Second Life: Money Checks In, But It Doesn't Check Out

from the mlm dept

In addition to all of the hype surrounding Second Life, particularly when a company announces that it’s setting up a business inside the virtual world, a lot is made of the fact that the game seems to have a sizable economy, in which fortunes can be won or lost. Unfortunately, like everything else surrounding it, such as its population of users, the facts aren’t so cut and dry. While there may be a fair amount of plain vanilla trade (i.e. one person selling a good to another), the economy doesn’t seem to support anything financially sophisticated. One speculator thought he saw an arbitrage opportunity based on the interest rates paid to deposits in in-game banks. But while the math worked out, the plan failed. The investor soon discovered that it was difficult to collect on his investment, and that many of the people with whom he was doing business turned out not to be trustworthy. So while it was theoretically possible to rack up big profits in Linden Dollars, on paper, actually getting them and then converting them back to real currency proved difficult. Reflecting on his experience, his conclusion is that the economy is essentially a pyramid scheme, where it’s easy to pump money in and see it inflate, but it’s difficult to cash out. Of course, if you’re still interested in setting up a business in Second Life, how about starting a collection service?

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Comments on “Second Life: Money Checks In, But It Doesn't Check Out”

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Jo Mamma says:

Yeah... not that advanced yet

You know, the thought had occured to me as well, but it struck me as rather inadvisable to take the time and effort to set up an entire business strategy based on an economy that can still be controlled on all levels by Linden Labs.

I’m sure straight forward “manufacturing” ideas can make money, but seriously, how can you ever expect to collect from people if you’re not doing an on the spot trade? How can you really make a decent amount of money if Linden controls the money supply and exchange rate (though they claim it’s a floating rate, their control of the money supply basically sets the exchange rate)? There’s also no “second” legal system and no precedence set in our “first” legal system for these disputes. There’s no law enforcement, because there are no laws.

Yeah, second life is absolutely fascinating and will likely be the future in one way or another (possibly web 3.0, so to speak), but it’s far from able to handle the complicated financial deals this guy was trying to pull, I would think.

With all that being said, I wouldn’t be surprised if someone finds a way to “break the Linden bank” one day… yet another reason not to put serious money into Second Life.

Mathew Ingram (profile) says:

second life

Joe, there’s a fairly reasonable response to the Second Life criticism here. Basically, the author compares Second Life to a small developing nation, and says its financial issues are no different than any small economy without a lot of liquidity (and no central bank). If the writer of that Valleywag piece decided to go after an arbitrage opportunity in Kazakhstan or Ulan Bator, he’d probably have a similar experience (except for the avatars, of course).

Mike (profile) says:

Re: second life

If the writer of that Valleywag piece decided to go after an arbitrage opportunity in Kazakhstan or Ulan Bator, he’d probably have a similar experience (except for the avatars, of course).

Mathew, that may be true, but investment opportunities in Kazakhstan and Ulan Bator aren’t getting written up on the covers of Business Week and Fortune as places where millions are being made…

Jo Mamma says:

Re: Re: second life

investment opportunities in Kazakhstan and Ulan Bator aren’t getting written up on the covers of Business Week and Fortune

I see your point, but if I based every investment decision on what was printed in magazines, I’d probably be as poor as the schmuck who tried “investing” in second life.

Magazines like to hype stuff that sells their magazines, whether or not something is really true. This is old news and someone that is a truly good investor should realize.

He should have done more homework before plowing 10K into a theory.

Jo Mamma says:

TFA proves this guy is definitely a tool

From TFA…

It is my conjecture that the perpetrators of this scheme are themselves utilizing the mispricing of USD to SLL vis-Ă -vis in game rates

And yet he was intentionally trying to use his perceived “market inefficiency” to his advantage. Something tells me that if he was the one holding the strings, the currency wouldn’t be “mispriced”, it would be “reflecting macro-economic trends”. He made a bad investment decision and is afraid to admit it to himself.

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.

What are you a fucking retard? There’s no legal system! Of course “counter-party risk is tremendous”… put more simply… watch who you give your money too! If someone is promising you a 2,000% APR and there are no financial controls… then how are they achieving that return + profit for themselves? 1) They are engaging in very high risk activities to generate astronomical returns, or more likely 2) They’re crooks.

Hell, there are “first life” countries that pay high interest rates on their bonds (Turkey, Russia, Indonesia, Brazil, etc) but there is a risk associated with it. Why would putting your money into a pretty UI change that?

This guy takes 50 words to say something that could be said in 2, he unnecessarily complicates things, and he is a dork.

He is probably an investment broker.

Jo Mamma says:

Re: Re: TFA proves this guy is definitely a tool

“I am thinking Day Trader.”

Are they even literate?

I never understood day traders… how can you expect to make a profit you can live off of when the gov’t instantly take 20-50% of what you make?

I’ve heard stories of people that have done it, but that’s all they are… stories. I have yet to actually meet someone that is truly successful at it.

Buy some uranium stocks and hold them for a few years… you’ll likely make a fortune.

Tom Jones says:

SL Banks are not relevant

Simply put, Second Life banks are not a prominent part of Second Life itself. They could disappear too and Second Life would not change. Second Life’s world is not based on those banks as the real one is bases on real banks.

Since the premise is taking Second Life banks as an example, every consequence you draw from it is simply wrong.

chris (profile) says:

virtual economies

i have a friend who essentially put himself thru college selling stuff (in game items, high level characters) in Ultima Online. the same is true for many online games. the game i used to play, asheron’s call, there were people who traded houses and mansions using real world currency.

accumulating wealth in an online game is not difficult, just time consuming, and since advancing a character in an online game is also very time consuming (known as grinding) some people opt use money instead of time to gain high end items or characters.

Lili says:

The only way to enforce lending in sl is if you have something to lose, land, an object you created that is given all perms to someone who let you borrow money, you dont pay, they sell the object/land.
I play sl, i make nice money in there but its only because i know its a game, i make stuff i wanna make, if people buy it, cool if not cool. its not meant to be a replacement for life just a game

If you want to make money in there stop playing you are already taking it too seriously

JJ says:

All he ran into was illiquidity in the SL currency market – poor baby. Turns out Geco was a pyramid scam offering outrageous returns – that old adage: if it sounds too good to be true it probable is – comes to mind. This and the articles that prompted it provide little but lousy disinformation on business in SL. Too bad they don’t expire and vanish into the pixelated dustbins of the net.

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