Linden Lab's virtual world — a much-hyped online amusement arcade of cartoon porn, avatars of IBM executives and frog bands —
has an annual GDP of about $220m, according to Fortune Magazine's David Kirkpatrick. That's only the size of the economy of
Guinea-Bissau, one of the world's poorest countries, but pretty impressive for a virtual economy, no? No. Many transactions within Linden Lab's environment are circular, more akin to stockmarket volume rather than GDP. One would have to take the Benchmark-backed economic ecosystem more seriously if some of the online sexchat workers and other Second Life entrepreneurs could show that their accumulated virtual earnings could truly be converted into real currency. But, as this financial consultant explains, anonymously, withdrawing money from the Benchmark-backed vitual world is about as hard as cashing out of a
pyramid scheme.
In 2005 I began working as a venture consultant for some entrepreneurs and investors regarding some fairly ambitious "RMT" ideas. My work resulted in my collection of a large amount of RMT market data for most of the popular MMO/VW games. Although the new venture was never pursued (largely due to my analysis of the true RMT market), one game stuck out as an aberration: Second Life. Unlike most other games, the operators of Second Life not only allowed and encouraged exchange of game currency for real money, but they facilitated it. In fact, even in 2005 I began noticing a rumbling from the interest-focused blogs about the exploding market that was Second Life, complete with in-game banks, multiple currency exchanges, a floating currency exchange rate, and a burgeoning in-game commerce/business base.
In other words, fertile ground for investment and arbitrage.
I didn't expect Second Life to be the NASDAQ. To the contrary, I was counting on the fact that Second Life was a rapidly developing, yet still immature marketplace rife with information asymmetry and mispricing of all kinds of stuff.
One good example of a fairly obvious arbitrage opportunity found around mid July 2006 involved interest-rates paid to depositors at in-game banks versus lending rates, compared to the prevailing exchange rates between the SLL (the generally utilized abbreviation for the Linden dollar, the "currency unit" for virtual world transactions) and the US Dollar, or USD. In this case, interest-rate-parity revealed that two in-game banks were mispricing rates implying a 2,786.32% return per USD invested.
As I discussed this type of stuff with a self-fashioned hedge fund manager friend, he determined to sink a more sizable amount into testing the Second Life market. After all, talk about uncorrelated returns. He'd read about Second Life in increasingly more sophisticated business and financial press. The Economist, The Financial Times, etc. All of which touted the large and exponentially growing size of the SL "economy". So a mere $10,000 USD shouldn't be but a drop in the bucket, given the fact SL was supposedly producing virtual millionaires.
Once we started playing with real money in SL, however, the truth about the supposed economy therein quickly came to light:
• You can earn a lot of Linden dollars in SL, in fact fairly rapidly sometimes, but...
• If you can actually collect your SLLs from your counterparty - which turns out to be an enormous problem - you can't cash them out for USD easily or profitably.
It turns out that inside the game, counterparty risk is tremendous. In fact, entire banks will suddenly disappear. Or banks will simply renege on obligations without recourse. Worse yet, the very people who provide the source of nearly all demand-liquidity within Second Life, those guys at the top of the virtual playpen pyramid, are the same ones who effectively set the SLL/USD exchange rate. Mid-2006, they even owned the only practical exchange market, a fact which I believe is even more true today. (The company run exchange turns out to be impractical for real trades of any volume. It is more of an open currency auction than a spot market.)
What should have been a relatively small SLL/USD exchange trades given media claims about millions of dollars flying around per week in 2006, in reality caused the exchange markets to distort tremendously. We could not effectively move sums of more than a couple thousand dollars out of SL without the exchange market confiscating most of our returns (through rate reflectivity). Example: in July 2006 USD/SLL was 293.0/279.2 bid/ask on the primary open exchange. Our attempts to trade resulted in settlement bids of more than 350. Interestingly, these trades tended to net returns of right around 4%, which was the prevailing dollar deposit rate.
This didn't make sense. After all, the liquidity supposedly existed to support these simple, smallish trades. Well, when the guys running the banks and the exchange trading floor are the guys with most of the SLLs, it's no surprise that outsiders are not permitted to extract any significant returns.
We concluded that we weren't playing in a market at all. We were suckered in by a classic pyramid scheme, albeit one with a pretty new user interface. New entrants plow real money into the game. Only the guys at the top can extract that money with any volume (and in excess of the risk-free rate of return). Attempts to move anything more than token amounts out of the game generally result in real-returns of almost exactly the prevailing USD deposit interest rate.
It is my conjecture that the perpetrators of this scheme are themselves utilizing the mispricing of USD to SLL vis-à-vis in game rates (whether implied rates or explicit rates) to arbitrage everyone else. Or in other words: a financial ponzi scheme. Each new sucker is encouraged to bring in more new suckers, supposedly helping the economy to grow so that they can start cashing those SLL checks. And if you're really successful and even more lucky, you'll get about 4% real return for all that effort and risk.
So given that:
• One cannot profit at greater than the risk-free rate of return for investments into Second Life;
• "Virtual labor" performed by the denizens of the game on their various Second Life business projects is always compensated far below the real-world USD equivalent;
• SLL are effectively illiquid beyond small volume trades —
What you're left with is lots of people putting USD in, and a small group taking those USD out, leaving the rest with no financial claims on anything - just an imaginatively sexy avatar.
Valleywag
Comments
That right there is the single most important bit of information I have read about business (and the potential for money making) in Second Life.
I've also posted a longer, unabridged version of the article on my blog, Capitalism 2.0. I'm the financial consultant (for those who eschew anonymity).
Lawsuit anyone? Makes you wonder if there will now appear a virtual "training materials" market.
• One cannot profit at greater than the risk-free rate of return for investments into Second Life;
For on and off participation in SL for a few years , I've gained valuable skills in customer service, project development, and computer graphics that gave me a jump start on my planned career. For this I now have pretty stable extra income that increases as I create more.
• "Virtual labor" performed by the denizens of the game on their various Second Life business projects is always compensated far below the real-world USD equivalent;
I have fun, I have direct contact to my customers, and can get their opinions right away. Besides regular customer support, there really isn't any cost to duplicating items made in world, and I don't need to be there to make a sale. For me a college student, its a great part time job, one that provides the opportunity to learn and enjoy what I do. What's wrong with having a job like that?
• SLL are effectively illiquid beyond small volume trades --
SL is still growing, the client is now open source, and the server software will follow suit down the road. Frankly to call it a pyramid scheme is kind of irresponsible this early on, right now if you expect to make a profit in SL as a large business you need to be patient, those who have a presence and experience in SL early on will have an advantage to those later on. Even then it is still a risk.
How is it hard to cash out? Its pretty much automated to sell Linden, and the lindex (linden money exchange) is still developing itself.
In reality I'm just a lowly college student, however even I can see to expect huge profits from SL right now is believing in a media hype. Secondlife has potential, calling it a pyramid scheme because it doesn't have the ability to give the media promised "easy cash from the Internets." right away is insulting to anyone who actually participating in the growth of Secondlife. It reminds me of when all those tech companies failed trying to ride on the hype of the internet in 99'. I'm pretty sure some of them denounced the Internet too. Yet now, it is a force to be reckoned with.
I make and sell virtual swords, in an online world. It just may be geeky, but it feels great that I can actually say I do that as a job.
I'm sorry if all SL boils down to some people is making money. To me it's alot more.
Also note, some people actually use SL to have fun.
See ya in world. ~Esprite Xavier
I take money out of the game all the time. It is easy. I've gotten it both from SL lindex and thru gingko bank. So are you leaving out information or what?
also Strokers Toys, and some other friends of mine take money out of the game regularly take out hundreds or thousands per month. So where is the verification for this data? Name some names, what banks, etc? When did it happen? It sounds all professional but the backing just isn't here. If everything is true, you can't be held libel for naming verifyable specifics.
Just as in RL businesses fail and things are lost. No bank in SL that i've seen says your money is guaranteed.
Just as money market funds in RL don't guarantee your money either.
Also with the cartoon porn, and other negative comments, if you don't like it you don't have to do it there are lots of PG areas where it isn't allowed and there are other things to do such as live bands etc. All for free for the most part.
I just pulled out US$120 for the month. Not bad for a hobby. It terms of writing and selling shareware, it couldn't be easier. It is perhaps not optimally set up for those that make money by dealing with only with money.
Just as in RL businesses fail and things are lost. No bank in SL that i've seen says your money is guaranteed.
Just as money market funds in RL don't guarantee your money either.
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Ummm Money Market accounts and BANKS are not the same thing. You fail intentionally to mention that BANKS do guarantee your money in real life. So you say no BANK in sl and then Money Market in SL apples to apples please.
Most money market funds are FDIC guaranteed up to $100,000, by the way.
And, in the real world, if a bank *intentionally reneges* on its obligation there are consequences and recourse for recovery.
*Ummm Money Market accounts and BANKS are not the same thing. You fail intentionally to mention that BANKS do guarantee your money in real life. So you say no BANK in sl and then Money Market in SL apples to apples please.*
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Money market accounts are offered in BANKs are they not? The only requirement is that you put a disclaimer saying that your value isn't guaranteed. Every 'bank' in sl says that you money is not guaranteed that I've seen. You assume that every BANK in the world is guaranteed and they are not. Also it isn't the bank that guarantees your money, it is the FDIC and that is in the USA.
Second Life is just a chat room with one person pretending to be many.
Money market accounts are offered in BANKs are they not?
Among others. One can get a money market through an online brokerage, a mutual fund company, or even through a credit card these days. Banks have a specific definition, especially if they are on the Federal Reserve System.
The only requirement is that you put a disclaimer saying that your value isn't guaranteed.
False. Myriad SEC regulations, licensing stipulates, binding industry self-regulation and other Congressional acts govern what they can claim and for what they are responsible.
Facts are sometimes inconvenient.
This is an interesting article. From my perspective and experience, it is also incorrect. I pay all of my bills with income from SecondLife. I run multiple content creation businesses. This amounts to several thousand dollars a month, over 100,000 USD yearly. I do not try to buy something for a dollar and sell it for two (land sales). I also do not try to make value of nothing by buying money and trying to sell it again at a higher rate. My assumption is this article is the result of a person who is very knowledgeable in real-world finances attempting to apply similar real-world rules and methods to a system that bears only a fleeting resemblance to the real-world. I have had no problems removing money from the game, I go through the Linden Labs run Lindex as well as the new Apez bank. As for anything, anywhere one has to pay attention and be informed to avoid scams, SL is no different.
However I do like the flavor of the article, you have to have ability and merit, in some way bring value to the community, to make money in SL. You cannot just jump in and make bundles of cash, it has taken me years to get to where I am. It is not a pyramid scheme as that term implies several things that are false to fact when compared to the reality of business in SL.
I beleive that this artice portrays Second Life incorrectly, saying that is not to be takin serouisly and that is a just a virtual porn world. This is very far from the truth, there are many hard working people that try to run small business within the world. I my self am the owner of Empire Construction (http://cec.awardpsace.biz) and find Second Life to be a very mature and productive area to conduct my business. My company does extremly well and I am easily able to pull my profits from the game monthly.
I have a different conjecture:
I think that the creators of Second Life have intentionally discouraged participation of certain types of individuals or certain types of activities. The most notorious one is that it is not a game: World of Warcraft gamers are typically not interested because Second Life does not have "action".
In a similar fashion, I can see them discouraging, just like Brazil does in real life, the "plundering of their economy" by preventing the artificial extraction of value through money arbitrage like the one intended by the consultant's client. Such activities may be very beneficial for the perpetrators but, since they do not add value, they impoverish the internal economy.
Technically, it is more than viable: The software that runs Second Life can keep track of how many times a copyrighted good has changed hands. That is why you can have one-generation copy rights that will not allow a second generation copy. Why couldn't they implement a tag on the money that says "This is still fresh money just exchanged from outside US Dollars" and have the exchange market behave fairly on them, providing them only as much return on their investment as if it had been sitting anywhere else, thus discouraging arbitrage and keeping the value within the community?
If my conjecture is right, I applaud it. Second Life is not supposed to be a mirror of real life nor an investor's haven but a social space. They can choose to exclude anything they consider detrimental for their community. While a large debate can be brought on whether the sex business is detrimental, on money arbitrage I don't think you can find anybody willing to say that funneling out the profits made through arbitrage can be good for the community.
The second life BS is a marketing ideal backed up with a system to filter money from the END customer (and the tax payer/s), via a SL customer, etc.... Yet the Queen of England and the US EPA permist a tanker to crash and its cargo to spill for the benfit of corperate media (the same wonderfull crown I pay fines too) who advertise the facts (not report them).
Any Business that emploies media technique known as the SL are infact up-charging END customers while attempting to hide facts in a glossed 3D posting and all to the benfit of multi-national corperate media outlets (the same ppl who bring you wmd and the printing processes with IP have found a new way to lock people out of content) AND providing nothing new but getting richer by the day while others die from preventable causes.
And having SL corperate media reps posting comments is a joke!
I have to note where SL is advertised upon commercial and government networks - with the tick #1 being a sad fact of making readers, listeners, or viewers forget they are being sold too. Mainly stupid people with money who want their children to profit over those without money!
This system works with SL ads in they always state an amount of money or value in a nice clean environment to a world creator yet nothing is said for the PAIN of average users go through just getting to work and who just wanted contact information who instead found INFORMATION and not window dressing in a search engine which took around less than a second to produce an actual result...
Then again considering the 'advertised' mafia that is SL with partners from x-y-z there is no shocker here that I need some new car with internet access, AC, electric windows, lockup garrage, 300sq home, 20 light bulbes, fridge with internet access, toilet with internet access... lol
PSS: Last time I looked people were more impacient (esp when driving)
Oh is there an SL Earth? Rock On!
All these profitable business owners existing blissfully in the artists-only eocnomy of carefully guarded elite profits. Yet no one is willing to come forth so I can actually test their claims with a spreadsheet and numbers? Incredible claims require...
I agree with the writers point that what is happening is wrong, but he basically just described the Federal Reserve and the United States. I'm sure that you can make alot of money on second life. But you'll never make nearly as much as the people at the top of the "pryamid".
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