Jan 242007
 

The headline is all over the Net today: whether Second life is a Ponzi scheme. It’s a sensationalistic headline and tagline for an argument that isn’t actually about SL itself but about how some folks may be using SL. As Mark Wallace says over at 3pointD, “a more scientific inquiry would find that what SL’s economy resembles is that of a small developing nation.”

That said, this is the most scientific inquiry we’ve seen in a while. And some good points are raised.

I commented a while back on someone’s blog that the volume of L$ transactions within the world as a metric wasn’t a measure of the total wealth generated in SL. It’s a measure of liquidity; if one guy buys something for $20, then the person he got the $20 buys something with it too, it shows up at $40 in that figure. Net gain to users as a whole may well be zero.

In practice, we’ve always seen that RMT traders have divided very cleanly into haves and have-nots. Anyone reading Play Money: Or, How I Quit My Day Job and Made Millions Trading Virtual Loot surely noticed that there were no millions involved, and alot of shady dealings. The anecdotes referenced in the “Ponzi scheme” article are what you might expect: money laundering, cyberprostitution, outright fraud, and usury.

The bottom line is that going into SL, or indeed any world, purely on the basis of RMT and money to be made is probably a bad idea. The reliable returns for the average Western person just aren’t there in any of the worlds. This doesn’t mean that the world operators are necessarily running a pyramid scheme themselves, and I think it’s irresponsible to say so. But it does mean that anyone looking to make a buck should assume they are the sucker, and be pleasantly surprised if it turns out otherwise.

  53 Responses to “Second Life under an economic microscope”

  1. Avatar Defamation?Raph / Raph’s Website: Second Life under an economic microscope

  2. I am now going to waste the next 20 minutes of my life bitching about the idiot-trap that is Second Life. After reading these three articles I’ve decided to recreate a scenario that happened half a decade ago at Linden Labs. Linden Think-tank hippie: Our system should have a user driven economy, that would be great. Linden Finance Dept Scumbag:

  3. claiming that SL is a pyramid scheme in which the only money to be made comes from the pockets of new investors. He was sent a lot of negative mail and was roundly dismissed by big players in the virtual world here, here, here, here and here. Read more…

  4. Raph links to a great article about Second Life, which comes to the conclusion that Second Life is a Ponzi scheme, or something similar. No, SecondLife is a classic pyramid scheme. Or, more of an Amway-like pyramid: partially legitimate, partially ponzi. Sure, there are plenty of legitimate

  5. Yeah pretty much as with anything in life, if it sounds to good to be true it probably is.

  6. What I found interesting in reading the original article was the first problem they identified, counterparty risk.

    The first problem we encountered was one of counterparty risk. Put simply, you can seldom trust those with whom you’re doing business in SecondLife. Even supposedly well established, well regarded business citizens are prone to defaulting on any obligations which prove inconvenient. Whole banks will disappear over night, along with your L$ balance. Private businesses will simply refuse to make good on financial contracts. And individuals, pretty much all of whose real world identities are carefully guarded anonymous secrets, sometimes even will openly default, without recourse.

    Justifications for default and non performance are usually wrapped in pseudo-libertarian internet political rants, or SecondLife political hyperbole. The simple fact is, if you arbitrage a bank for over 2,000% return because they don’t understand financial engineering, don’t expect to be able to collect come payment time.

    SL may have the economy of a small developing country but it’s embedded in a developed country with a well developed tort system and a litigious society. I wonder how long those ‘carefully guarded’ anonymous identities will stay that way when LL gets a subpoena?

    I don’t know what the ‘time to tort’ is but I have to believe it’s shrinking.

  7. […] A man who knows MMO's like few others chimes in.  linkThey need to get a life. […]

  8. Fascinating read, and just reinforces my unwillingness to get too involved with SL.

    A thought on it, though, and why a game company is better for responsibility in a VW: A game company producing a VW recognizes that their consumers have options to turn to should their VW not live up to expectations. Because a consumer can quit at any time and leave for WoW, CoH, Eve, etc., the developers have a desire to amke the game fair,balanced, and pleasing to their consumers. This includes banning illegal RMT, pyramid schemes, exploits, etc. SL is not only the only game in town, but it keeps your money within the world – if you want to leave, you have to cash out (and sometimes at disadvantaged rates). By having your money as L$, Linden has a powerful pull over your involvement with the game. And the lack of competition means that there’s nowhere else togoto setupyour virtual 3D casino.

  9. This is going to get ugly. It will be interesting to see if the reaction with the SL crowd, if this is true will the SL evangalists (press media and marketing included) be to SL what the Bostonian investors were to Ponzi? (Unable or unwilling to admit to the hype)

    It’s not so bad when your getting bad press and retain users, but once those users start turning, they tend to be the most vocal “minority”(?) asking for blood.

    I dont think linden labs can blithly ignore this one, there is some pretty decent fin. analysis going on there by someone with chops.

    But I’m wondering is thier cultural value system so firmly embedded in that VW that it would prevent regulation or rather will they start losing users when they start to regulate?

    One of the commentors in that article was spot on: SL as the first mover in this area is going to take the biggest hit, and someone will innovate and iterate off what they’ve done.

    SLv2 might be a good project to start thinking about…..:)

  10. So, what’s the deal here, add a diamond mine with a suitably rare drop rate, and a fixed exchange rate and all of a sudden it transforms from ponzi scheme to bonafide virtual economy?

    Apparently the OP’s never joined an established raid guild and been told “we do blind auctions for loot” while receiving the spreadsheet of DKP allocation indicating every one else has a gazillion points already.

    Perhaps he has not also experienced his company’s officers hypin’ the company stock that you have delayed vestment in – options and ESPPs… all while engineering an SPO and dumping hundreds of thousands of their personal shares on the market.

    Or perhaps he is unfamiliar with interest-only loans and the SoCal real estate market where, last I checked, $1 million in semi-liquid assets buys you what? half a condo?

    I think tonight I’ll go to Chuck E. Cheese with $10 K and see if I can get the equivalent in tokens. When I run the token changer machine dry I’ll write up a scientific analysis on how Chuck E. Cheese is a ponzi scheme and must be stopped at all costs.

  11. I enjoy ignorant critiques like this Capitalism 2.0 guy.

    There are some critiques which make me nervous (ie, Justice Department declaring gambling illegal in SL, comparison between teleconferencing and virtual worlds), but uninformed bloggers going on an on and reaching conclusions which are so obviously wrong and based on a complete lack of research make me think that SL is the right thing.

    People are desperate to take down the big dog, and when their attempts fail so easily it makes you think the big dog actually has something real going for it.

  12. Everyone will draw their own conclusions, and I have mine. When I read the article, my first thought was “we are not ready for player-driven content”.

    Now, this will undoubtedly come off as offensive to many of the regular readers of Raph’s blog, but consider the state of affairs objectively. Much of the content of the SL world is oriented towards the salacious. Furthermore, there is no way to get away from it, since there are no effectively-enforced zoning mechanisms or the like (contrary to what Linden would proclaim). It is simply everywhere.

    In estimating how long until all of SL becomes nothing but a large brothel, one has to ask how any player-content-driven virtual world could avoid this scenario. In truth, they can’t without restrictive mechanisms, and it is those mechanisms that the faithful of Raph’s and related blogs have howled in protest. One person’s “reasonable controls” are another’s “fascist shackles”. The sad truth is that any “open” world like SL is simply anarchic, and while people can pretend that small segments of it maintain some semblance of normality, it is only a matter of time before they do not.

    For those of you thinking “player governance”, I urge you to suggest an environment (with more then ten users) where that has actually succeeded. Look at what SL has wrought – players there have themselves enabled the very problems that could collapse that world. Any world dependent on player-created content is doomed to this fate.

    I don’t shed SL any tears – it was a dissolute place with a sinister air constantly present, whose miscreants could taint even the most earnest of intentions. But the sins of SL taint virtual worlds beyond their own, and those who blithely think we’ll learn a few “life lessons” from it and start over might be in for a rude awakening. Is it a damning indictment of our First Life? Perhaps, but at least in this world we have the means to attempt to combat these demons – in SL there is no hope.

  13. Hello,

    @Klingsor Grailhunter

    “I don’t shed SL any tears – it was a dissolute place with a sinister air constantly present, whose miscreants could taint even the most earnest of intentions.”

    I don’t know why, but it really bothers me when people hold up everything they see to their prude and protestant microscope only to declare it abnormal. If most of the people on second life are spending their time trying to get off with each other, guess what, that makes getting off with each other the normal behavior and anything else an aberration. IBM are the weirdo’s for NOT having a brothel on their island. And you know what? THAT’S OKAY!

    All technology is used for sex. The camera was used almost immediately for pornography after its invention, same with video, and same with the Internet. The reason we have Internet commerce is because of the incredible advancements made in Porn-sites. Why do you consider this a bad thing? It sure keeps ‘em coming back, no?

    “Much of the content of the SL world is oriented towards the salacious. Furthermore, there is no way to get away from it”

    There are tons of mechanisms in place for avoiding that which you find offensive. I’ve been playing SL for almost 2 years now, and aside from the occasional nude avatar showing up at my store, I haven’t been inundated with sexual content. And if that is still too much for you, you can log off. A solution you’ve seemed to discover for yourself.

    What I find strange is the sort of schadenfreude you seem to display at the news that SL might be taking a hit from this mental midget’s article. As if you can’t get comfortable until you know that there aren’t any foxes f***ing in some imaginary world you’ve chosen not to be a part of. WTF?!?

  14. I didn’t sign up to SL to chase a fortune. I signed up to hang out at a virtual library a friend made. I treated it as fun time, and I spent money on it.

    See, a lot of people spend money on SL. These days, some of those people give some of their money to me. I make little houses, I spend evenings playing a game of fancy lego- it’s both rewarding and fun if sometimes a little frustrating. When it’s done, the bits get packed into a cube with a picture on and a price attached. People buy it. I sell the L$ I got eventually on lindex to people who want to buy lots of L$ to have their kind of fun in SL, and it sits there in my SL account covering my tier cost and paying for my subscription.

    Once or twice I got Linden Lab to transfer my US$ balance to my paypal. Actual real money.

    Anyone can do this if they want to. Nobody has to “suck virtual cock for money.” People do that if they like it and they’re good at it.

    Not everyone in SL needs to earn a living. Most don’t want to. It’s a club 18-30 holiday resort and they want to spend some change on looking great and living a vicarious millionaire lifestyle, if only for a couple of hours a night. People run clubs at a loss because they enjoy it. That doesn’t make them losers in some Ponzi scheme. It makes them people spending their money on leisure activities, occasionally offsetting their costs.

    All that said, if this kind of rubbish means less people coming into SL purely with a mind to how they can bleed as much money out of it as possible, then I’m all for it. You can stay out, and leave us to *play* how we like. Whether we profit from our play or not.

  15. […] A classic Chinese whispers game was the exaggerated story of Anshe Chung’s alleged call-girl career retreaded from SL into the grudge-bearing Sydney Morning Herald (in fact, it appears that Anshe had only a brief stint as an exotic companion before focusing on the much more lucrative areas of SL business involving content and real estate). Far from any “media digging” on the story as claimed, VW cites SMH…which cites VW — in a typical circular and mutually -admiring blogation. The hyping of the story seems largely of the old LL forums type of “let’s start a thread just about one person that Jeska won’t close and the target will get banned trying to answer” — over Guni’s gaff demanding take-downs of ugly pictures from SMH, which coupled his RL wife with obscenity. The slugging began in earnest on Second Citizen, a bawdy and disreputable no-holds-barred forums like anything but our Professor’s 18th century salon. There, Joshua Nightshade plotted how he was going to pay people for dirty stories about Anshe; crash her Wikipedia entry and amplify the claim of a sultry past; and get the story around (later, a bizarre but predictable SL twist to the Whispers game, after a many-hours convo with Anshe herself, he pulled an unpersuasive Damascan turnaround and began defending Anshe). […]

  16. Are you all sure that this article deserves so much attention? While answering to critics, the author of the article explains and admits “I’m no expert on legalitie”.

  17. […] Pyramid of Confusion: The Latest Second Life Backlash By Wagner James Au | Analysis Om just passed me the most recent attempt to deflate the Second Life hype bubble, a Valleywag post which is actually an excerpt of a longer post by financial analyst Randolph Harrison. Essentially, Harrison argues the internal SL economy is a pyramid or Ponzi scheme, and unsurprisingly, that assertion has provoked strong replies, from Tateru Nino at Weblogs’ Second Life Insider (”Way to compare Buicks to boysenberries there, boys“) to Mark Wallace of 3pointD (the analysis is “not about SL,” Wallace observes, “but is only a conversation about a conversation“) to renowned online game developer Raph Koster (who notes that SL content creators are not “necessarily running a pyramid scheme themselves, and I think it’s irresponsible to say so“.) […]

  18. The “economics” piece is nothing but lies. There are at least three professional services to cash out of SL, and will soon be another when the new GOM opens. You can’t cash out US$50,000 in one day, but you can get there over time. Certainly it’s enough for Anshe Chung to pay her Chinese workers in real money. I routinely sell L$ to cover my tier, and have cashed out to Paypal before. There are several SL banks which don’t offer insane rates, and have good reputations for honest dealings. I can only conclude that the perpetrator of the piece has never actually used SL.

    Klingsor, your premises are wrong, and your conclusion is wrong. Some people are not ready to join worlds containing player-generated content, because they’re not mature enough to handle other people having fun. You don’t like casinos and whoring; fine, there is a minority that shares your views. But a majority of people clearly do like these things, because that’s what makes the big money, in SL and in the original virtual world, Las Vegas. And everyone, whether they like them or not, has to learn tolerance in order to live in SL and the real world. We don’t want you in SL if you aren’t capable of tolerance, and in fact you will be suspended and then banned by Linden Labs if you’re not capable of tolerance.

    However, you’ve also clearly spent little or no time in SL. The mainland has both PG (no strip clubs) and Mature (anything goes, in enclosed spaces), and privately-owned islands have zoning, typically fairly draconian. I own mainland land in a PG sim near an arcade, but there’s no stripping there. The zoning really works. I also rent island land in mixed residential-business areas, tending towards the classier end. There are regions in the same estate which are residential-only, others are business-only. There are other islands which are giant nightclubs. It’s whatever people actually want.

    Private island estates are Franchise-Oriented Quasi-National Entities (FOQNE), to use a term from Snow Crash. They’re total dictatorships, but with such limited scope and such ease of movement out that nobody is oppressed by them. If you break your estate covenant, you’re out. It happened to some griefers last week. Law and order, at least to a western frontier standard, which is all we want.

    Give people tools to make stuff, give them tools to buy and sell products and services in some quasi-reliable fashion, give them tools to tell what kind of content they’re going to see, and give them the tools to ban annoying people on their own property, and wonderful things happen. What doesn’t get to happen is sanctimonious jerks dictating the content of other peoples’ private property.

  19. Oh, dear, Raph, if that’s science, I’d hate to see what is really science for you. I had hoped for better from you. I don’t see why you’ve been taken in so. Where’s the science? Just because words like “banking” or “two percent” or “the economy” appear in this slam-book? I’ve written a critique of this and other Valley Wag pieces here. You can’t even place comments on their blog unless you are one of their little friendsters invited by the in-group, bleh.

    They don’t even specify the names of the avatars or companies they are talking about, and they mistake the inability of their own little “business” to come in and take down the popstand, due to the relatively small and synthetic nature of the world, with the alleged inability to other inworld businesses to make money and cash out. That’s absurd. The whole point is that you can in fact make money and cash it out normally.

  20. >I dont think linden labs can blithly ignore this one, there is some pretty decent fin. analysis going on there by someone with chops.

    Where’s the chops? Why are people so easily snowed? These guys don’t even show evidence of having visited the statistics page and studied the past LindEx market performance pages. They don’t even provide sourcing or names. They’ve made casual and undocumented comments about trying to play what amounts to a foreign currency market as a market-mover and then bitched that the country evidently had circuit breakers to curb their dubious activities (and that’s the case — and they seem to be unaware about LL’s own role in selling Lindens and maintaining breaks on the LindEx). It would be like Soros saying, gee, I could break the bank of England by shorting the pound but I couldn’t break the bank of Malawi, they were too dinky and wouldn’t let me.

  21. Counterparty risk is the biggest problem that article identifies. People playing SL intrinsicly believe there is security in their money when they drop it in the bank. Anyone here ever live in a time where your money wasn’t federally insured to $100K? No such consumer protection exists in SL. That lack of protection applies just as equally to the exchanges as it does to the banks. There is no difference between opening a bank, accepting people’s money and running off with said proceeds versus opening an exchange and restricting/fixing the prices of trades based on volume. The latter is covered by the SEC in this country and the former is covered by FDIC. Both are consumer protection mechanisms that do not exist in SL so counterparty risk is exceptionally high. When the value of money is largely contained inside the system that counts it, (ie banks and exchanges) you need some sort of neutral regulators to prevent the conflict of interest inherent in the idea of a for-profit-privately-owned bank. If there was another SL where your money was transferable then the beginning of checks and balances might be in place. Until then, there is no system checking and balancing the scam artists.

    The article immediately assumes from anecdotal evidence that price fixing is occuring by these privately owned banks and exchanges. While it may not be the case, its wise to accept that it can readily exist in SL and behave appropriately. It’s very easy to imagine a scenario where a privately owned bank would manipulate the exchange rates in their favor. With no one to answer to when they do it, simple greed takes over. I’m all for free markets but there is a role for government in the marketplace and its an important role.

  22. Hmm. I was fairly critical of the piece — didn’t I call it sensationalistic and irresponsible?

    That said, the article is a bit more substantive than I think you are giving it credit for (not the Valleywag piece, the actual original article). Did you read the comments thread? There’s quite a lot of supporting specifics offered up there.

    I stand by my final point: for the vast majority of people, there may be money to be made in RMT in general, but it’s not significant amounts relative to real world earning sources, and it’s not reliable. Are some people making good money? Yes, absolutely.

  23. However, you’ve also clearly spent little or no time in SL. The mainland has both PG (no strip clubs) and Mature (anything goes, in enclosed spaces), and privately-owned islands have zoning, typically fairly draconian. I own mainland land in a PG sim near an arcade, but there’s no stripping there. The zoning really works.

    My co-worker logged into SL the other day to catch up on how it was going.

    The first thing he did, as I am sure most newbies do, was check the “top places” list.

    100% of the list was porn.

    Jumping to the accusation that “you’ve spent little time in world” is disingenuous. People spend little time in world because they overwhelmingly meet things they do not want to see when they log in. There is a pattern here. Plenty of gems may be hidden in the muck, but saying to people “you must wallow in muck to understand!” is not a fruitful argument.

  24. Not everyone in SL needs to earn a living. Most don’t want to. It’s a club 18-30 holiday resort and they want to spend some change on looking great and living a vicarious millionaire lifestyle, if only for a couple of hours a night.

    Hence why I said “going into SL, or indeed any world, purely on the basis of RMT and money to be made is probably a bad idea.”

    Once again, it’s been fascinating to watch the defensiveness crop up — what I said was SUPPORTIVE of SL, ATTACKED the article, offered up one measly compliment (that it’s actually the ONLY piece I have ever seen that gets to the level of terms like “counterparty risk” — I really do think saying that the author does not know what he is talking about is a mistake), and concluded with a point that surely is non-controversial?

    And yet, I’m being taken in by a “mental midget” as some have called him?

    As with most virtual worlds, the citizens of SL do not really mind criticism of the world operators, but broader critiques of the userbase tend to get their hackles up, it seems. Which is to be expected, really.

  25. All that said, if this kind of rubbish means less people coming into SL purely with a mind to how they can bleed as much money out of it as possible, then I’m all for it. You can stay out, and leave us to *play* how we like. Whether we profit from our play or not.

    We don’t want you in SL if you aren’t capable of tolerance, and in fact you will be suspended and then banned by Linden Labs if you’re not capable of tolerance.

    You’re forgeting the traditional second component of the fanboi’s response to criticism of a game. It’s not enough to say ‘don’t let the door hit your @ss on the way out, more bandwidth for us’. It has to be followed by at least one ‘can I have your stuff’.

  26. Well, Raph, I didn’t accuse you of being taken in by anything, my comments are just about what I read over on the valleywag site. I couldn’t be bothered with yet another registration for comments there so you got most of them, and 3pointD the others. I guessed you’d like comments since you blogged it.

    JuJutsu, I’m not kidding about disliking people thinking SL is some pot of gold and coming into it with that in mind. I don’t like that attitude, and I don’t think it works. Raph seems to say the same thing- relying on RMT in SL as an income is a bad idea. I dunno, I could get by on what I could cash out I think, until the bubble burst- if I treated it as a full time job. The same would be true of working for any business. No guarantees in life. Maybe I could build websites instead of virtual homes. The basic requirements aren’t much different. Neither are the long term survival prospects of any net-content firm I might join different to the prospects of SL.

    Raph, I hate the popular places list. They may be popular, in that they’re consistently hugely traffic’d, but they are not the majority of places in SL. I wish that list would vanish. Not to deny what goes on, but to remind everyone there is so much more else to do. “Top Places without the words sex, casino or camping” would be a nice one. Would be stores mostly. Filter off commercial properties, I wonder what would be up there. Things like Bliss Basin, Gardens of Apollo maybe. Nice places.

  27. The instant defensiveness of SL supporters, like so many of the things surrounding VWs and VW type games, is far more humerous and interesting then the worlds themselves.

  28. Almost as humerous as the burning need people seem to have to make comments about something that neither interests nor affects them. Kind of like Orlowksi’s Reg articles but without the advantage of being paid to do it.

  29. […] Raph links to a great article about Second Life, which comes to the conclusion that Second Life is a Ponzi scheme, or something similar. No, SecondLife is a classic pyramid scheme. Or, more of an Amway-like pyramid: partially legitimate, partially ponzi. Sure, there are plenty of legitimate SecondLife customers who just like to go there to get their kicks, spend a couple dollars, and be on their way. […]

  30. Almost as humerous as the burning need people seem to have to make comments about something that neither interests nor affects them.

    Many of us are interested in the category [games and virtual worlds] but not necessarily in any specific member of the category. I’m no more interested in playing WoW than I am in playing SL. I’ve done both and to be honest neither is interesting enough for me to spend any time on it. I feel free to comment on aspects of both of them. They’re part of the category. Club Penguin is certainly not my cup of tea but it was nonetheless interesting to find out about it.

  31. I don’t think Second Life is uninteresting or that it won’t affect me, even though I don’t play it. It is a fascinating experiment, and like all experiments, it sometimes reveals unanticipated consequences. Certainly, as it is a high profile player in an important space (I’d call it a 3D MUSH, to place it in historical perspective) in the online world, its innovations and its errors will probably have serious impacts on my future online options.

  32. […] Remember a bit back when said, “These guys seem pretty smart.“? Well, apparently not everyone agrees. I was reading Raph’s comments on it earlier today: It’s a sensationalistic headline and tagline for an argument that isn’t actually about SL itself but about how some folks may be using SL. […]

  33. @Prokofy,

    Fine please point me to an article that has a more in depth basis of analysis.

    If I login to SL todday and drop 50k into the exchange system. and tomorrow after buying my virtual Pantaloons and Island want to extract 45k
    can I do so?

    And why not?

    If I go down the street to BofA and deposit 50k into my bank account, go spend 5k on a server then the next day withdraw 45k can I do so?

    How safe is my money in a virtual bank in an enviornment with no regulation and a buyer beware practice of depositing money?

    Kressic wrote:

    “I’m all for free markets but there is a role for government in the marketplace and its an important role.”

    Spot on.

    There is no anectodal evidence required, saying that it might be happening thats laughable, where humans are concerned and money is involed, without legal or regulatory recourse, people will manipulate the system for gain. Period.

    Raphs right in that “you can avoid it” (smut) isnt good enough, in fact he’s a bit more poitic than I am so Im going to call it what it is: A bullshit cop-out by the community.

    If your to busy with your own virtual business, liesure, gambling, or Pirate Ninja fantasy to care that people can engage in virtual pedophilia and rape fantasies then there (I’ll be polite) as an outside observer how does that reflect on the quality and integrity of your community?

    Oh I know “let people freak with freedom” and dont impinge on thier “virtual freedoms” and I’m not some moral majority type by any means but I mean can you really defend an enviornment that allows that and a slash and burn economics?

    If you as a SL can defend that system with a decent comfort level, then hey, whatever. But no ones going to feel sorry for you when you get burned by your own enviornment.

    Since my point was lost I’ll state it more clearly: LL needs to start regulating thier enviornment a bit more or someone will start doing it for them, or worse you won’t have a VW to play in.

  34. bleh…..wtb spellcheck button 50gp!

  35. […] I am now going to waste the next 20 minutes of my life bitching about the idiot-trap that is Second Life.  After reading these three articles I’ve decided to recreate a scenario that happened half a decade ago at Linden Labs. […]

  36. In the market trading world, there is a phrase known as “talking your position”. If you own a security, you will say nothing but nice things about it; if you’re short, you hate it. It’s really difficult to be objective when analyzing securities or virtual worlds, and the shrillness of the SL “defenders (and paucity of responses), is illuminating. The “defenders” have no idea how much time I’ve spent in SL or how much money I’ve invested – their reaction is based simply because I don’t agree with them. I am neither “long” nor “short” SL.

    But back to more objective commentary. To support my premise that virtual worlds relying on player-created content are “not ready for prime time”, consider some of the arguments offered up so far.

    1. But a majority of people clearly do like these things, because that’s what makes the big money, in SL and in the original virtual world, Las Vegas — This one’s very revealing as to how some people miss the forest for the trees. So the majority of SL accounts support “the salacious”? OK, fine – how many is that? A few thousand? Depends on how one dissects Linden’s public information. If the implication here is that virtual worlds will tend towards “hijacking” by a few thousand users, then those same worlds will never be populated by more than those few thousand users.

    2. I don’t know why, but it really bothers me when people hold up everything they see to their prude and protestant microscope only to declare it abnormal — again, shrillness obscures perception of the big picture. If a few thousand people hijack a virtual world and declare their behavior “normal”, then so be it – the normal behavior of Second Life is now officially “to get off”. It does not, however, induce hundreds of thousands of other possible participants to join that virtual world, for whom this is decidedly not normal behavior.

    3. The “economics” piece is nothing but lies. There are at least three professional services to cash out of SL, and will soon be another when the new GOM opens. You can’t cash out US$50,000 in one day, but you can get there over time — I think this poster needs to go back and read the original article more carefully. For anyone with any open market-based experience, this environment is immediately crystal clear: if the bid side lifts the offered side a few too many times, there won’t be an offered side anywhere near where they think it will be. The RMT spreads currently touted are likely paper-thin in terms of liquidity, and any one attempting to cash out of $L (i.e. lift the offer) for any significant amount of money will likely be disappointed. I have witnessed countless people attempting to make markets where they do not have the liquidity to support normal trading activity, and nothing I have observed here makes me change my mind.

    4. However, you’ve also clearly spent little or no time in SL. The mainland has both PG (no strip clubs) and Mature (anything goes, in enclosed spaces), and privately-owned islands have zoning, typically fairly draconian — Well, the location of buildings is only a part of the picture. Do you know what a “tout” is? Get propositioned enough times in SL, and you will. And don’t get me started on some of the “flying objects” I observed. That’s a normal part of life, you say? Not to the degree that it exists in SL. This point is very relevant, in my mind, to the validity of virtual worlds as a proxy for many participants’ raison d’etre for being in that world.

    I can go on, but the more astute won’t require more examples. For a few, SL is a “fun” virtual world, but I still maintain a salacious one. Ultimately, it won’t appeal to the huge player base that Linden is allegedly claiming. Equally as importantly, it is a very poor role model for future evolution of virtual worlds. But to people “talking their position”, those words will fall on deaf ears.

  37. I think this poster needs to go back and read the original article more carefully. For anyone with any open market-based experience, this environment is immediately crystal clear: if the bid side lifts the offered side a few too many times, there won’t be an offered side anywhere near where they think it will be. The RMT spreads currently touted are likely paper-thin in terms of liquidity, and any one attempting to cash out of $L (i.e. lift the offer) for any significant amount of money will likely be disappointed. I have witnessed countless people attempting to make markets where they do not have the liquidity to support normal trading activity, and nothing I have observed here makes me change my mind.

    I read the original carefully, several times. The reason that counterparty risk struck me as the most important part of the article is because I don’t find the ‘pyramid or ponzi’ argument credible. The author was clear about the auction market, why the outrage that it behaved as one would expect? Lots of markets are thin [muni bonds?], that doesn’t make them pyramids. For that matter, institutional investors with large holdings can find it difficult to liquidate their postion without taking a substantial penalty, does that make the NYSE a pyramid?

  38. Lest we forget, Second Life exists to profit the Lindens, not their customers. Would he call Las Vegas a scam because the casinos win more often than the gamblers?

  39. Ace Albion said, I hate the popular places list. They may be popular, in that they’re consistently hugely traffic’d, but they are not the majority of places in SL. I wish that list would vanish.

    And that’s fine, but the problem is when you imagine a newbie jumping in after seeing SL on the BBC or something. What would they open up? It’s a problem, and it should be addressed.

    It seems to me, in general, that the problem of SL is that it’s too small. The Internet is huge; thus, the porn isn’t that big of a deal, because the other stuff has overwhelmingly drowned it out. If you could create popular locales in SL that drown out the porn, then I think things would become much better.

    Just a thought.

  40. Raph, are you aware that TheStreet.com writes regularly about the SL economy now? They’re a bit breathless, but trust me, they’ve got it on these dudes about “science”. Sure, you characterized the piece as “sensationalistic,” but to even apply the word “science” — let alone “most scientific” seemed really odd coming from you. Huh? Why would you, of all people, be taken in by some rich kids sojourn to SL to try to play with a currency market. The piece yielded absolutely no useful or enlightening information whatsoever. To write a piece like that and never once mention that the Lindens themselves print and sell Lindens really seems careless to me.

    As for your co-worker and the porn palaces, I can only say: newb. Everybody knows that “Popular Places” is a meaningless list of only 20 locations that all game their position on that list through the use of camp-chairs and dance-pads. You would think porn and cybering for pennies would be enough of a draw, but in fat, there are so many of these places they have to fiercely compete. So you really have to go right past that and ignore it as noise caused by the old developers’ program, which rewarded high traffic with actual US cash awards, and a function of the camp-chairs.

    Then, once you start plugging in words of any sort, whether “steampunk” or “science fiction” or “poetry” or whatever your thing is, you will then find the traffic more meaningful. The difference between a 5000 or 1000 or 200 traffic then lets you know whether people are really going to the sites and finding them useful.

    I’m never for censoring or hiding information or human behaviour patterns that people don’t like. Let them sit there on the popular places list. Let the events list fill up with a million Tringo games and yard sales. It’s all good. People are having fun. They don’t want to sit in an 18th Century Salon with Urizenus Sklar. So let them jump on the balls and the sploders.

    What I think the solution is for this kind of “inelegant content” is merely to populate the list with more than 20 returns — as they did in TSO — and make the categories more granulated. They’ve got the beginnings of that, which they started after a lot of interaction with residents to see what categories to pick — they have stuff like “business” or “parks” or whatever — but aren’t hooked up yet — for one simple reason, I imagine, and that is the SEARCH altogether is deeply in trouble. I don’t know the mechanics of it, but from what I gather, they send out a query and it doesn’t always come back. To their credit, they did fix one really bad search bork which I and others complained bitterly about (two word searches were returning everything on either word arranged by traffic, unlike its previous more Google-like functioning which bound the two words into an “or” so that it could be coherent in the search).

    I think this is probably a data base problem, and like other problems of lag and grey squares and such, feels to me like they just have too many catalogues on file, and no way to quickly get to all the dogeared file cards usefully probably because whatever thing they’re doing it with isn’t scaling or reaching. I gather it would be a luxury to populate the Search Places list with more returns like the other functions; some nights the search is turned off completely to save resources or something.

    Mikiyo’s right — that’s the question to ask. I’m surprised that these Valleywag people and Clay Shirky doesn’t ask it, or that somebody knowledgeable about virtual economies like Ed Castranova would ask it.

    They have this interesting list of avatars, with the alts and multiple accounts all rolled into a unique avatar (see, they can do it when they want to, so people should keep asking them for the number of extrapolated alts to correct this 2.5 million stuff), where they analyze the “Positive Linden Flow”. But that’s not “profit” — because they don’t calculate what’s left over from that “flow” AFTER someone pays tier. So it’s a very obvious inflated look at the number of businesses and their incomes because what is shown with a figure like $2000 US may not reflect that the person has to be $887 in tier or something. Other business expenses like payroll or infrastructure like prefab houses, etc. aren’t shown either, they probably couldn’t differentiate it. So it’s kind of meaningless. A figure like the $200,000 US minimum that Anshe must take in a month (500 islands x 16 lots per island x $25 monthly fee per lot) isn’t reflected in this system at all because it is all paid separately, offshore so to speak, via PayPal.

  41. Also to note: there’s plenty of transactions not being measured by any economic data published or researched by anyone: it’s the transactions that are based on USD.

    I’m thinking __(insert big brand here)__ didn’t pay __(insert design agency here)__ with lindens and prim hair.

    I hire people to do work for me and the Lindex/Linden $ is not involved.

    Demand for service offered.

  42. Two third-graders are walking to school. One says, “I’m really worried about that test today.” The other says, “I’m not… I’ve got smart pills.” The other says, “Give me one, eh?” The first says, “I’ll sell one to you for $5.” The other says, “OK. Here,” and gives him a fin. His buddy hands him a little grey pellet, and he slugs it down. Making a face, the kid says, “Holy heck! That tastes like… I don’t know… like rabit s**t, I guess!” The other kid says, “Hey! That’s exactly what it is! See, you’re getting smarter already!”

    The point being… there’s value, and then there’s *value.*

    A couple folks at the original post (and here) have pointed out, and I agree, that the purpose of SL is *not* to make money. Most people in the game don’t. According to the Linden’s economic page, you’ve got something like 17K folks who have a positive cash-flow out of the system… more than have of whom make less than $10/month. OK. Well, that’s $25/month more than spending $15/month on any other online game, eh? But still… it ain’t a living.

    Unless you live in China. In which case it may be, while not an entire living wage, the difference between heating your house and not. Let’s not forget that what counts as disposable income in the US/Canada and Western Europe can go a lot farther elsewhere. So while talk of Pyramid/Ponzi Schemes (which, btw, SL is not, as these are very specific kinds of multi-layer and investment frauds) may be interesting… they aren’t really apropos.

    I’m not an SL enthusiast. I’ve played it and have enjoyed it. Have never owned land. I think there’s a lot of potential there. But when the press talks about “The Second Life economy,” and then somebody wants to deconstruct that press as if the MSM and, therefore, all of us are jumping into SL as if it is a world that can sustain us without recourse to food, water, electricity, oxygen, etc… I start to get a bit bent.

    IBM, Reuters, American Outfitter, and all the other companies that are “investing” in SL know for damned sure that they ain’t gonna get the same kind of ROI or foot traffic out of SL that they get out of an RL store or a Web site. That ain’t the point. Right now, though, the PR value for every Major Co. that’s put up a shingle in SL has been worth the scratch, because they’ve gotten good hits just from doing so. Even if they let the storefront languish… they’re seen as “techno-hip.” These are not dumb-ass companies from a marketing standpoint.

    Also… they may be interested in simply messing about. Keeping a toe in what is, currently, some pretty inexpensive water. The price of a whole island in SL is insanely low compared to almost any other budget item for a major retail company. It’s way less than the cost of one full-page ad in any major news daily. So getting your intern to do the grunt work and funk around and maybe hire a couple design monkeys to throw up a store-front and come back and report on the action… well, it really isn’t much skin. And who knows? You might learn sumfin. Or have some fun. Or get more press…

    Here’s the thing that most amuses me… Futures’ trading, selling short, money-market accounts, currency trading… all kinds of economic shenanigans in real life are, in many ways, at least as “virtual” as what goes on in SL. They assume metaphoric loads that are as tenuous and thin as that of avatars and a 3D mesh. The number of steps of belief between real, worldly value and what is going on in the computers and bank accounts is at least as drawn out as between a furry DJ and the bling designer she just bought new dance poses from.

    Lest we forget… all money is virtual. I will gladly pay you Tuesday for a hamburger today.

  43. To Michael- I agree with you. It’s a shame people take one look at the smut and switch off. The _blacklibrary is about rebuilt, there’ll be a bit of a do next friday I think. It’s not far from the Terra Nova plot that Ren hasn’t managed to build yet :)

    “”You can have multiple avatars in ‘Second Life,’ but the overall average is 1.25 avatars per person.” The median age of users is 31, and the oldest users spend the most time in the world (over 80 hours per week for 10 percent of the residents). Women are 43 percent of the customers.”

    Philip Rosedale, Nov 06. Just posting here because Prokofy raised the metrics subject again :)

    This research may make sense to some economists, but that suggests more about economists to me than it does about the practicalities of how I invest my money and spare time. I’ll stick to selling handmade souveneirs on the resort beach, it’ll keep me in shoes for the foreseeable future.

    As a general comment, it would be super-shiny if people stopped polarising everyone else’s opinions into stark monochromatic For and Against. There’s nothing like being quoted by someone arguing against someone else saying “all you people”. It is actually possible to have more than two opinions in a group on any subject!

  44. Nevertheless, the Lindens do explicitly hype SL as a way to make money. Which is dishonest.

    Actually, i found the whole thing relatively encouraging since it means that the standard money-laundering practises we’ve all been anticipating won’t pad anyone bank account except for Philip Rosedale’s.

  45. […] Life as Ponzi Scheme Second Life as Ponzi Scheme: “Raph links to a great article about Second Life, which comes to the conclusion that SecondLife is a Ponzi scheme, or something similar. No, SecondLife is a classic pyramid scheme. Or, more of an Amway-like pyramid: partially legitimate, partially ponzi. Sure, there are plenty of legitimate SecondLife customers who just like to go there to get their kicks, spend a couple dollars, and be on their way. […]

  46. @Cael: Yes, they do. And Disney hypes The World as a way to experience familial bliss, and Nutrisystems hypes their shakes as a way to lose weight and the AbLounger hypes their chair as a way to tighten your gut and eHarmony.com hypes their service as a way to find the gal/guy of your dreams and the entire freaking Western World hypes beer and cigarettes as a way to (somehow) score chicks.

    We call it advertising. Hype. Marketing. Spin. Fluff. “Results not typical.”

    It is *possible* to make money in SL. Some people do. Quite a few people make a little money at it. A few people make “hobby income” at it. A very, very few people make a decent living at it.

    I fail to see how this makes SL a pyramid, Ponzi or any other kind of “scheme.” It’s all extremely transparent. It may end up being regulated out of existence. It may not be to your taste. It may be that a few connected or particularly vigorous or talented (?) or unscrupulous players do the best at the money portion of the game.

    The business side is one aspect of the thing. You don’t have to pay to play, or prim to play or buy to play. You can. And you can do it a little or a lot on either side. And like any (and I mean *any*) business venture, if you go in all wide-eyed and bushy-tailed (and in SL, you can be really bushy-tailed), believing 100% of the hype of the promoters of the higher-level of the platform… well… you get what you deserve.

    – If you buy space for your business in a mall without a full understanding of how traffic there works, same thing.

    – If you start a Web business and don’t understand SEO, same thing.

    – If you accept VC money and don’t get what kind of control they have over you, same thing.

    – If you use copyrighted materials and don’t get the extent to which you vs. the artists own the content, same thing.

    ALL business involves risk. ALL business involves work. That’s why they call it “work.” If it was fun all the time, they’d call it “camp” and make you pay. Which is the game side of SL. If you want to have fun 24/7, you get to play it that way, pay for clothes, hair, skin, bling, games, sex, what-not, and be on that side of the equation.

    Which is nefariously close to real-life, eh?

    Hmmmm… Reminds me of the “First Life” post. I wonder if real life is a Pyramid Scheme? That’s an argument that I’d seriously consider…

  47. Nevertheless, the Lindens do explicitly hype SL as a way to make money. Which is dishonest.

    But not a ponzi or pyramid. It might be intellectually dishonest in the same way that the real estate seminars mentioned in the article are, but certainly not illegal. Strip away the ponzi/pyramid stuff and its just another article about Second Life hoopla.

    One last kick at the dead horse. The counterparty risk the author discussed is gonna make the news at some point. It doesn’t require big bucks. Just a financial loss combined with an attorney willing to do some work for a short interview on CNN…

    Lest we forget… all money is virtual. I will gladly pay you Tuesday for a hamburger today.

    You’re right; it happens all the time. But when you DON’T pay me on Tuesday guess what happens?

  48. You’re right; it happens all the time. But when you DON’T pay me on Tuesday guess what happens?

    OMG I think Jujutsu’s in the mob and he’s going to have Andy’s legs broken….poor Andy

    Raph’s blog is getting better than reality TV and the Soprano’s. :)

    This is Andy posting:

    If you start a Web business and don’t understand SEO, same thing.

    – If you accept VC money and don’t get what kind of control they have over you, same thing.

    Which is nefariously close to real-life, eh?

    Hmmmm… Reminds me of the “First Life” post. I wonder if real life is a Pyramid Scheme? That’s an argument that I’d seriously consider…

    And I endorse this Message!

    I hope SL can avoid the derail, but you know its one of those case studies waiting to happen: At what point should the organization been proactive about self-regulating prior to the supoenas(?) flying….

  49. Allen, if *Linden Lab* permits child-rape fantasies to play out with simulated child pornography created by adults, and other deviant and sick stuff on their servers, I don’t understand why that has anything to do with me, or any other land owner or service provider in SL, any more than what some porn palace does on W. 42nd Street has to do with me, merely because I live in New York City.

    I don’t tolerate this sort of extremism on my land, and I also have limited means to deal with this in any event given the limited tools we are provided.

    I don’t get why I have to be slammed, and bullied, and ridiculed for running a business in a virtual world and tarred with the same brush as those running sex clubs. This isn’t playing in a sick fantasy; this is running a business in a virtual world. If I run the rentals building on W. 39th St, it makes me completely irrelevant to the porn palace on W. 42nd St.

    Any single article on Reuters or The Herald of TheStreet.com about the way the economy works and all the scams and high-stakes capers going on would substitute as “science” by contrast to this “journalism” as the Randolfe admits when I confronted him on his blog — the weakest point in his piece is that he provides no names of avatars or businesses and merely provides his own anecdotal experience. And he has only the LindEx speculation as a proof of any “pyramid” — flimsky indeed.

    No, the challenge is to you to come up with some proof that Sl is the pyramid scheme he claims. It’s not. Whatever the bait and switch going on now with selling real estate that they plan to devalue, as Mitch Kapor made abundantly clear yesterday in an interview with Reuters in Davos, it may not rise to the qualification under law as a Ponzi.

    There are many ways to make money in SL. Most people will never approximate anything like the fortunes of Anshe Chung or Adam Zaius because they are either unable to work 24/7 and not bill their hours, have no investment capital, nor are they programming whizzes with close tie to the Lindens. Those are the ingredients to become rich in SL. Even to eek out a few hundred or few thousand dollars a month, you have to not bill your time at RL standard wages, and you have to fight Supply Linden, who is depressing even the paltry wages you do make by selling Lindens printed out of thin air on the LindEx (Supply Linden became a millionaire himself last month, selling his first batch of US million dollars in printed money).

  50. […] to learn Chinese… Source: Terra Nova – Academics playground Categories: Bloggers 17:54 Second Life under an economic microscope The headline is all over the Net today: whether Second life is a Ponzi scheme. It’s a […]

  51. […] may recall that his last article alleged that Second Life is a Ponzi scheme (I discussed it here). This time, he moderates the rhetoric a little bit, considering it instead a HYIP, or high-yield […]

  52. […] are plenty of other “experts” – including Edward Castronova, who literally wrote the book on virtual word economies – who […]

  53. […] Days. How YOU Can Too! Sponsored by: http://www.FilthyRichTips.com/ [Found on LookSmart] 11. Raph’s Website » Second Life under an economic microscope It’s a club 18-30 holiday resort and they want to spend some change on looking great and living […]

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