Op/Ed: Pumping Up Supply Linden
by Jessica Holyoke on 09/01/08 at 7:39 am
GOM Part II
by Jessica Holyoke
Substantial Risks to the SL Economy. That’s the reason Ken D Linden gave when he wrote the blog post banning interest and rate of return investing in SL. But banks and stock exchanges pump money through an economy. By allowing people to invest in these two services, the economy grows, either through new businesses started or land being purchased. Perhaps the SL Economy is not what we think it is, but what Linden Lab needs it to be.
A few weeks back, I wrote an article about microeconomics in MMO’s. Most of the responses showed interest in SL on a macroeconomic scale. Some commenter’s also pointed out that in the real world, printing up currency is an inflationary move. More dollars or deutsch marks in circulation means that they are worth less than before. Supply Linden does not work the same way. He does not print up Lindens out of whole cloth, he sells them. By doing so, Supply Linden creates a deflationary pressure on the economy. By keeping the market flooded with Lindens, the value of the Linden dollar does not rise over a certain point when there are more buyers of Lindens then there are sellers. If the exchange rate is 269L per dollar, then a scarcity of Lindens could mean an exchange rate of 250L per dollar. This effectively raises prices for US residents and lowers in-world wages for everyone. Additionally, Supply Linden generates revenue. Each purchase of Linden dollars is straight revenue. Higher prices may discourage purchasing on the Grid and users purchasing Lindens.
And that’s the trend I’m seeing. No third party exchanges, because they may be crooks, means more people will use the LindeX. The punishment meted by Linden Lab for something that a resident has no control over means that a resident would not dare use a third party exchange, unless they do not have a credit card or PayPal. Every third party exchange is money out of Linden Lab’s pocket. And while the third party’s Lindens have to come from somewhere, it does mean that the Lab is losing money. (Customer buys Lindens off of the Lindex. Customer gives those Lindens to Vendor in exchange for goods. Vendor could sell the Lindens on the LindeX and pay money to the Lab as they sell their Lindens and they transfer money to the Vendor’s PayPal account. Vendor could spend those Lindens on a resident who does the same thing they could have done. Or the Vendor could horde those Lindens and sell them to a third party, cutting the Lab out of both the selling fee and the transfer fee.
No capital investing in world, because they may be crooks, means that to raise massive amounts of Lindens you have to buy it through the LindeX. Again, instead of using Lindens already purchased and being reinvested, a new business owner turns to his own bank account and has to obtain Lindens by using the LindeX.
Now other theories regarding the banking ban are going around, including real world banks are coming in and wanting to provide services and the Lab wants to provide banking and investing type services. But the important thing to come out of all this is that after months of saying the Linden dollar is a right or a credit, Ken D Linden called it a currency.
Markus Breuer (Pham Neutra)
Jan 9th, 2008
Interesting theories.
May I offer another one – which might probably not be too popular?
What is with the theory, that the banking and investment business in the physical world is strictly regulated and that this regulation is not really a bad idea – because it protects the consumer/investor?
OK, thats just a theory, of course.
Lonny Miasma
Jan 9th, 2008
Hello, Jessica
Just wanted to let you know that there are not any Deutsche Mark around anymore since some years.
The actual currency like in many other european countries is now the Euro (€). Deutsch marks is maybe used still in some songs
, but that would be eightees songs.
Kahni Poitier
Jan 9th, 2008
Know who I’d like to see come into SL with a banking presence?
PayPal.
Or even something like Citi. As much as I hate them, they’re a SOLIDLY BACKED company. You KNOW that if you give them 10,000L, it’ll be more secure than in sold Gingko scam.
They won’t offer 30% interest, but NO REAL BANK WOULD!
If it sounds too good to be true, it probably is.
A SL friend of Jessica.
Jan 9th, 2008
We have to ask what’s the basis that L$ is built upon. RL currencies may be backed up by bars of gold, or tied to US Dollars. L$ is based on ???.
(Yes, the US$ is not based on anything but the faith and trust of the US Government, but in a pinch the government could sell something to raise gold, be they unused air force bases, or maybe a national park or two–the government owns 86% of the land area of Nevada, after all.)
So where’s the pressure to move L$ off 269-per-US$? (I won’t go into how L$ is inflating overseas because of US$ devaluation: a UK pound bought L$400 not too long ago, now around L$500.)
For the 1% of the SL population that seriously makes real money off of this, a stable exchange rate is a good thing. And for the 99% where this is a game and L$ are mostly one more thing to play with there’s no economic effect. Supply Linden is making pure profit off those who buy L$ and never cash them in.
I could be wrong, but if L$ was truly based on something tangible, and more than a small minority of players exchanged L$ out for large amounts of money, we’d see real economic effects. That may happen someday, if SL takes off like the Lindens would like. But as long as Supply Linden is making money off L$ sales, enough to cover avatars cashing out, the current game can continue.
(I wonder how many L$ are parked in the millions of dormant accounts? All those camping L$ are still there.)
SL has a number of interesting things going on with it. For the most part, RL economics isn’t working in SL yet.
Calypso Bing
Jan 9th, 2008
Speaking of PayPal…
http://www.snopes.com/politics/taxes/paypal.asp
This out to be interesting for many of the SecondLife users.
DaveOner
Jan 9th, 2008
In reality those banks and stock markets don’t help the “economy” unless you consider the owners of said bank or stock market buying shit for themselves as helping.
Unlike RL, SL’s cute little economy is based COMPLETELY on disposing of income in the name of sheer consumption and entertainment. Investments are risky at best, completely manufactured and easily destroyed. LukeConnely could just dissappear one day and unless you live in Australia you’re screwed out of the fake money you gave him.
The errors in this and many other “economics articles” on SLH show how much of a joke this subject is and how uninformed and ignorant to actual concepts of economics the authors of said articles are. If I didn’t think the people that are fools enough to buy into this shit deserved what they got I’d say you are part of the problem with money in SL and should be stopped. Fortunately I actually get a kick out of it from time to time!
But then again how seriously could you take someone in an avatar showing disproportionate virtual cleveage when it comes to math and economics? CEO Barbie indeed!
Bee Mizser
Jan 9th, 2008
You forget that Supply Linden also makes money from people cashing out.
There is a charge to convert L$ back to US$ and a less favourable rate. Therefore as long as the exchange is working then it is win/win for LL. Particularly as a lot of cashing out is done to pay tier… So the money ends back in LL’s Coffers.
Katie
Jan 9th, 2008
I guess what I’m still missing is other than creating more bottom feeder mainland land barons, what do businesses need massive amounts of Lindens for anyway?
Your biggest need is product, but the means of production are free, the raw materials are free, and the cost of creation is… free. The only real expenses might be photoshop or a 3dpackage, which last I heard you purchased in real world money, not Lindens. The second priority would be land, which if you are at all serious is purchased in the forum of private islands which last I heard were purchased and tier-payed in US$ not Lindens.
Yes, you might want to rent stalls in malls or hire someone to do some scripting or graphics for you, but these are small money purchases. Far easier to put a few hundred on your VISA than it is to take out a Linden loan.
The business model of a bank doesn’t make any sense.
The first thought with our current real world financial crisis is the tightening of credit markets and the possibility of it creating national or worldwide recession. Why have we heard nothing from the business community about the failure of the banks? Why aren’t businesses in SL in a complete panic? Why? Because they don’t need Lindens.
If you read the forums, the biggest problem for business is too many Lindens and LL failing to raise their trading limits to allow them to exchange all of their excess for US$.
IntLibber Brautigan
Jan 9th, 2008
Problem with your logic Jessica:
When someone uses my exchange, or SLX’s or another third party exchange, it is typically because someone wants their money faster than LL will provide it via their slow as death “process credit” which can take up to 5 days via the fastest method for US citizens (to paypal). For this reason they accept higher exchange rates typically north of 275 or even 285 L$ to the dollar in order to get their money quicker.
So its not like an A or B choice for people. Furthermore, we dont actually magically transform L$ into dollars. While we frequently have sufficient float on both sides of the exchange to handle all transactions, there are frequently trends where one needs to move money to one side or another. In such case, we exchange owners have to move that money through Lindex, so LL makes money off us there.
Spooner
Jan 9th, 2008
The only “risks to the SL economy” is letting dumbass lawyers like Dan run it. We already have seen what putting the lawyers in charge has done to the real world, SL was supposed to be different. Danny boy, go learn some economics, you are doing more damage to the SL economy with your asshattery than any banker does.
Gwyneth Llewelyn
Jan 9th, 2008
Tut tut… please, guys, the “gold standard” was abolished on almost all countries, as recently as 1973 (some countries have abandoned it way earlier).
Money is the most “virtual” thing that we humans have invented. It’s solely based on trust and reputation — citizens trusting that what the Government prints out is, in fact, legal tender; and that people will use that money mostly with legal intentions, and that the agencies controlling the flux of money have a good reputation. It should be pretty obvious by looking at any currency exchange how this trust is measured — if some Government loses their reputation or is mistrusted by the citizens of the world, its currency devaluates (compared to other currencies), and vice-versa. Sure, day trading on the foreign currency exchanges will stabilise currency, but if you cheat too much (ie. removing too much currency from the international market to make that currency artificially scarce), people will not go for it.
Well, so, what makes the L$ worth what it’s worth? It’s a microcurrency mostly based on Linden Lab’s own reputation. 12 millions residents trust LL to have a reasonably good reputation, that they aren’t going all away and buy an island in the Caribbean with the money, and that they do positive interference in the economy (by adding and removing L$ through Supply Linden; by adding “just enough” land; that they don’t interfere much on resident-to-resident transactions, etc) to make it stable.
So long as a vast majority of residents trust Linden Lab to keep up the good work so far, the L$ has indeed “value”. Not “intrinsic value” (as said, no currency in the world has intrinsic value since the 1970s), but just “value” based on trust and reputation.
Perhaps this was also one of the reasons LL was ‘forced’ to shut down the fraudulent ‘banks’. By doing so, they’re sending out a message: “sorry, guys, but we won’t allow you to scam the residents using our currency”. In some circles this will mean that some people will continue to trust LL to keep fraudulent transactions using the L$ at a minimum. And that makes the L$ a “valuable” microcurrency!
TW
Jan 10th, 2008
” When someone uses my exchange, or SLX’s or another third party exchange, it is typically because someone wants their money faster than LL will provide it via their slow as death “process credit” which can take up to 5 days via the fastest method for US citizens (to paypal). For this reason they accept higher exchange rates typically north of 275 or even 285 L$ to the dollar in order to get their money quicker.”
So what do you do? Prey on those that do not use credit cards? For those that do, click the button and instant L. I’ve also purchased L from Anshe at one time. I’ve never waited more than 10 seconds for any amount of L through LindeX. Never more than 30 minutes via Anshe and Paypal either.
At any rate, I think Linden has made a completely successful assessment of this matter. I believe they acted in the best interest of SL as a whole.
TW
Cai Pirinhia
Jan 10th, 2008
Gwyneth Llewelyn wrote: [stuff] … “And that makes the L$ a “valuable” microcurrency!”
Nonsense. Second Life “currency” is a limited license right available for purchase or free distribution at Linden Lab’s discretion, and is not redeemable for monetary value from Linden Lab. Regardless of terminology used, Linden Dollars represent a limited license right governed solely under the Terms of of Service, and are not redeemable for any sum of money or monetary value from Linden Lab at any time.
(Linden Lab Terms of Service, Section 1.4)
When you convert US$ into L$ this is not a currency exchange, but a purchase; similar to you using money buying an apple in the real world, here you use money to buy a token (or “licensing right”). The mere fact that you can go and sell the apple to somebody else and get money back for it does not make the apple itself being money. It also doese not make the apple, the supermarket selling the apple and the apple farmer subject to banking and currency laws for that matter. The same goes for the Linden Dollar.
Some people just want to believe that Second Life is more than an entertainment product…
Pierre Luigi
Jan 10th, 2008
Jessica, wake up and smell the coffee.
Cai – great analysis – Gwyn also.
Gen Ferraris
Jan 10th, 2008
Btw. Gold has no value neither, it’s just most human beeings believe gold looks sexy, so it has a tradable value. Just like USD is just a piece of paper (actauly not much paper, what it really is is FED-Bonds or FED-Debt, infact USD has a negative value (since debt doesnt bring income, but expense instead) if the private institution (Federal Reserve) manages to persuade foreign investors by promising them skyhigh/”ponzi-style” returns they’ll buy and FED can print, gold is just a piece of metal. EVERYTHING in RL and SL is just “your world. Your imagination” (or should i say your illusion). Infact i would hope to see the SL monetary policy put in practice in RL, because DEBT only serves the very richest of the population and creates economical unstability. Oh and the most interresting part about the USD is that your government doesnt have the authority to give you anything of value in exchange for your “paper bills”, as described here: “Although not issued by the Treasury Department, Federal Reserve Notes carry the (engraved) signature of the Treasurer of the United States” further disturbing, is the way they make formulate how it is exchangable “Federal Reserve Notes are fiat currency, which means that the GOVERNMENT IS NOT obligated to give the holder of a note gold, silver, or any specific tangible property in exchange for the note. ” So they’re saying sure you can exchange your federal reserve notes to anything you wish (as long as it’s federal reserve notes, lol). You can read more about this unconstitutional monetary form here: http://en.wikipedia.org/wiki/Federal_Reserve_Notes
(they’re not unconstitutional because they’re not backed, they’re unconstitutional because they’re not controlled by the us govt). Thats my hyperinflated-2cents about money.
Jessica Holyoke
Jan 11th, 2008
First, thank you all for writing, especially Gwen and Cai. Pierre, I smell the coffee and it is mochalicious. DaveOner, thank you for the CEO Barbie comment.
Second, some of this will be covered in future articles once more background is laid, but I wanted to point out Katie’s comment.
“If you read the forums, the biggest problem for business is too many Lindens and LL failing to raise their trading limits to allow them to exchange all of their excess for US$.” Which supports my thesis that Supply Linden is revenue. Granted, Supply Linden cannot buy Lindens to keep the exchange stable, so trading limits need to be enforced. But consider that in December 07, there was over L$227 million in Supply Linden sales, or about $843,000 US. so why should the Lindens consider raising the sell limits and lose revenue?
Tristin Mikazuki
Jan 12th, 2008
I;ll never buy or invest in SL again after this cerap from Linden lab I have had it with these ass holes enough is enough!
Gwyneth Llewelyn
Jan 12th, 2008
Cai, you’re being nice and supportive of Linden Lab by quoting straight from their ToS and public statements (specially from Ginsu), but you’re really missing the whole point here. On casinos you use chips to play. Banks use letters of credit or checks (or, these days, emails…). These are not “money”; they haven’t been “printed” by a central authority backed by a government; nevertheless, they’re convertible to money easily. What makes a check “worth” anything is the reputation of the bank emitting it (and also the government regulating banks, which add to their reputation); it’s a worthless bit of paper if the bank emitting it has absolutely no reputation. So a check drawn from a bank in Albania will probably have a hard time getting redeemed by a citizen of Australia, but also very likely have no problem to be exchanged by cash in Cuba.
Trust and reputation are behind what we call “money”. Historically, of course, it’s governments — through their use of force to stamp out fraud; through regulation to keep those banks legitimate and reputable; through their citizens and their productivity, to give some value to it — that define what “money” is and how it can be used and employed. But “money” is valuable just because people believe it is valuable, nothing more and nothing else. If I give you a banknote for a thousand Cuban Pesos to pay for tier on your land, you will very likely not accept it — because you don’t trust the Cuban equivalent of the FED to back that banknote up. Cuban Pesos, for you, are just “play money”. They have no value at all (outside of Cuba, that is).
Linden Lab, to cover their tracks, have no choice but to call the L$ “limited license right available for purchase or free distribution” or something. They have no choice: “printing money” is a federal crime in the US. But in a sense, they’re right. It’s not Linden Lab that backs up the L$ (although they certainly have a saying in how it is used). It’s the SL economy that gives it value. I think that in your mindset you can only label that as “collective hallucination”, in the sense that we’re all pretending that the L$ has any value. Well, wake up to real life: money is, indeed, the most widespread virtual concept ever devised by the inhabitants of Planet Earth.
As for your “apple” example, watch the SLCN show on banking. They use “fish” as an example and come to the same hilarious conclusion as you do. A particularity of anything being used as “money” is that it can be reused over and over again. I hope you realise that our (earlier) use of gold as money is that gold is incredibly adequate for that purpose (it never rusts or degrades, it is quite hard to chemically combine it to anything else, and thus it maintains its properties for millenia). Bank notes, of course, degrade over time, but you can always replace a ripped bank note by a new one. In this age where the majority of money in circulation among the Western countries is stored in digital form, “digital money” is even better than gold: it “exists” and can be reused indefinitely without degradation.
The L$ does have that property of resilience (it’s digital money) and unlimited reuse (unlike, well, apples or fish). It is an universal medium for bartering and transfer of content in SL. And, well, perhaps less technically, but just philosophically, it has the value that 12 million people attribute to it — and that’s lot of value!
Really, once more, as time goes on and on, long-term, I can only see LL’s survival as the “leaders” (not “owners”) of SL so long as they can escape the constant bickering of lawyers and government to use all pretexts to shut them down. I believe it’s just patriotism that makes them remain in the US and take all that is thrown against them. At this stage, with an economy that exchanges 1.2 million US$ per day, and regulatory agencies and lawyers greedily after LL’s skin, I’d just switch operations to the Cayman Islands or any other “safe” and unregulated place. The US is just stifling LL’s growth and expansion of SL under silly pretexts. Where did the spirit of “the land of opportunities” go? LL, out of nothing, created an economy that grows 1000% annually and transacts 1.2 million US$ daily. Isn’t that positive? Isn’t that something to be proud of? Sure, there are scams and frauds, but can’t those be dealt with? Why has LL to constantly “Disneyficate” SL in order to comply with outdated laws from a past century? What, indeed, is so terrible about a company that just wants to make honest money?
I think the question will remain open for a few more years. Let’s see the advent of many interconnected grids using the same protocol, grids that won’t be subject to quirksome and paranoid ‘government controls’, and we’ll see what happens then.
Cai Pirinhia
Jan 14th, 2008
See Gwyn, your 800some word reaction is exactly what I meant when I was writing that certain a kind of persons just want to believe Second Life is more than an entertainment product.
Is it because you think SL is so cool that it should be more? Is it because the product name contains the word “life” in it? Is it because some aspects of the technology might be leveraged to be of use for real corporations? Or is it because too many of your friends are cartoons?
In short, you are still mixing up a product with a currency. The Lindendollar is a product. If you don’t like to bite into my apple example, feel free to think of something of more longevity that is harder to chew (and if that doesn’t help, try to understand what an “illustrative example” is …).
As for your “12 million people” supposedly attributing value to the Lindendollar: There are about active 875,000 users that play in SL regularly, and another 500,000 that seem to be casual users. Engaged in Lindendollar transactions are less than 350,000 of which only about 100,000 spend more than L$5,000.
If you look at it from your “economy” point, only about 50,000 players have more L$ in their account than they spend and for less than 10,000 players this amount is more than 50 US$ in real money – and even that is before you deduct tier costs.
Numbers are taken from the economic statistics on the Second Life website; not sure if you are aware of them.
So, basically there might be the population equivalent to that of a tiny village (or the top half of a large office skyscraper) that *may* think that the Lindendollar might be something like real money in their heads. Sounds to me that you would also view tokens for communal washing machines in a large complex of apartment buildings as being real money as well.
cyberreserve
Jan 16th, 2008
Cyber Reserve Set to Rescues Second life’s bad debt.
The new founded Cyber Reserve will over see all banking in second life by issuing bank charter licenses for banks. Avatar Crevon Ashbourne, [Brandon Mathews] self appointed CEO of Cyber Reserve has struck a deal with super mall MSM. MSM is a banking engine used that powers Mainstreetmalls, an online shopping mall. MSM has agreed to the purchase of 100 000 trust tokens from Cyber Reserve, giving Cyber Reserve use of the MSM software for 5years. This move will allow CEO Crevon Ashbourne to set up an umbrella bank called Endeavour. Endeavour will call upon all the failed banks to reorganize so that the Cyber Reserve can pay back all dept to players. So anyone that has lost money will get it back. This move by Cyber Reserve is to buy back the faith of players under a new and regulated banking system. Crevon will ask that the ATM’s can stay in place if they are branded under Endeavour, they will in no way be offering interest but will be a convenient gateway to join the bank to recoup lost money.
This is how it will all work:
Cyber Reserve will be the main power house of the banking network. The failed banks will receive a temporary license to resolve their depts. All there customers will be transferred into the Endeavour Bank. Each failed bank will retain all there clients and effectively become managers of there old banks under the umbrella of Endearvour Bank. So every bank will change there name to Endeavour Bank and the branch name will be the former name [ABC BANK] once the bank has resolved its dept they can drop the Endevour Bank branding and go back to their original name. They will still however be within the Cyber Reserve bank engine and have to abide by the charter rules. Any Bank that fails to operate under the strict rules of the charter will lose their license.
Cyber Reserve will Float 1000 000 trust tokens to pay back the bad debt. In the interim all lost linden currency will be converted into Cyber Reserve Ounce. This is a new currency that will allow the players to carry on trading in the game and later be able to withdraw gold tokens from Cyber Reserve. This will keep the currency accounted for and be traceable by Cyber Reserve. When the bad debt is absolved Cyber Reserve will issue 24ct Gold ounce coins for players to cash out or allow the ounce to be transferred back into linden dollars.
The trust tokens used to raise funds to solidify the Reserve will be certified and tradable and Cyber Reserve will display the buy and sell prices. For those that have lost funds or have a failed bank and would like to work toward a solution can contact in life avatar Crevon Ashbourne or email cyberreserve@gmail.com