What is Linden Labs' liability?

I'm not sure liability is the correct word, but presumably Second Life is a game and as such the Linden Labs currency has no intrinsic value. As far as I can tell it is a made up currency without any legal status, yet it is being traded as such.

Does anyone out there know if Linden Dollars are being regulated in anyway and what protection we (the game players) have against Linden Labs arbitrarily deciding to scrap the currency or changing the exchange rate to whatever they wish?

This question is prompted from a discussion I was having with someone who knows nothing about SL and after having me explain to them about Linden Dollars suggested the Linden Labs are a pyramid scheme and that their business model is completely illegal.

I think this is a little unjust and I really don't know what the real situation is, but would appreciate anyone willing to try and explain it to me?

Thanks
Leon

PS. I'm sure it may be covered in the TOS, but I can't remember reading anything about it.

I find their business model quite disturbing if not down right scandalous, the fact of the matter, LL isn't a public company (yet) so, I'm guessing that what they're liability is isn't really divuldgeable. If it is, its lost in the sea of pointless reteric in their 'TOS'.

Basically what their TOS says, they take no liability for their actions, downtime, inventory losses, etc etc etc, so basically we're entirely reliant on their service whether they'd like to provide it or not. There's no one we can complain to however, if this form of business is illegal. They seem to like to do things the dirty way.

Here:

One thing that does seem to have been misunderstood here is that LL do not set the exchange rate. The people who sell L$ enter the price in US$ they want for them, and then people who buy them buy them at the best price available. Naturally, if a lot of people are selling L$, people will be tempted to enter a lower price so that their L$ sell more quickly; equally, if lots of people are buying them, the lower priced ones will sell out and sellers will be able to get away with a higher price.

By the "pyramid scheme" I assume your friend meant a Ponzi scheme (where the "payoff" from an investment is in fact paid from the starting stakes of other investors). There is no way that LL could be running their business this way; saying that "if everyone stopped buying L$ then the existing members would lose out on their investment" is like saying that "the Stock Market is a Ponzi scheme because if everyone stopped wanting to buy shares the inventors would lose their money, and knowing that nobody could sell the companies could stop posting dividends".

Okay, so Linden Labs behave like a 'bank/exchange' yet have no real world regulation?

Don't get me wrong. I understand what I am signing up for.

What surprises me is that with the current war on terrorism and all the extra red tape that banks/money institutions need to adhere to, that this 'business' is even legal? What is to stop money laundering taking place in SL? I know it is a small 'economy' and any significant transactions would easily be picked up, but it is possible

Alarmist Leon

I bitched on my blog about this a few weeks back. Alot of my points still stand. I need to add something about currency : http://burke.godswitch.com/?p=12

If LL did have any real liability, it'll be failing to see the opposition sneaking up to knife them in the back.

I think the claim is that they're not a bank/exchange, any more than World of Warcraft is a "bank" because you can buy and sell gold for real money. However, how the fact that Lindex is provided by LL as opposed to a third party affects this I'm not sure.

Ah, thank you for clearing that up.

So, LL are behaving like a 'real' exchange. But of course without any of the regulation to protect the users of it to go with it?



I think the person I was speaking to was thinking more along the lines of Linden Labs being able to shut-up shop and keep everyone's money ... I.e. all the 'investors' running their businesses would have absolutely no legal come back ... And as to ponzi scheme, as long as there are new users joining the ship is sailing happily?

Leon

PS. I also want to point out that I'm only trying to clarify exactly what it is we are all playing with ... after all SL is "only" a game? (Played with real dollars )

Interesting comment. I'm not a lawyer, but I'd be very surprised if LL could claim they aren't running an Exchange Market. Can't quite remember the saying, but it is something along the lines of if it walks and talks like something then is is that thing?

Hopefully there is a lawyer reading right now and would be willing to explain it.

Curious Leon

Interesting points Burke.

I don't understand you last comment about opposition sneaking up to knife them in the back. Would you mind explaining?

Thanks
Leon

The volume is a bit small yet for money laundering schemes to be attracted by SL big time.

One interesting question though is how much the volume of exchange is driven by old users recurring consumption compared to how much by the influx of new players setting up (and sometimes getting ripped off). That would make the economy and the Linden rate very sensitive to SL's growth rate, and not only its user base.

If we have the latter configuration, we're headed for a big time crash some time in the future.

Definately, but it is going to become much more prominent as SL grows ...



Stephane, I must be having a slow day ... what do you mean by "old users recurring consumption"?

I'm also curious as to how come each new account doesn't result in 'inflation'? By this I mean, how is the 'stip-end' and 'starting' money absorbed in SL. There is nothing of 'value' being created by the mere act of creating an account? (Free basic one that is?)

So how is this money being removed and how comes the exchange rate is so 'stable'?

L

PS. Thanks for the great replies everyone.

Upload costs, classifieds, first land and rates.(think that are all of them)

Can you explain 'rates'? I don't think I've come across those yet. You aren't talking about tier charges?

L

LL is providing an entertainment platform. Get rid of the new age hype about a "new world" and just look at LL's underlying business model (which is NOT SL's business model):

- LL is hosting an application, people are paying for Cpu time, Bandwidth and Disk space using that application.

- Service Level Agreements for the hosting are remarkably lax (we provide what we want when we want in terms of availability, and we decide of the feature set). They are so lax actually that even MS could get jealous.

- Prices are sky high. $1200 setup + $195 monthly fee will buy you a lot of CPU and bandwidth from 3rd party hosters these days - much more than an equivalent Pentium 4 with 512 Mb of Ram and comparatively little bandwidth (ON AVERAGE, some Sims are very busy, most are empty 95%of the time).

All the economy, contracts, services, content and value that we put on the Linden $ has nothing to do with LL... it is purely "our world, our imagination" to quote them. The TOS is quite clear about that: Their involvement and responsibility is strictly limited to the hosting service described above. Any long term investment someone decides to make into SL is purely that person's decision, and LL's has no obligation to deliver anything else than an entertainment platfom. The entertainment value and content delivered inside SL is produced by the rsident, not LL -- that's actually the IP that LL is rescinding, and its' what makes SL so appealing.

One question worth asking is the obligations that come with the initial setup fee of island sims. Billing $1200 for setup is inconsistent with the service ceasing to be provided at LL's whim.

You pay tier with real dollar.

You can rate a person in their profile. They are hardly used anymore.

"New" lindens eventually find their way into the accounts of merchants and business owners in SL. From there they are horded or turned into real $$$ through one of the exchanges. Once those lindens are exchanged, they are effectively removed from the in-world circulation. It's the in-world market that keeps the linden relatively stable.

You are a client not an investor. LL can close up shop and leave you high and dry, but when you sign up, you agree you know this is a possibility and you bear the risk. Ponzi schemes apply to securities.

Not a game -- a 3D development platform where developers may choose to create games or any number of other things.



The TOS grants Linden Lab the ability to do anything they wish with the currency system, including remove it.



Well, I'm not sure you correctly explained the concept to your friend. Linden Lab's business model isn't based on the currency even remotely. Instead, their business model is based upon the sale of server resources to interested customers ("land" or "islands". Linden Lab makes no money from the exchange of L$.

What may have confused you is the Linden-sponsored currency exchange. As I said, Linden Lab makes no money there. However, the entire success of Second Life is predicated on the success of individuals, and later businesses, making money by developing content that is interesting and useful to other residents of Second Life. The currency exchange makes it easy and convenient to start businesses and maintain business transactions in-world (it may be helpful to think of the L$ along the lines of a complementary currency). Basically, the L$ has become a simplified micropayment mechanism.

Currency on the exchange is neither created nor destroyed. The currency is bought by people who want L$ and have US$, and sold by individuals who have L$ and want US$. Currency is only created by Linden Lab when paying stipends (weekly) and when using L$ as encouragement for beneficial activities like referring new residents to SL. L$ are destroyed by uploading images, sounds and animations, as well as by paying parcel directory fees, advertising in the in-world classifieds, paying for partnership and divorce, and a few other things I'm probably not thinking of.

If the L$ were removed by Linden Lab or completely devalued by unsound management of the economy, it wouldn't be the end of the world for in-world business. To be certain, it would be an uncomfortable adjustment, but I speculate that a new class of complementary currency, privately managed by a few SL entrepreneurs, would quickly spring up to replace L$. In any case, a system of micropayments that isn't subject to nasty credit card transaction fees would be necessary to ensure the continuity of SL business as we currently see it.

Blah, that was long. But, again, in short, Linden Lab is just facilitating the businesses that keep their service interesting. They make their cash by providing the server real estate and the service itself.

Huh, on a exchange they get sold to people who needs them for something, i think they hit the in-world market very fast after exchange.

All that needs to be said. You cannot fraud soone who knows, has reason to know, or should know, what they are signing up for. LL has never misrepresent the service.

"New" Lindens first go into the acount of every user through stipends. Which are used to buy content from merchants... these merchants buy content from others and exchange the leftovers.

If the Linden is exchanged how is it removed from the in-world circulation? The way the exchange actually works is one user wants to buy L$ with $US and another wants to sell L$ for $US. The resident who buys it isn't going to destroy it. They are going to use it to purchase content. Then it is passed to the content creator, who exchanges it. It doesn't go anywhere. It's just passed from person to person.

If there was no inworld content that people just had to have they would no longer feel the need to spend $US to get more L$.

Yep, I stand corrected on this point. I guess the way lindens leave in-world circulation is when residents buy land from LL or make payments to the system (ie, photos, uploads, tier payments,...).

These are very good questions, particularly as you hit the important concept of 'value'. In particular, you ask about inflation related to stipends and new users. Obviously, there are complex systems involved with any economy, but we'll try to simplify.

A currency pool needs to be scaled. In the United States, we increase the supply of currency by buying up bonds, attempting to keep the US$ in a stable place relative to other markets by introducing more Government-generated currency. When inflation of US$ appears imminent, we sell bonds, taking our citizen's money and keeping it. That's how the US manages its currency pool, in very simple terms.

Second Life doesn't have such mechanisms. To scale the currency pool and prevent deflation of the currency, all users are given a certain amount of money weekly. This is the creation aspect and we need it to prevent deflation. To prevent inflation, as has been mentioned, there are various fees involved with uploads and other things.

So, these upward and downward scaling mechanisms are obviously not nearly as effective and interactive as what is used to manage "real" currency like the US$.

But so far the balance of stipend versus upload fees and other fees seems to work for keeping deflation and inflation in check. The real sources of inflation we've seen in the economy came from L$-subsidized activities like "event support," wherein any individual could host an "event" and get L$1000 for doing so. The result of this was runaway inflation, as any individual could host any banal "sexiest thong" contest, and be paid money for doing so, many times a week. Obviously, there is very little value being added by 100 people hosting the same contest every day of the week for personal profit, particularly compared to events that required careful planning and execution.

Stick around long enough and you'll get to hear some amazing and insightful solutions to our economic challenges. My favorite is "give everyone more money."

Ok I know I haven't been around in SL too long. But what I view the whole currency system and all the checks and balances with upload fees and other fees is this.

LL took a pre-emptive strike to:

1) try and keep the economy stable
2) detract the would be "gold farmers" that other MMO's (massive multiplayer online systems such as LL, There, Everquest/2, SWG, WoW etc.)

Now lets break that down..

For my first point I would say just read Enabram Templar's post above mine and you will see some of the checks and balances with upload fee's, land ownership fees (if over 512m) etc.

As for point #2.

People mention how L$'s are being sold for RL money. Well guess what every other MMO has that happen too. Yet their in game currency is still fake just like SL's in game currency is fake. What LL has done is head off the "gold farmers" or groups of people that simply play to gather in game currency and sell it for real life money through websites and other means. Take the website www.ige.com, they sell not only in game currency but also game accounts and items. It's these type of sites that LL tried to curtail from getting a hold on the economy and ruining it like those type of sites have done to many other MMO's in the past and are currently doing.

Just take a look at what Sony has done recently with Everquest 2. They are finally now trying to curtail the gold farmers and other sorts by opening up a couple "Exchange" servers where Sony itself provides the means for selling in game items for real money and even selling in game currency to other players. For a fee I do believe. I know part of the reason is they want to cash in on it themselves but if they would of done what LL did with SL from the start. They would of had a better chance at controlling the economy to make sure it wasn't ruined. Sony is already looking at the future for 2008 or 2009 when they talk about releasing a Star Wars Galaxy 2 game with no monthly fees but something you could say mimics some of SL's foundation. With upgrades, premium services, and items and other stuff being able to be bought for in game but with RL money. Yes Sony and other developers that do this will make a profit from it but it also allows better control of the economy so even the players who don't use these services benefit by having a stable economy.

To close off my point I would just like to point out, if LL didn't have these options in game and under their own regulation of sorts. This games would have all the "gold farmers" in abundance just like other MMO's do. Cause their is one thing for certain, if you don't have the option their are enough players who would still go behind LL and buy the currency or items from a 3rd party website that has players in game getting the items, currency to sell.


That's just my viewpoint on it. My MMO background is this.

The Sims Online
Star Wars Galaxies
Lineage 2
City of Heroes/City of Villains
World of Warcraft
Guildwars
Final Fantasy XI
Everquest 2
The Matrix Online

and of course Second Life.

You know the one thing Second Life has that all those other games don't have? A stable economy.