Currency devaluation and the marginalization of small business.

SL is a very interesting platform for online business.

The problem largely is the constant devaluation of the Linden Dollar.

The game, since August of last year, has gained close to 150,000 new accounts.

This would, in theory, create a larger demand for the Linden Dollar, and increase the value.

But because of the platforms open ended nature, the largest amount of Linden Dollar purchases focus on relatively few products.

Because of this, the largest amount of developers in the game are held solely and totally at the mercy of the major market developers in the game.

Monthly profits, for the average SL business, run in the range of 50 - 300USD. This is a good thing, it gives the developer some return for their efforts, allows them to maintain their tier. And puts money back into the economy on expenditures and expenses as well.

But the richest people in Second Life tend to work in high exposure, generalistic markets that don't deal with the genre specific limitations a specialist designer works in.

So whereas well over half the designers in SL are making 300USD a month or less, there are a few superstars in the development community that are making upwards of 5000 to 10000USD in a month.

Taking nothing away from them, or their success, it is unfortunate that my business, and the businesses of my friends are constantly and totally devalued by these big money developers as they constantly dump millions of Lindens on the market monthly for conversion at higher and higher rates.

Because of this....at the beginning of May..I have to raise my prices to match the rate of inflation. Which will also further limit my business...and continue to keep me from making a fair profit simply because there are a limited amount of people in the world with millions of Linden dollars to dump on the market constantly at ever increasing rates to ensure they move their money first.

Captialism is well and good, but the Linden market is completely unregulated. The Lindens must institute a system of regulation which drives the value of the Linden dollar in a realistic fashion. The constant inflation of the currency market by a small percentage of the developers does nothing but limit the ability of new developers to find a justification for their efforts.

The simple facts are that the Linden market requires regulation, and your sell value should be determined not by YOU, but by the amount of Linden you are selling on the market.

There must be a currency tier implemented, or by June of 2006 we'll see the Linden dollar at nearly 500L to 1USD. And that will force the small business/small developer out of the market entirely....or force the entire economy to regear its pricing in response to the level of inflation.

And a constant process of inflation and adaptation is not evidence of a growing economy. It is a provenance of a foundering economy and does not deliver honestly or realistically on the grandiose claims of "gold in them thar hills" that you read about in the nationally published articles that expose this simulation to the non-gaming public.

The previous are my opinions, not declarations of wisdom or telling anyone what to do. But as a small business developer myself, I am seriously feeling the pinch of the constant devaluation in the market. And my options to adjust to it are actually negative to a consistent growth of my business. A 100L increase to the prices of my products...to adjust to today's Linden market would hurt my sales more than it would help them.

So I'm simply stating, that either the Lindens must find a way to regulate the value of their currency...or the developers and speculators that are making the largest percentage of the capital in the game must start regulating themselves when it comes to converting Lindens back to cash...because the constant capping of the market at a new high rate with millions of Linden is an unending spiral and there is currently no way for the demand for Linden to actually match the constantly inflationary rate.

Something needs to be done. Raising our prices to stay afloat against a constantly inflating Linden dollar is not going to be a positive answer for the specialist developer.

I think you have a slight misconception as to how this works. The L$ that the big business are selling have to come from somewhere. And the fundamental problem with this SL system is that LL is actually delating it's own currency by constantly issuing new L$, whether it's to the new users or through some other means. L$ is ultimately a commodity that fluctuates according to supply and demand. Unfortunately, in SL world, there's unlimited supply and limited demand. Please see my thread about a possible solution to this problem.

I think you have a slight misconception as to how this works. The L$ that the big business are selling have to come from somewhere. And the fundamental problem with this SL system is that LL is actually delating it's own currency by constantly issuing new L$, whether it's to the new users or through some other means. L$ is ultimately a commodity that fluctuates according to supply and demand. Unfortunately, in SL world, there's unlimited supply and limited demand. Please see my thread about a possible solution to this problem.

I don't agree that a basic or premium stipend is the driving force in the devaluation of the market.

I believe that its a valid argument, but its also a simple and easy answer for a problem that is far more complex and multifaceted than that one issue.

The driving force in the devaluation in the market is the lack of diversity of the currency destinations.

For every 1USD of Linden bought, 60 cents of it is going to end up in the pockets of the same big ticket developers in the world. So nearly 66% of every dollar spent in the market goes right back onto the market from the exact same source it was purchased from in the first place...at higher and higher rates as these developers see a constant increase in their weekly/montly volume.

2000L a month for a premium account, and 200L a month for non-premium accounts isn't a drop in a bucket compared to the millions of Linden that are rotated onto the market by the same few power players weekly...and since these power players want to move their money, they constantly cap the market at a new rate nearly once a week.

I won't deny that the constant influx of new currency into the market in the area of stipends is a problem, its not the driving force of the unstoppable devaluation of the currency we're dealing with.

I have the folowing assumptions about this market, please correct if I am wrong.

The only way to get new L$ is to buy it from LL or buy it from the existing L$ holders. If you buy from LL, the supply of the L$ is increased. But if you buy from an existing holder, there's no change in L$ supply. Since L$ is intrinsically worth 0, LL is happy to issue it to you at the market price and book that as a profit in the real world. But when some one in SL accumulated a large inventory of L$ and want to convert, LL is not going to be there to buy it. That's because if LL buys it, it will record a loss in their real world books because they just bought something that's worth zero for USD.

Therefore, there's unlimited supply of L$ but limited demand. And the only way for L$ to go is down. I have suggested a way for LL to self regulate for the good of the SL and for itself in the long run.

---tiger.

1. you shouldn't punish someone for their success....all that does is lower the motivation for everyone else to try to succeed. You should give everyone the chance to become just as successful, and that is exactly what we have in SL. Yes, there are existing market leaders, but no economy is going to press a restart button every time someone new decides they want to join in. Everytime someone says "the market is too crowded for new entrants", someone else comes along and shows them that this statement is wrong.

2. blaming currency problems on market leaders is misplaced frustration (the only theoretical exception I can think of is if someone used a large currency balance to play games with the market). We have a supply/demand problem, yes, but it doesn't matter whether that supply comes from 10 people or 1000 people. To reiterate, in terms of the pool of money being spent each day by consumers in SL, which then gets brought onto the market by content creators, the total pool (i.e. supply) remains the same whether consumers buy from 10 creators or 1,000 or 100,000.

The currency solution is simple but it would appear some people here have a limited grasp of economics and the laws of supply and demand. Also some here appear somewhat intellectually challenged in terms of understanding fungible value

I suggested a little while ago the easy solution is the creation of a Gold Linden Dollar, and it would be just that, a virtual currency backed by solid real life gold as traded on the London Stock Market under the epic code gbs (gold bullion securities) an exchange traded fund

You would have an external limited company running such a scheme subject to either UK or US real life law.

The company would either create or cancel units for the payment/receipt of real life money via pay pal and hold accounts for people in world in a similar way to ther Geco Bank or SL Exchange terminals

There would be a facility for avatars to transfer gold Lindens between themselves for money or monies worth received.

End of story, end of currency issues.

You can't buy L$ from LL. You can get it from stipend, dwell (until it goes away), teaching payments... I think that's it. But you can't just buy it.

Thanks. I am still learning the ins and outs of this world. If what you say is true than is it fair to say the only increase in L$ supply is the Incentives that LL hands out? If that's the case, the problem is easy to solve if there's a will on LL's part.

Paul,

I partial agree with you. But creating a gold backing is cumbersome and hard to manage. It also comes with it's own problems. When you let go control of your currency and peg it to something else, you lose flexibility. Look at how gold has doubled in the last few years, if we . had a gold pegged system, the services provided in SL would have been a lot more expensive. And that will turn some people off. There's no need for extreme measure like the gold standard. US got off the gold standard in 73 and it has worked wonders. As long as the currency is managed by an independent org and kept in balance, we should be ok.

---Tiger.

Ashes,

when it comes to earning US$ you've 2 solutions:
a) The L$ gains value
b) Your volume rises

In May 2005 there were 18593 unique logins. During March 2006 there were 60899. In may 2005 the average L$ rate was 248, in Mar 2006 it was 285. Due to the nature of SL there are no production costs hence volume is very interesting as you've very good margins. Now obviously specialists in a niche market won't triple their sales if the activity triples. Though let's just say it should be acceptable to expect at least a 50% increase if the product is competitive. As the loss due to currency depreciation is far below 50% a business should be making more money or they're doing something wrong.

Note that pressure on small retailers can be countered but it hasn't really started yet. The average mall in SL has an abundance of low quality stuff. If you're really looking for quality you need to find the right store or you'll have to wander around a few dozen malls. I don't understand why so few retailers have considered creating a sensible retailers organisation. Look for other people who sell quality gear, team up, create a well organised and structured mall and combine your marketing PR. As an end result you'll get a lot closer to what the big businesses can do and your customers will appreciate the fact that they don't need to look for the gems in a pool of mud. Note that this is not a mall that rents floorspace. You team up and only those in the team are in the mall so that you're assured of what is going to happen.

I don't make any US profit a month, I don't cash out. The linden value is fine..and my prices won't raise either. I will purposely undercut you with a similiar product too. Its a game..and I don't use it for money.

Jonas,

which is what should happen for a lot of things anyway. Some things in SL are severely overpriced for no reason at all. A lot of the more "fun" oriented items that require quite a bit of building, texturing, scripting, ... sell for the same price as a shirt. Even better for quite a few of those things you can get free upgrades while for clothing it ends once you've bought the item.

Won't SL always be an economy that mirrored the US economy of the 80s.? Inflationary recession? With no limit on the fundmental resources, how can there ever be any kind of stabilization?

If we do have a supply/demand problem then obviously the supply is piling up somewhere visible or else you wouldn't say it. Please tell me where you see that supply. Note that the available volume on the Lindex has decreased by 1/3 recently while the rate kept on depreciating.

Something I've said quite a few times before:
Major sellers are selling at those rates because it is fair to them. They are not selling their L$ at a loss and they don't care about the depreciation. That's also why the available volume can decrease so much without influencing the rate. The only way to get the rate down at the moment is to have demand that outpaces supply a lot. If it doesn't outpace it enough the L$ will be in the hands of the sellers and they'll just sell them again.

The continuous flow on the Lindex determins the rate of the L$ far more than the stipends. I can only assume this is hard to grasp because it's not really comparable with a RL economy. (Could you imagine that during one month the currency trades in US$ would equal 40% of all available dollars in the world?) But so are many other things about the SL economy which is why a bit of out of the box thinking should be done.

That's not quite true, though, because the L$ has a very serious diminishing returns problem. Once you get to a certain amount of L$ in your account, extra L$ have practically no value except to cash out.

Suppose we have a reduced economy where there are L$10m in circulation. If there are 1000 creators each of them can earn L$10000 a month which is an amount that might get spent in-world on stuff. In fact if all the creators buy from each other, each has only L$10 to spend at each other creator - and chances are they'll all manage to create items in that month of not just that value, but more. That "more" - the extra value - will be paid for by their income from customers' newly generated stipends, and so value and money stay in equilibrium.

But if there are 10 creators each of them earns L$1m. They have L$111111 to spend at each other creator. Do you think every one of those creators could make enough new stuff in a month that someone would spend L$111111 on it? It seems pretty unlikely! So each of those creators earns L$1m but then has nothing to do with L$900000 of it, so they either cash it out or hoard it. Because probably none of them can create enough fast enough to restore equilibrium, when the new round of stipends are paid, they go in on top of the hoards and make the problem even worse.

This doesn't happen with RL currencies. People like Bill Gates might have more money than they could ever spend but it still has value to them because it can be used to earn interest and it can be passed on to their children. You can't really do either of those in SL.

The "inflation" (or rather the exchange rate) shouldn't have much to do with your prices, because it doesn't change the marginal cost of production.

The thing is that in Second Life for almost all products that you can sell there's zero marginal cost of production, so your marginal profit per sale is close to the retail price. If you sell two widgets for L$50 instead of one for L$100 your total profit is the same.

So regardless of the exchange rate, you should rationally try and find the price where your total profit (marginal profit times unit sales) is a maximum. Since marginal profit is close to retail price (since you don't need to buy new prims or virtual cloth to make a product... the only per-sale cost is your time spent supporting whatever fraction of your customers contact you after the sale), that's (retail price times sales).

The exchange rate may allow you to increase your prices in Lindens by reducing the perceived cost to the customer, and by giving the customer a psychologically acceptable explanation for the price change, if your competitors also adjust their prices (which they may, followingyour lead). But if you haven't been test-marketing your product at a variety of prices and comparing total revenue from each you really can't say if you're near the top of the profit curve or not.

Actually, you can. There's several banks that will make loans and pay interest on them, and leaving it for your children... that's either a matter for role playing, or a qustion as to whether you think Linden Labs is going to become the Metaverse.

The real problem is that there are no capital goods in SL except for land, so you can't usefully invest in business... just real estate and personal loans, and the high land tax that can't be paid in Lindens makes real-estate an expensive game.

I think you've identified a major drawback to our economy and articulated it intelligently. However, I believe your message is slightly skewed insofar as you appear to be blaming successful merchants for the devaluation of the linden dollar. This, IMHO, is the wrong approach. They should not be blamed for their success and they are only dealing with the system the best way they can, given the monetary exchange tools provided them.

A better approach would be to accept, encourage, and embrace their success ...

... while implementing effective sinks, increasing LindeX operative options and efficiency, and limiting LL subsidized cash in-flows that will bring about effective change within our economy.

Argent,

When you sell an item, you are not just dealing with the marginal cost of production. The primary cost to you is the labor you spend producing the product. Just as in real life, Microsoft makes a lot of money per windows xp copy sold. But microsoft has to put up a lot of money upfront to develop the software.

---Tiger.

Argent,

In terms of banking in SL, it's almost non-existent. How can you have banks when there's no contract law. What's preventing the bank from taking your deposit and running away? The SL economy is in a very simple stage right now. I think LL has to serious rethink the setup and come up at the very least with an escrow account system. I have a feeling that SL is setup by people with a lot of technical knowledge but without any financial knowledge.

---Tiger.

I think Second Life needs a Windfall Profits tax. Sounds like Oil profits to me.

I'm no economist but it's still pretty obvious to me. The L$ devalues because:

1) The rich have nowhere to put the money as a result often cash out (TRUE). It's sensible that they do, that's money they can use in their first life.

2) There is no demand for L$, that is, not enough people purchase L$ (TRUE).

3) The total money in the game goes up because of stipends (TRUE), some say that it's not supported (FALSE) you can regard it as being paid for by the *tiers*. There is Real$ behind stipends. So in effect there still is L$ being purchased ... but it's not being done directly through the currency exchange.

4) We technically can exist in the game on nothing. Avatars don't eat nor pay utility bills or tax on being alive. We can all create our own stuff at no cost (assuming you don't upload anything).

Talk of solutions:

On #4, I believe LL wants to avoid changing this because at its core SL is supposed to relieve us of first life stresses. Why go into SL if you're going to be faced with bills and taxes all over again? While it may be good for the economy it's going to be bad for the experience.

On #1, We do need to find places where the rich can spend their money. We're not talking about taking money away but find places that they'd like to spend. I have no suggestions here. Actually we need to find things to spend on and that's really difficult in a world with no true consumption.

On #2 and #3 what might work is making a mechanic that will course the tier US$ payments through the Lindex and in effect create L$ buying. The tiers can be made payable in L$ but the L$ must come from a Lindex L$ purchase equivalent to the dollar value of the tier payment. This suggestion is meant to be a starting point only and is nowhere near workable as written. From the tier-Lindex transaction LL can come up with a L$ reserve from which stipends are generated, so money will be backed up.

Keep the stipends, that will keep a casual SLer going because we can't expect everyone coming on to be able to generate their own money. Perhaps some never will.

Agreed the above comments. But see my own bank as I have made some steps to moderate that issue

Tiger, gold is about the best backing for any currency because gold is unique. It is almost the only asset that is not a debit on someone else’s balance sheet and I would point out it effectively underpins the Switz Franc - the hardest currency in the real life world.

But there are alternatives, I still think gold is best but the same backing for a Second Life currency could come via the Diamonds Trust or the Spiders, US exchange traded funds that mirror the Dow and the S&P 500. Just as long as it is a real life asset that is stock market quoted

I still believe the only viable solution is for LL to bring back the ability to buy plots of mainland at auction with $L.

This would be a HUGE sink. If I remember correctly, it was usually cheaper to buy mainland plots with $L.

Of course LL would just have to bite the bullet on this one since they wouldn't make a profit on the initial sale of land, only tier payments. Personally I like this idea for that very reason. Up till now most of the 'adjustments' have generally been negative for the common AV on the street. Lower stripends, no more ratings bonus, no more DI, and now no more dwell.

We as the 'citizens' have had to take the brunt of all these measures to stabilize the economy. Let LL take up some of the slack too I say! Bring back mainland plot auctions that can be won with $L.

The Swiss Franc went off the gold standard in 2000.

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