A Solution to the Linden Dollar Devaluation Issue

A Solution to the Linden Dollar Devaluation Issue.


Ever since I was born in Second Life I have been intrigued by the paradox of the Linden Dollar, a virtual currency that has no legal value as defined by Linden Labs TOS, a virtual currency that cannot be used outside of Second Life, a virtual currency with no legal safeguards against inflation, yet a virtual currency that can be used to buy in world goods and services by anybody within Second Life from anywhere in First Life, and a virtual currency that can be converted into so called real currency via an exchange supported and encouraged by Lindon Labs and Second Life residents, and finally a virtual currency that has been used to directly buy First Life goods and services.

But within Second Life there is no real portable wealth. All that exists has transitory value only. Examples include virtual land that devalues due to both real dollar tier and unlimited creation by Linden Labs, fully enabled file permission objects and scripts that only have value while there is an in world demand for what amounts to an in world possession, and perhaps finally reputations of individual Avatars (call it goodwill if you like) that as in real life can be lost in a one off transaction.

Previous attempts to stabilise this situation have failed, and in the future always will ultimately fail given the above market data, with perhaps the partial exception of a very wealthy First Life (Second Life) resident who is determined to support the Linden Dollar by un–commercial support. We are still waiting for that happy day.

In addition there are other major drawbacks to transacting any real business within Second Life, including that of a complete inability to enforce any agreement by legal means (unless it is with Linden Labs) and consistent software bugs that are enabling a rapidly changing virtual world.

But despite all these drawbacks there are successful businesses within Second Life, which generate a worthwhile First Life return. Examples include Anshe Chung’s Dreamland complex, the two major Texture stores, the Security business located within Home Depo (and Home Depo itself) and some of the larger Land Barons to name but a few. This list is not wholly inclusive by any means.

But all will ultimately suffer from a falling Lindon even if they are able to postpone the evil day of reckoning by being fleet of foot and adaptable. If devaluation continues eventually the game will no longer be worth the candle and any real commerce within Second Life will die.

I aim to change that by the introduction of something BRAND NEW within Second Life that will not pose a threat to Linden Labs…..in other words an object that you can purchase for Linden Dollars that will have the potential of having real life fungible value that will not cost any significant real life money to maintain unless it appreciates in value (in which case I will be taking a fee of a modest part of any profit generated.)

Please visit my sim (and Merchant Bank) in Plush Zeta for full details, but suffice to say I will be offering to convert Linden Dollars (if possible) into real life currency and will be using that to purchase a potentially increasing real life asset (a UK Quoted Investment Trust called RIT Capital Partners) and will on demand in the future reconvert the purchased object/investment back into either Linden Dollars, Pound Sterling or Dollars. In addition I will offer safeguards that will include absolute proof of First Life identity, and if the business is successful it will be fully audited by a UK Chartered Accountant. All of this will be achieved without me giving any financial advice, or any financial support, and because it has purchased via Lindens (which have no legal value) is completely above board and legal.

So to conclude what we could achieve within Second Life would be the potential creation of an alternative object having fungible value, fully transferable between Avatars, purchased by Lindon Dollars, that might itself create additional demand, thus underpinning the currency.

Regards

Paul

Paul,

I'll come check it out (I assume more detailed information can be obtaind at your bank?). It's an interesting concept but you've to make sure you structure it properly. If not your system would be open to an attack which could cost you a great deal of meney or would destroy the value of your service.

I believe the measures I have taken are robust Blakar, clearly I do not wish to debate them in a public forum but I am not over dependent on scripts, a risk on an open platform such as this.

So, it's a solution to a problem... that will make you money?

Who is paying the management fee?

EDIT: Additionally, why do I want to pay you a fee to do something I can do myself?

Right...invest in RL to possibly compensate for loss in the L$....hmmm...

You mentioned that there are a number of successful businesses in SL...so why would a resident not start a business and make it successful on their own, thereby realizing value in the L$ - fluctuations in the L$ could be compensated for by (for example) charging for services based on the current USD exchange rate, or varying prices based on the exchange rate.

A variable L$ is not a huge deal - even if you need to convert thousands or millions at a time. Classic 'dollar cost averaging' (selling a bit at a time, over a period of time) reduces the effects of a rising and falling L$ (or any other currency or commodity for that matter). In fact, a variable L$ indicates that there is indeed a functioning economy in SL - I'd be more concerned if the relative exchange always stayed the same.

A few other points:

* If I wanted to invest I would not do that in SL using an underlying RL investment
* Enforcing any agreement internationally is hard to do - there is nothing stopping you from walking away since the agreement could be un-enforceable
* Earnings reports - I assume that you won't disclose the investment, and even if you do, investors have no way of verifying what investment you are using. This is important since, as an investor, I'm interested in knowing how the underlying investment performs to determine if the fee you charge for managing it/them is worthwhile.

I went to see your in-world bank to get more info. The infos that are available are obscure to a non-accountant like me. There are no clear explanation about what we are buying for L$100,000, L$500,000 or L$1,000,000...
And lastly, who in their right mind would put that many L$ into your scheme in exchange for a box and a password that you will IM to the purchaser.

I'm sure your scheme will be disected by others mor knowledgeable than me, and they will point the flaws better than I could.

Good luck, you are going to need lots of it to pull this off.

BTW, you know you will be accused of trying to pull a scam.

I was working on something (that sounds, if I'm understanding correctly) similar a while back with gold, but was worried about the legalities. Are you licensed to do this? If not, are you 100% sure that you don't need to be?

By the way, if you'd like to help the L$, it might be a good idea not to allow people to cash out to real money directly. Always selling the shares and buying the L$ may help to provide L$ stability during times of panic. Granted, it's possible to take a hit this way, but may be a worthwhile risk for the sake of economic stability.

At any rate, it sounds very interesting. I'll read up on RITCP and stop by your sim for more information also. This is definately worth checking out!

I've considered the underlying idea here for about six hours... it was a lot to digest when I first read about it.

There is an issue of trust but quite frankly, at least to me, he's fair dinkum. RL name, info and so on - I don't even give that out.

Scam? I don't think so. Money making venture - well, most financial entities are. I have no problem with that.

What does fascinate me - and I'm trying to wrap my mind around this - is the tax shelter angle.

Presume a US investor:
a) buys or acquires $L
b) then places an order with Paul, who converts to... GBP? (or other investments)
c) then later cashes the GBP back to $L
d) then back to USD


Not saying anything is right or wrong here. I remember there was a big scandal regarding mergers once - if you merged companies -vs- bought a company there were some tax difference once upon a time, so everyone suddenly was doing mergers instead of purchases in the US for a while.

Just thoughts.

Best of luck Paul, when you last IM'ed I was drowning in other IM's and I fear I sounded short - I'll try to catch up with a social chat when I can

psssttt... Paul....


Tell them who made those nice signs for you.




*runs and hides before Paul whacks her in the head with a bat for shamelessly plugging her own work* hehehe

Thank you for this post, it has given me some pause to think this through a little better. Could this be used for money laundering as well as tax evasion? Of course I'm not suggesting that this is the PURPOSE of the investment opportunity. I'm thinking though, what if this attracts a lot of bad people? That's a bit worrysome, to me.

Paul, I have had a look at your info & bank in Plush Zeta.
Good luck with your venture.

The parts that I felt needed clarification were:

So the theory is - if you have spare $Linden you can park them in your bank, and have it safe, backed and potentially get a return from them being invested in a RL Fund. Is that right?

I do not understand how this would solve "problems" with the price in the $Linden.
Wouldn't you have to convert $Linden to $US (and maybe even Sterling) to purchase the shares (or whatever the traded equities are called)?

Would not fees and fluxuations in the $Linden make this more expensive than investing directly?

I can sort of understand why someone may want to park existing $Linden in a bank for security and return but are you suggesting people would buy $Linden to invest in it - Why would anyone do that?

I was also confused by how shares in the fund are transferred between avatars?

What sort of liquidity does the method of exchange have?

Do the shares have a quoted value in RL?



Paul, I am not posting this to be a negative or a pain. Just trying to help by letting you know the types of things I felt were unclear in reading the information at Plush Zeta and the types of info people might need to be more clear about to be willing to invest.

Good luck again.

Morning all.

To pick up on some points.....

Yes I am UK based.

The underlying investment will be in pound sterling (at this time)

Verification of Identity issues, (which I will refer to as VOI in the future) is not an issue as Linden Labs, Paypal, and all credit card companies insist on VOI as part of their terms of service. I will only accept deposits via Linden Dollars, therefore the purchase of those dollars has to come ultimately through two or more of these service providers.

Please do some research on a guy called John Law. He introduced the concept of paper money but ultimately failed due to the fact that his paper currency was not backed by tangible net worth. In my case that will not be the case.

Which leads me on to RIT Capital Partners......please do some research on that too...in particular the market cap of this investment trust, the nature of collective investments, performance of this investment trust in pound sterling, underlying investments held with this trust, and finally the name of the person who controls it.

I am offering a service which could underpin Linden Dollar investments by paying for fungible value with a virtual currency that has no legal value....a bit ironic that one. In fact in terms of currency support it could be better than gold or commodities in the longer run

Which leads me on to the fact you cannot normally buy stock market investments via Linden Dollars directly, and outside the UK you may not be able to directly buy this particular investment.

Finally what I am offering to do is to buy real investments via Linden Dollars if converted. Again they have no legal value, but my service should produce the chance of fungible net worth.....from nothing

I hope that answers questions posted to date..

Regards

Paul

Badgers? WE DON'T NEED NO STINKIN' BADGERS!

Short the Currency....

RBD, shorting actually improves liquidity both in currency and share trading. But in this case it cannot be done because there is no technical means of borrowing Lindens, selling them, and then returning them to the original holder by buying them back. Also as we both know there is no effective means of enforcement vis-à-vis counterparty risk.

To continue.

What I am offering to do is to be a very special type of stockbroker. I will take orders for one share only and take initial payment for it in Linden dollars. If I am able to obtain a "fill" any clients of mine will be in possession of sufficient information to take comfort. If not I will return their Lindens providing I am able.

I will NOT provide financial advice as to any merits of buying or selling. In the UK this is called "execution only". I will provide product information but only that ,that is in the public domain.

I may allow transfer of value between Avatars at my discretion, a fee will be charged for this service. I anticipate this will be broadly equal to that of the Lindex, i.e 3% or so

Repayment will be on demand (subject to a time delay if necessary) and will be paid in either US Dollars, Sterling, or Lindens again at my discretion.

RBD, shorting actually improves liquidity both in currency and share trading. But in this case it cannot be done because there is no technical means of borrowing Lindens, selling them, and then returning them to the original holder by buying them back. Also as we both know there is no effective means of enforcement vis-à-vis counterparty risk.

To continue.

What I am offering to do is to be a very special type of stockbroker. I will take orders for one share only and take initial payment for it in Linden dollars. If I am able to obtain a "fill" any clients of mine will be in possession of sufficient information to take comfort. If not I will return their Lindens providing I am able.

I will NOT provide financial advice as to any merits of buying or selling. In the UK this is called "execution only". I will provide product information but only that ,that is in the public domain.

I may allow transfer of value between Avatars at my discretion, a fee will be charged for this service. I anticipate this will be broadly equal to that of the Lindex, i.e 3% or so

Repayment will be on demand (subject to a time delay if necessary) and will be paid in either US Dollars, Sterling, or Lindens again at my discretion.

Ok thanks Paul - I better understand your offering now.

The only bit I still don't understand is how it helps solve the Linden Dollar Devaluation Issue.

The only way to work Shorting of the Linden Dollar is to:

Setup a 3rd Party Trading Site with a Market Maker structure.

Assuming pricing, fees, etc makes trading on the 3rd party site
a better deal then LindenX, then volume will shift from LindenX to
the 3rd Party Site.

Now what you have is Linden Dollars being traded, but all the dollars
pending a transaction being held by the site/market maker. That gives
the person the ability to allow a percentage of dollars to be available
for loan/short sale.

The issue of risk to the market maker and the people who's lindens
which have been loaned out are now the main focus. The only way I
see this working out is if the short sellers have to establish an escrow
account to cover any short position and be prevented from any type of
US$ dollar withdraw while any short position exists under their account.
Otherwises, folks would short L$, withdraw the US$, and vanish off the
face of the earth. With the block against withdraws, they can never get
away with their cash. With only allowing a percentage of their escrow
amount to be shorted in Linden dollars, you never have to worry about
a short squeeze preventing shorters from being unable to buy back
the Linden Dollar.

The whole monkey wrench in everything is keeping fees low and protecting
yourself from credit card chargebacks. It must be possible, otherwise all the
online gambling sites would be screwed.

I still don't understand why anyone would give you $L that you would exchange to RL currency and purchase equity shares with. Why wouldn't they just do the exchange and buy shares themselves in whatever investment trust they think is worthwhile?

Who is paying the management fee?

I wish you all the best with your business/investment venture Paulismyname, but ...

... can you explain how this solves the Linden Dollar Devaluation Issue?

I know the answer is in here somewhere...



...but would you be so kind as to clarify please?

The answer is right before your eyes. Be it stocks, bonds,
gold, college funds, whatever.. The point is that people have to
buy Linden Dollars to acquire these assets. Assets which are
denominated in Linden Dollars. This creates (demand) for Linden
Dollars which currently doesn't exist. The demand for L$ is what
helps drive the valuation higher.

Here is the problem with the current system. People do their thing
in SL by selling widgets, making money, and cashing out for US$.
The only demand for Linden Dollars are:

a) Land
b) Widgets
c) Small scale service sector (ie: paying programmers for code)

Outside of this, anybody who makes L$ is more than likely not to
hold it and stockpile L$, but to sell it for US$. Not because they have to,
but because there is no incentive for them to keep L$.

If LL or maybe some bright citizens figured out a way to create demand
for linden dollars, more buyers would show up at the LindenX gates
than sellers. Supply and Demand would be envoked and the value
of the Linden Dollar would rise.

Now buying real world assets with L$ through a middle man wouldn't
work, because the middle man would have to sell your L$ to buy the
real world item. There would have to be ingame securities and
commodities with their own price values determined by trading
to aid in the creation of an ingame investments. Investments like
ingame Companies who make a profit doing "something". I could
rattle of a list, but I think you get the idea..

If there is nothing in SL which drives demand for L$, then sellers
trying to unload their L$ will push down the prices. Much like
the LindenX graph shows. Downward trends and rising volumes
mean only one thing, Sellers command this market.

Ookay...

So now that you've given us the readers digest version of basic economics and the law of supply and demand...

...what are we all waiting for?

Let's all skip-to-my-loo to the LindeX and buy up all the linden in the world and give them to Pauliwhatsisname over there, why don't we?



*nods*

Um .. It was me who asked him to explain how his venture would go about solving the Linden Dollar Devaluation Issue remember?



Mmmkay....

Everything is so much clearer to me now.

P.S.- I'm just having fun don't take me too serious k

Sorry I am on GMT Time and have just caught up with the latest posts.

1) Why would objects having fungible value increase demand for the Linden?

Answer. In short demand. For a variety of reasons including tax planning, currency speculation, and (at present) the freedom to invest and potentially make a profit without any exchange controls or restrictions on bourses (stock markets) that currently exist.

Why. Because the Linden Dollar has no legal value

2) Is Paulismyname running a scam?

Answer. No I am not.

I have a successful real life business in the UK. I would nothing to put that at risk.

3) Why do I not just short the LindenX to make cash?

Answer. RBD's post is fairly complex, I would need to look into the mechanism behind it, but a more simple answer is that in theory I could at present borrow Lindens from Ginko (offering them Linden Land as security) sell the Lindens for US dollars, and simply carry on repeating the process.

4) Why do I not just do that?

Answer.

The success (or failure of that) would depend on if my pockets were deeper than Ginko. I do not care to enter into what is called "naked shorting". In essence you only go short (short term with stop loss) to hedge a long position you do not wish to sell

Regards

Paul

Question from ReserveBank Division

Originally Posted by ReserveBank Division
Now buying real world assets with L$ through a middle man wouldn't work, because the middle man would have to sell your L$ to buy the
real world item. There would have to be ingame securities and commodities with their own price values determined by trading to aid in the creation of an ingame investments. Investments like ingame Companies who make a profit doing "something". I could
rattle of a list, but I think you get the idea..

Answer.

Yes you are right RBD in terms of my selling Lindens to buy stock thus causing further pressure to the downside.

But you have ignored the supply side issue.....that could be two fold. People buying Lindens to invest and peoples redemptions of stock and being paid back via Lindens from me, which of course I would have to buy. Of course I reserve the right (but not the obligation) to repay in pounds or US dollars if such purchases could cause imbalances

PS Sorry I missed that one earlier but here in the UK it is both weekly food shop day (ourselves) and The Grand National Horse Race, a great annual UK event

Regards

Paul