Mark Herpel]

"HYIPs are not frauds by definition. It is only ex post that they are Ponzi schemes. While one is in operation, it is not necessarily illegal or fraud. That's the whole problem/debate around HYIPs."
Sorry, it is not a problem or debate, you are wrong here, let me explain. Your statements "HYIPs are not frauds by definition, is not correct for two reasons. The moment the web solicits investor money, it becomes a scheme to defraud investors-here is why. All HYIPs have some opening text or 'about' section which usually reads like this:
We are a small group of forex traders...
This one I just copied...-----
Neo-Yield is originated from an offline investment group which was founded in the year 2005. This group is comprised of some experienced investors who are dedicated to making. investment and business all over the world. It has come to the top in the year 2006. We have made a huge success in many investment industries. There are programs of stocks, Forex and other profitable programs. And all these programs have brought us huge profits.
-----
There is NO disclosure statement showing what is actually done with the proceeds and where they actually go, which is NOT invested in any type of offline investment.
These are misleading FRAUDULENT statements. When a web starts accepting money from the public based on the premise they are 'investing' it in a forex trading account or another offline investment, when in reality they are NOT making any investment but ponzi-ing the funds back to other investors, that is FRAUD and it starts from day one when the web appears making the solicitation. The text says one thing and does another. There is no changing that definition, its illegal to take someone's money and lie to them. I can provide the Federal and State Statutes relating to US victims, if you like, no problem. Also, as a general rule of thumb, it is not just the USA which works like that, if you are a big fat liar in the the USA then most likely the same or similar law applies if you are outside of the US. Additionally, the receiver of those funds(the operator of the HYIP) is from that moment forward involved in a illegal money laundering operation of the ill gotten, fraudulently obtained proceeds and/or income. 2) Point number two. It is illegal to solicit investments online from US persons with out the proper registration and approval of the 'investment offering' from Federal authorities like the SEC and the proper local jurisdictions (as in each State) where each investor lives. Even the ads you show online MUST be approved & comply with certain legal guidelines and disclosure. If you take money from someone in Utah, your securities offering must be registered and approved by the State of Utah. That includes ALL investors, .01$ (one cent) and up. An example, 12DailyPro, the largest I can think of in recent times and also big in Utah, complaint for violation of Federal Securities Law: http://www.tlennonfor12dailypro.com/media/12dailypro_Complaint_Violation_Federal_Securities_Laws.pdf There were also approximately 88,000 participants from the US and they each lived in a State...and each State can file a suit for violation of securities law. This is an illegal operation and a fraud, you can't argue different. It cannot be made, 'by definition' something else. Based on that point alone, HYIPs are fraudulent operations. Taking money, lying about what is done with the proceeds, the handling of the money from that point on, and finally the securities violation on a Federal and State level. Second Life and the L$ are NOT these types of fraudulent illegal operations and your comparison is NOT a valid one despite your excellent numerical suggestions.

[Xah Lee (aka Xah Toll in SL)]

Dear Randolph Harrison,

Thank you for your articles. I read 3 them, and a substantial
percentage of all the follow ups, with avid interest. I think your
articles on the whole hits the spot. The economic values of Second
Life as painted by the various finance related pop mags are harmful as
in mis-information.

(i do, however, find Second Life's values in the areas of education,
technology, social sciences (such as researchs in social sciences),
and even the very social aspect of Second Life's impact on real life,
to be something nearly revolutionary. In fact, such a virtual world is
an inevitablility in our info age. It is just a matter of time when
virtual world actitivies will be ingrained into every human's daily
lives in developed continents, as internet is today. (and probably
within 20 years) ) (i know you do not necessarily dispute aspects of
Second Life other than its economic ones.)

I'm also writing to tell you, perhaps for a bit selfish reasons, that i have a incident with Google's Add Sense program. Namely, they kicked me out after a month, citing “violating agreement because of racial content” (quote not exact), after owing me about $50. See bottom of
http://xahlee.org/Periodic_dosage_dir/tr/traffic_report_2005.html

Also, since i started to use Second Life, i started to do a website reporting on life in Second Life. At the moment contaning 370 screenshots.
http://xahlee.org/sl/index.html
(see the introduction there on how i perceive the value of Second Life in mathematical research/visualization)

Thank you for your articles. In my opinion, in our info age,
(reasoned) alternative views, are priceless.

I hope to meet you in-world sometimes.

Xah Lee