A solution for the L$ problem

Eventhough I am still a newbie (but not a newbie in the real world) and have only joined this community after reading the feature article in Business Week, I have detected a fundamental flaw in the way SL is setup.

In most successful economies in the real world, there is a clear seperation between those who run the government and those who run the economy. But in SL, LL functions both as the government and the central bank. There's a huge conflict of interest.

For example, in order to have a stable currency, there has to be a stable monetary supply. In the case of SL, there isn't. L$ is a currency of unlimited supply. LL can at any time issue additional L$ without any regard for the holder of the existing L$. Anytime a new user joins the community, new L$ is created. This system is inherently unstable.

I propose that LL setup a seperate non-profit institution that functions as the Central Bank of SL. This Central Bank should set a limit as to how large the monetary supply is and publish that number on a regular basis.

Let's suppose currently the outstanding L$ in circulation is 100mil, the Central Bank could set a Monetary Supply target of 1bil L$, there would be a Reserve of 900mil L$ (1bil-100mil). Everytime a new user joins the community, he/she will get a fixed proportion of the Reserve, instead of a fixed number of L$. In this case, there will be a constant amount of L$ in the system. As more and more user joins SL, the incentive gets smaller and smaller. If someone wants to purchase L$, he/she can either buy it from the Central Bank or the market. In either case, the Monetary system remains unchanged.

I think this should solve the current problem of L$ depreciation to a large extent. There will still be fluctuations because L$ is ultimately not backed by any real currency. But then again, USD is only backed by the US government's power to Tax as well.

To make the system even more ideal, I think that in the interest of community, SL should be run as a non-profit orgazination as well, with LL acting only as a custodian for hire. But I doubt LL will agree to this. When you buy a piece of land and pay monthly assessment, that money should go to SL for the benefit of SL, not booked as a profit for LL. It is for LL to decide whether it wants in the future, a smaller role in a Large SL or a large role in a Small SL.

---Tiger

What you have to say is all very reasonable, and it gets hashed out over and over here.

Great idea, but your perception is right when you said "But I doubt LL will agree to this." Given that, it's all just pissing in the wind.

Welcome to SL Tiger.

Yes, look what happened when additional macro-economic powers where given over to the bank of England in the UK. We now have one of the most stable economies in the world, despite massively fluctuating oil prices and a somewhat unstable world economy. This is just an example of banks being far better at managing money than politicians, who would have thought it?

As for LL taking a small part in a big SL? I dont think so, at least right now. If SL is going to grow into a strong metaverse, then really its very infentile right now and needs the strong nurturing hand of a parent (LL) to grow up. If LL took a back seat now and let SL drive itself, I can only imagine it failing sooner rather than later.

Good post though, and yes, welcome to SL, hope you enjoy it as much as I do (no chance I love it too much hehe).

Actually, the fundamental flaw is too much reliance on economics and money, and not enough reliance on having fun and providing a quality experience for others to enjoy.

Lewis

I signe dup for 500L a week. I expect my 500L a week. Not a percentage that continually goes down as more users join.

Jonas,

For any new user, there will not be any noticable difference. Let's say the reserve is 900mil, and LL set the divisor to 3.6 mil arbitrarily, then new users now will still get 250 L$ when they join. The next user will get (900mil-250)/3.6mil, which is 250L$ again. It only makes a difference when the amount of user in SL grows substantially. For example, the 1mil th user will get according to the following formula:

L$ = (a*(b-1)^P-1) / b^P

where a=original reserve (900mil)
b=artitrary divisor (3.6mil)
p=user number (1mil)

The solution is somewhere between 180 and 250. I think by the time SL get to 1mil user, LL should be very happy and there's no need to pay anyone L$ at that point to join. The point is that everyone will know L$ supply is fixed and there will be more confidence in the currency. Trading currency is all about confidence. I should know, I am in that business.

-Tiger.

... then you would know that to have currency it has to have tangiable assets that are resellable, such as gold.

If LL close down tomorrow, your million L$ which is worth $(x) today is suddenly worth zilch.

You can't seriously put any confidence on a game currency. Until I can go to my local bank and walk away with a handful of L$50 notes... then it's just entertainment.

Lewis

When will everybody finally see there currently is NO L$ PROBLEM?!

What you see is an accelerated economy. The value of the economy as a whole is rising spectacularly and while the L$ loses ground it doesn't do all that bad.

In Mar 05 the total money supply had a worth of ~874.000 US$, by Mar 06 it was 2.014.000 US$. Value has grown month over month and both February and March 2006 were pretty good months. If you cut too much in the money sources in this phase of the economic growth you'll simply stop the growth and push it towards a decline.

Yes as an individual who just reaps in stipend or other minor income your wealth when expressed in US$ is declining. But I'm pretty sure the large businesses are doing fine and have seen a healthy income and profit increase over time.

I'll crosspost this in the thread in Land & Economy and I hope the discussion will move there.

Lewis, I've seen you repeat several times that for you SL is merely entertainment and that money in it means nothing to you.... you know everyone understands that. But for SOME of us, even though it's entertainment and thats our primary focus, it still feels kinda nice to sell something we've worked on (and had fun doing) cash those lindens and go to starbucks in RL with it.

So while we're having fun and being entertained, we can also still care about the value of the lindens and dollars. In fact for some people calculating those money transfers and keeping track of the economy is actually FUN. It's part of their entertainment.

Now, personally I've never made enough lindens yet to be able to warrant making the trade but they day I do... hey it's gonna be fun! I'm gonna really enjoy that starbucks coffee. But if it never happens, I'm still having fun and I'll still be curious about how that L$ value is doing and how many other people are cashing it in.

So for you, the money doesn't interest you. Ok, point made... keep having fun.

And maybe instead of pointing out so often how your fun makes more sense than "their" fun because your fun has no materializm mixed into it... you could just agree that everyone has different ideas of what they can do in SL.

For all we know, maybe even Anshe is having a blast today too.

If you want people to invest serious money in SL, you need to have the perception of stable monetary policy. So far, I can see a lot of creative people building sites under tight budget. But that's not going to pay the bill for LL in the long run. Even the most successful business in SL is complaining about the depreciating L$! You can not expect investment without a stable currency. Just look at Latin America!

The way I see it, LL already owns all the land in this place. It's in their interest to make the economy as large as possible so they can sell land at a higher price. In the long run, it's more profitable for them to be a provider of infrastructure and let an independent (impartial) organization run SL.


---Tiger.

Are you trying to tell us that the people who make money out of SL achieve those riches by providing rubbish, low-quality experiences that everybody hates?

I want my five hundred. I ALREADY have confidence in a GAME economy.

I believe that Lewis may be talking about the user experience as a whole, rather than any particular thing someone has built.

The complete experience of an SL user, especially a new user, can indeed turn out to be poor - very often precisely because of the fragmentation created by the content market.

*gasp*

Yawn!!

When they finally restrict the money supply to the point where nobody can afford to buy virtual toys because a Dominus Shadow costs as much as a real car... for the dozen paper-millionaires left playing the game.

Nobody in their right mind will pay real life prices for garbage. Second life objects have no value outside of the game. A real life car is useful and not dependant on if the grid is up to work.

I would like to see the "creative" ones faces when L$1,000,000 is worth NOTHING or $0.00. Remember there has to be a demand for something to be worth something. I refuse to buy Lindens for dollars or yen. I have sold my Lindens for the dollars and will sell my stipend ever so often to ofset the cost of my "premium" membership and tier.

I contribute directly to Linden Labs in the form of tier and membership fees. I dont feel it is required for me to support the "creative" ones.

I don't see this conflict of interest you speak of, OtherTiger.

In the real world, politicians need to spend the system's money to get things done. Each is fighting with the others to get a bigger slice of the pie. If each had the power to print their own budgets full, then the economy would collapse under inflation.

But Linden Lab doesn't need to spend Linden Dollars. Having more doesn't benefit them in any direct and significant way. They do print the money, as it were, but only to match the increasing population. If they didn't, then each time the population doubled, the worth of each member's wallet would half.

The only other ways money enters the system right now are through dwell payments and weekly stipends. The dwell payments have been overshadowing the stipends 30-to-1, if I recall correctly. Eliminating them -- which is being done as we speak - will have the largest stabilizing effect of any single change Linden Lab could make to the economy.

In the beginning, there were many ways to make a buck off the system... And that was good. It encouraged growth when there was little content and a small population. As the population grew and grew, those incentives fell like dominos. (To, no surprise, much wailing and breast-beating.)

The next big domino left is the weekly stipend. Lets have a look at that one this time next year...

THis really belongs in Land and Economy so I'm moving it

In order for the economy to grow, there need to be an net increase of money supply.

In RL we have the banking system to generate new money into the system, throught lending, required money reserve and all that junk, while operating under the regulation of the Feds/ or central banks in other countries. Under this system, the money supply increase porportional to the economy. A market driven money generation. The way money generation rate is controlled, is by interest rate changes by the Feds/ central banks.

In SL there is no regulated banking system, the only way for $L to be generated is by LL printing them via stipends, dwell payment and instructor payment, a centralized/ communist like system. And looking at how that didn't work in RL and with most communist country switching over to the market driven/ capitalist system. The future of the economy in SL is really in question.

Maybe it's time for a monetary system reform?

Comparing real life monetary system and second life monetary system does not work. In real life we are required to pay for food, medical, housing expenses. There is a certain amount of activity that is required unless you want to live in the mountains and in a cave and eat off of the land. In second life a resident do not have to spend any money at all! Content providers have to create demand by making "have to have things". In second live a resident can make all of the things required in the game without resorting to paying money for it.



What I a getting at is that we are all "self sufficient" in second life. Most residents don’t need to have Lindens or worry about them. The Linden can become worthless and we can continue to enjoy second life. Anshe Chung is happy to accept payment from pay pal J

I like this answer

WRONG....

Supply and Demand work just as well in Virtual Life as it does in
Real Life. If you want Land in SL, the laws of supply and demand
will dictate the price. The same is true with the Linden Dollar. Since
there is no driving economic investment which is denominated in
Linden Dollars, the supply/demand of the money supply become the
critical factor determining its Valuation.

Whilst I agree in part with this - it's not quite true.

There *is* a sort of supply and demand in the land market, but unlike any RL economy I can think of the lindens plug in a new stack of servers and lo, another 40 sims appear! Supply isn't quite as limited as it should be. IF plugging in new sims was controlled in some fashion related to the land markets there would be more of a supply and demand market - but a couple of weeks ago 15 new sims appeared for auction and at the same time a look at the grid map showed plots for sale, often multiple plots, pretty much all over the map so it's probably fair to say supply far, far and continuously outstrips demand. We're not, however, seeing a land market with prices bottoming out - the market price has (by my rough and ready metric) fallen from about L$8/sqm to L$6/sqm which is more or less giving it away for the land barons I guess.

But all the other elements of the inworld economy have no such supply and demand economy. The only thing that limits availability, unless artificially limited by the creator, is the desire of people to buy the product and their knowledge of its existence. If I'm suddenly inspired and make the next big thing™ it will spread as far as there is demand pretty damn quickly - just look at tinies if you don't believe me.

I think the only way to look at land in SL is think of it as a service. When you buy land, the price of land is the initial setup cost of a new server and the on-going maintainance is basically a monthly fee cost of renting that server. Nothing more. Since there's unlimited amount of supply of land(servers) the price will always go down. The land barons are basically wholeseller of bandwidth. They rent the server from LL in bulk and sell them to others for a higher price.

---Tiger.