October brought significant changes in the virtual economy of the virtual world Second Life (SL), as noted by "Pham Neutra," the avatar name of one SL resident. Pham's comments drew on her observations of heated debates over an alleged Ponzi scheme and the fall of the virtual currency (the Linden) against the U.S. Dollar. Pham suggests economic and market psychology explanations for the drop in the Linden. Her article includes graphical depictions of the monetary exchange statistics. The SL Economy in Review - November - SLOG (Dec. 1, 2005)
Particularly interesting is an ongoing controversy between residents over the activities of an in-world enterprise that offers high interest rates in consideration of demand "deposits" of Lindens. The Linden is readily convertible into US Dollars and it appears that this enterprise now holds "deposits" aggregating millions of Lindens. Some are concerned that it may be a Ponzi scheme and its collapse could damage the virtual economy. The enterprise is unregulated and does not provide disclosure of its financials or investment plan, but its high payout rate has earned many supporters.
(read more below the fold)
Some SL residents are vowing crusades against what they see as fraud or dangerous speculation, others are outraged that someone is attacking the institution that is paying them such high interest rates. Spookily reminiscent of the emotions and controversies surrounding the speculative bubbles of yesteryear and of not so long ago.
Pham also commented on possible economic effects of a change by Linden Lab to the mechanics of transportation in SL. The map of SL is very large and includes impassible mountains, rivers and oceans. Residents move across SL's vast space by walking, flying or "teleporting." Even flying between distant places is slow, so two years ago SL management created teleporter hubs placed across the map. These hubs were spaced and acted much like local airports; travel from port to port was instantaneous, but a resident had to walk or fly from the hub to their final destination.
The hubs became natural focus points for retail development. Residents bid up the market price for virtual land surrounding the teleports and build retail malls there. To attract the attention of arriving teleport passengers, they built virtual towers with large, colorful signs advertising their wares. Arriving passengers had to walk or fly around these obstacles to reach their destination.
Responding to complaints from new residents, SL's management (Linden Lab) decided to allow "point to point" teleportation to destinations. This immediately diminished the need to fly into hubs in order to get to other destinations and led to an outcry from those who had bought and developed around the hubs. Pham comments on the economics of this change and its possible effect on leveling land values in SL and diminishing the economic fortunes of early investors in "hub land."
The exchange rate of the Linden dropped from 251 Lindens/Dollar to 266 Lindens/Dollar during October, and Pham suggests theories for the apparent short-term imbalance of Linden sellers over buyers. Pham provides currency exchange data in graphical format with her economic commentary. The Linden is traded on several electronic markets by both Linden Labs and independent market-makers in virtual currency.
What is fascinating to me about this analysis is how it is able to applies the same tools used in non-virtual economic analysis to the virtual economy of SL. This encourages my own optimism for using virtual worlds like SL for experimental study of principles of law and economics.
Posted by dougsimpson at December 3, 2005 05:08 AM