The question often comes up, just who is the Alan Greenspan of Second Life? Who pulls the levers and otherwise steers the fate of the Second Life economy? Incorporating a dynamic mixture of Linden Dollars (L$), land sales, commercial transactions and intellectual property, the economy is in fact managed by a number of people at Linden Lab. Despite being one of the central features of the virtual world, I still think there is a general haziness around conceptually what these tools represent. Today I’ll try to answer some of the more common questions:
Just what is the Linden Dollar (L$)?Linden Lab implemented the L$ to facilitate the exchange of digital property. In July there were approximately 12.5 million transactions, averaging less than a few dollars each. Simply put, the L$ represents a limited license right to use certain features of the Second Life service – to participate in the virtual economy. It is a virtual medium of exchange that has real-world value associated with its ability to be traded with others, for real-world currency. While Linden Lab does not guarantee a demand for the L$ or that residents will be able to trade at a consistent rate, a healthy Linden Dollar economy is critical to the health of our service and as such Linden Lab has a strong business interest in maintaining the stability of the L$.
Given real world economies have seen currency collapses and hyperinflation, what’s to stop that happening in a virtual one? The Second Life virtual economy is much more akin to a completely paper- currency (cash) based economy where the total value of all currency can be ascertained simply by adding up the sum of L$ in all active accounts. Linden Lab increases the supply of L$ in-world in two ways: (1) as a part of the premium subscription stipends that it…
distributes each week, and (2) by selling L$ directly on the exchange. Linden Lab reduces the supply of Linden dollars in-world by accepting L$ for certain in-world system events such as uploading an image or posting a classified advertisement. These are known as sinks. The various Sinks and Sources and their amounts can be seen here. Given the expanding population and popularity of Second Life, expanding the money supply has to date been the most frequently used tool in our toolkit. As population growth stabilizes, the use and development of Linden Dollar sinks will become more prominent.
Would these sinks be sufficient to adequately re-adjust the money supply? Currently there is approximately L$2.6 billion in world held by 1.7 million accounts. The average held in each account is L$1,687 and the median is L$161. In an average month, more than 75% of the in-world money supply moves through the LindeX. Each month our sinks represent about 3% of the money supply, stipends represent 7% of the supply, and our L$ sales on the LindeX represent from 0 to 5% of the supply.Although we currently do not accept L$ in lieu of land sale and maintenance fee payments, we could. Acceptance by Linden Lab of just one month of land sale and maintenance fees in L$ denominated payments could cut the in-world money supply by more than 50%. In general, its our goal to maintain large enough sinks such that the only day to day and minute to minute mechanism that we need to manage the exchange rate within a narrow band is to sell L$ on the exchange. Since August of 2006 this has kept the exchange rate quite stable as you can see here.
Why haven’t you put in place any regulations for “virtual” banking institutions in-world? Are there plans to regulate? It is important here to distinguish between real-world banks and the “virtual banking” services that some people are trying to develop in Second Life. From a simple perspective, banks exist in the real world so you have a place more convenient than your mattress in which to store your cash. Banks in the real world attract capital by offering to pay an interest rate. They then turn around and try to lend that capital to worthy borrowers earning money on the spread between the interest they pay and the interest they earn. Because Linden Lab holds everyone’s L$ as a database entry in each account, virtual banks don’t offer a superior “storage” alternative.
Probably the most important point is that real-world banks are regulated by real-world laws. Linden Lab does not intend to recreate or subvert real-world laws in any way.We are not aware of any institutions in Second Life that are insured by the Federal Deposit Insurance Corporation or similar governmental agencies in other countries. We caution our residents to be wary of anyone offering extremely high interest rates at no risk, either in the real world or in Second Life — if it sounds too good to be true, it probably is.