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Second Life – a pyramid scheme?

In this article I am referring to a posting from today in the blog Valleywag about the virtual economy in Second Life. Actually Valleywag themselfes are referring to a bigger article from Randoph Harrison. It's not the first nor surely the last article Valleywag is posting against Second Life, but one of the more interesting ones. And since it was featured today on the front page of Slashdot, thousands of people of not even more read it.

The article in Valleywag is a very opioniated piece of writing, again. The article from Mr. Harrison itself is more serious written, but they are both referring to the same fact and most of the article in Valleywag is just a big quotation from Mr. Harrison, anyway.

So, to cut it short: Mr. Harrison thinks that the economy in SL is just some kind of big, overhyped pyramide scheme. Why that? Because on the ond hand it's simple to make Linden dollars in game but he thinks it is real hard to convert them again into real dollars after that.

To cite Mr. Harrison himself:

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.

And here I disagree with him, strongly.

When you have an economy you can only convert some sums into another currency before the market reacts. Given the nature of SL, the number of concurrent players who visit frequently is importang, not the number of existent accounts after all. If you take this into account, you have the economy of a small city, not more. Therefore the market of course reacts very strongly on high bids.

For example, the today's activity at the LindeX was 182.507 US-$, the money spend in world actually 1.021.595 US-$. So if you want to sell 10.000 US-$, which is about 1/18 of the normal flow of a day at the LindeX, it of course has a serious impact at the exchange rate. No surprise here. Also no surprise that most money stays in game actually.

Mr. Harrison concludes his writing with the words:

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

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

After all, Anshe Chung herself started out as a virtual whore, so you too can become a SecondLife millionaire, right?

And guess what? Again he's wrong in some serious points.

First: most real world corporations entering SL don't want to earn direct profit in SL. Some use it for teaching, others for experimenting, or to get good public relations. So your company wants to have a good feedback in the blogosphere? Well, make an event in SL, all big magazines and many blogs will cover it up. The costs? Minimal, much less than one commercial in the TV. But the coverage in the media? Very, very good. That's the way it works and how it actually makes sense for many companies!

Also about the economy and pyramide scheme: haha. Hahaha. It would have indeed been very good if Mr. Harrison would have taken the time to actually take a look at the homepage of Anshe Chung Limited before writing about her as an example for milking of the SL economy. Why? Because Ms. Chung charges for her land in real life currencies only via PayPal, mostly US-$ and Euros, but no Linden dollars whatsoever. Period. So, of course, she knows about the problems of the LindeX and just circumvents them by charging via PayPal. Clever, that. But this shows also she cannot be an example for this so called "scheme", because she simply is not participating at it the way Mr. Harrison describes in his article.

Also of course many builders actually charge directly in US-$, because how should they make an invoice for the hiring companies in Linden dollars...?

SL is actually more like in RL itself: some make the big bucks, the rest - well, has to see, but no pyramide whatsoever. It's actually perhaps being a little overhyped, but when this is over it's here to stay.

Last example: what would happen if the People's Republic of China decided to sell 700 billion US-$ at once at the exchanges? Of course, the dollar would go down and down and down...

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