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So is Second Life nothing but a pyramid scheme?

Tuesday, January 30th, 2007

This is the question posed by Randolph Harrison at Capitalism 2.0. He caused a storm of controversy with this post which suggests it is. He received his share of criticism from Second Lifers, including a raft of people claiming to run profitable businesses. He has responded by offering to “prepare a business valuation of one typical Second Life business.” I will be watching this intently….

I found the orginal article fascinating. They were able to take advantage of a large arbitrage opportunity due to mispriced interest rates offered by in game banks. Although they had problems with people failing to honour deals, he asserts they were able to make a significant Linden Dollar (SLL) profit. However, they were then unable to change these SLL into USD without dramatically skewing the exchange rate. This was when he had his epiphany:

As we scratched our heads trying to figure out if there weren’t a more clever way of disguising our trades, or perhaps creating our own in-game banks and exchanges in order to arbitrage the other direction, it suddenly dawned upon me.

This game was just a pyramid scheme.

Unsurprisingly, he was quickly attacked by the Second Life faithful. The most reasoned criticism (I read it here) is that selling large sums of SLL causes the price to drop. This indicates a lack of liquidiity in the market, not that Second Life is a gigantic Ponzi scheme. I think that if you accept that the currency exchanges are honest (Harrison isn’t convinced), this argument is rather plausible.

To be fair to Harrison he anticipated this argument to a degree. He conceeds that it’s possible to make relatively small amounts of and to transfer this back into USD. He feels however that this runs contrary to the hype surrounding Second Life and looking at the sort of money that’s been invested, it’s difficult not to agree. Failing to live up to it’s own hype doesn’t make it a Ponzi scheme though, yet this lack of liquidity is a real problem.

And this is a problem I don’t see being resolved any time soon. We’re currently seeing big business scrambling for a foothold in Second Life. They will be hiring Second Life experts to help build their presence. I suspect though that these experts are going to want to be paid in USD not SLL. So most of that investment will simply bypass the Second Life economy altogether. This sort of reminds of the time when websites were the newest game in town, everyone paid exhorbitantly

Admittedly, I have approximately no economic knowledge nor do I know much about Second Life - but doesn’t it seem obvious that the bottom will drop out of this eventually? I just don’t buy the argument that Second Life is the realisation of a Gibson style metaverse. I don’t think it will be popular forever and when the market crashes people will get burned. So maybe Ponzi scheme doesn’t sound so far from the truth. In any case, I will look forward to the results of Harrison’s evaluation.

Tags: art, gaming, geek, rant, virtual

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