Shaping Thoughts

Great article on Second Life macro economics with a message

Over at the Capitalism 2.0 blog Randolph Harrison posted The Linden dollar game. It is an interesting account of the monetary economics of Second Life.

The main message is that:

• a severe downward pressure on the Linden dollar to USD exchange rate is to be expected as the population growth returns to normal
• and that this needs to be compensated by Linden Lab buying up the expected net supply of Lindens or else there is a likely risk of economic chaos and people seeing the USD value of their Linden dollar account balance severely shrink.
• and that all of these problems could have been avoided if Linden Lab didn’t make the mistake of introducing the Linden dollar in stead of just using a real currency like the USD dollar.

The article contains numerous charts and descriptions of the working of the monetary side of the Second Life economy. Most of it is more or less dedicated to describing and predicting the demand for Lindens.

For reference (277 L$ to USD):

• total supply of Linden dollars: 1.8 billion
• in US dollars: 6.65 million

So actually there is only around 7 million at stake now.

The author of the piece is no fanatic SL-critic. His only point is to the currency risks and the consequences for the SL economy and therefore the whole project.

Here is a quote from one of his replies in the comments section:

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.

I must say I am quite convinced about the analysis of Randolph Harrison, and that we could see a net supply of Lindens in the future.
But, given the number of people involved, who says Linden Lab (or investors) will not just pick up this supply and spend some USD (too big too fail scenario). As Randolph states a currency reform could avoid this uncertainty: so Linden Lab, why not pick up the bill and pay the USD 7 million to transform all Lindens in USD?

Related: all my Second Life articles

Technorati tag(s): Second Life, Economics

| posted Feb 22, 10:18 PM on Feb 22, 2007 | category: Second Life