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.