Second Life skeptic sees Linden heading for a crash

Wed Feb 21, 2007 9:24am PST

By Adam Reuters

Randolph Harrison made a big splash a month ago with his article claiming that Second Life is a pyramid scheme. As I understood his argument, since many in-world banks appear pyramid-like (as I reported back in October), and the lack of liquidity on the Lindex makes it very difficult to cash out large sums of money, therefore all of Second Life is a pyramid scheme.

This obviously caused a lot of controversy among residents and drew criticism from virtual world economists like Edward Castronova. Castronova wrote:

The SL economy is so obviously not a mere scheme that it’s hardly worth opposing the notion … Imagine Mayberry, in isolation, with the occasional Don Knotts figure setting up a bank. Ha: The consultants walk in and expect to find perfect price arbitrage. Ha Ha: When they exploit the arbitrage opportunities to winnings that exceed the local GDP, they expect to cash it all out. Fark: When the markets won’t support that, they think they’ve discovered a con game.

Now Harrison is back. After crunching some of the detailed numbers released by Linden Lab this month, he seems to have moved on from the pyramid scheme hypothesis [in an email, Harrison notes: "Come on, I even linked the Wiki on HYIPs right there for you in the article, before detailing 16 Second Life similarities to HYIPs] his new prediction is of a coming meltdown in the Linden dollar:

Supporting the current regime in which Linden Research is always a net seller of L$ in order to support (i.e. weaken) the L$ compared to the $USD, Second Life must register around 45 million unique players by the end of 2008; a growth rate of 40% per month by that point.

Note, this is a ceteris paribus [all other things being equal] analysis. Linden Research could, and most certainly would attempt to use “virtual fiscal levers” with its series of controlled sources and sinks to strengthen the L$ in the face of diminishing growth. I maintain, however, that these efforts will probably succeed only for very short durations and, like taxation in real world economies, ultimately produce far worse unintended negative outcomes. For example, attempting to support L$ strength by forcing in-game deflation would almost certainly result in a serious “virtual recession” by depressing the game’s “virtual commerce”.

I’m not sure I agree with all of Harrison’s assumptions or conclusions. Take a look at the full article, especially this chart, and form your own opinion. Email your full responses (in layman’s terms) to adamreuters@gmail.com, and I’ll run the best of them on this blog.