Is the Linden Dollar a Ticking Time Bomb?

Graph-price

Pixels and Policy reader and virtual world enthusiast Doubledown Tandino left a thought-provoking comment on our article about the lack of competition in the virtual world. Tandino made the argument that attaching a dollar value to Linden Dollars is really a work of fiction:

Linden Lab…says [the exchange rate] is $260L to
$1 USD every day…so it is. and the world believes it. It is fortunate
that the bubble hasn't burst on the fictitious economy.


It's an intriguing argument, so Pixels and Policy decided to take a look at the confidence behind the currency. Is Second Life's economy just irrational exuberance?

The Happy Lindex

The Lindex, Second Life's official currency exchange mechanism, is a remarkably stable institution. The unofficial L$260 to $1 USD exchange rate rarely fluctuates more than a Linden Dollar in either direction, and daily transactions normally go down in lots of around L$6-7,000, or around $20 – $25 U.S. Dollars.

Skeptics watching the Lindex for dizzying highs and lows will be disappointed. As the graph at the top of the article shows, the Lindex enjoys a high level of stability brought on by consumer confidence in the continued viability of Linden Lab's virtual world.

This is fair. There are currently no other major virtual worlds with content creation systems similar to Second Life, meaning the Lindex faces no competition for dollars.

Users are captive in their consumerism – it's possible one could cash out their L$ for real currency and then exchange it again into World of Warcraft gold, but purchasers of Linden Dollars are looking for an experience not provided by any other online game to date.

The Power and Peril of Monopoly Power

It would take a massive, unfavorable change in Linden Lab's governance of Second Life to create the kind of capital flight envisioned by Tandino's comment. Right now the alternative – nothing at all – keeps players grudgingly pinned to Second Life. But what happens when an alternative of similar quality DOES emerge?

Under this situation, we might see something like the capital flight and market bust Tandino predicts. Similar market shifts hit Ultima Online after the launch of graphically superior worlds, a transition that ultimately placed the once-dominant Ultima into a rut from which it never recovered.

Players will not desert Second Life just because a competing world is opened, but players will leave if the new world provides a significantly better experience. If Linden Lab continues to generate negative press and lawsuits from major content creators, players will become increasingly willing to abandon Second Life – and the Linden Dollar – for a world that successfully delivers a superior play experience.

Much like real-world countries, the stability of the Linden Dollar depends entirely on the community's confidence in Linden Lab's virtual nation. If the lethargy of monopoly overcomes Linden Lab, they may soon face a sea change in consumer taste.

7 thoughts on “Is the Linden Dollar a Ticking Time Bomb?”

  1. Better than paypal micro transactions where you pay most of your transactions to paypal. People really need to stop bashing the Lindex when it is obvious they have never examined the only available alternative that is worse than a Renderosity deal. As long as the economy in SL is alive then the system is working. If everyone quits then nobody is going to hear it fall anyway. And since none of the new competition has a chance in hell of succeeding then there is no reason to worry about it. Besides we haven’t seen what LL is working on anyway so why don’t people just hold their horses a bit and see whats up. On the other hand all of you wanting to jump ship feel free. More for those of us that stick around hahahahah.

  2. I have no problem with the majority of the world continuing to believe in the fantasy.
    It’s a ticking time bomb just as real life economy is too.
    USA is a ticking time bomb….. what happens when China asks for their money back?

  3. I quote “I have no problem with the majority of the……….”
    My my, I had no idea Doubledown what’s his name was an economics major….What University did he say he got his degree at?
    I think it’s great that people like you think because 80,000 were logged in at one time that SL is the 800 pound gorilla in the virtual world room LOL

  4. A complex question. The fun bit is that people still look at the virtual economy in Second Life β€” which is as strong as its residents believe it’s strong β€” and think that the real economy is different πŸ™‚
    So, yes, of course, like Ann said, if everybody leaves SL, the economy is worth zero β€” but then again, who’ll be around to notice? I totally concur with that opinion.
    While the vast majority of SL eager residents are still participating in it, the L$ is as strong as any other currency. Although I find it amusing that its major reference is towards the US$ πŸ™‚ Other exchanges (e.g. http://www.xchange4ls.com/) will show the L$ vs. the Euro, and, like the US$, it slides much faster… πŸ™‚

  5. LL is making millions, I’m pretty confident in the L. What is the US dollar but a piece of paper? It’s the same thing.

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