New Trade Volume Data

Second Life's land auctions can be used to reveal the real-dollar value of the trade happening within its virtual borders. It comes to $2.17 million annually. 2L has about 2000 users [edit: 2,000 is the number who actively engaged in trading in this period. 2L has many more users than that.], making the annual per capita trade volume $1,084. If the 750,000 users of Sony's virtual worlds traded at about the same rate, that would come to $814 million. It's another hint (the first came in this post) that the amount of trade within virtual worlds dwarfs the amount of trade on eBay (which, according to my own tracking, probably amounts to no more than $100 million world-wide).

Here's how I got the $2.17 million figure: Second Life allows users to run their land auctions in both real dollars ($) and Linden Dollars (L). By the Law of One Price (stating that arbitrage will eliminate price differences in comparable markets), the same effective price must be reached in auctions of both kinds. One 2L user, Kathy Yamamoto, posted land auction data showing that the average Linden price for land was L5.47 and the average dollar price was $0.0294. That implies that $1 buys as much land as L186, meaning the exchange rate between dollars and Lindens is 186 to 1. I queried Philip Rosedale, Linden's CEO, about trade volume within the world, and he reported that the first week in February saw about L7.76 million in trade among the 2,000 users. That's worth about $41,700, or annualized ("times 52" if you hate business lingo), $2.17 million.

Comments

[MM]

1.

I think that's fantastic. I haven't been able to play 2L yet because of the hardware reqs, but I've been keeping an eye on it for a while.

It's clear that there is definitely a real cash market for these objects that "don't exist" and "nobody owns." To bad I don't own any of that stuff myself.

There was an article in Wired recently about some guy who is doing currency exchange between US$ and various virtual currencies with the goal of providing inter-world exchange eventually. I didn't really like the way he spoke about what he was doing (he seemed to think he was just 'skimming off the top'), but that it's going on at all is remarkable. Hopefully, a less shady-sounding player will show up soon... a player like a bank.

If only the online economies didn't seem to be so broken.

And how does 2L stack up next to EQ in this regard?

[Cory Ondrejka]

2.

Just to clarify slightly, 2000 unique users engaged in P2P trade during that first week of February. That is only a fraction of the total SL user base.

[DivineShadow]

3.

MM,

"It's clear that there is definitely a real cash market for these objects that "don't exist" and "nobody owns."

This is evidenced by the volume of trade happening in eBay and similars, but don't confuse that there is trade among players inside the game with a trade for dollars outside. If Ted's $814M tried to be traded on eBay for dollars instead of inside the games for the game's currencies, then who would buy? ie: If everybody sells, then who buys?

[Julian Dibbell]

4.

DS:

"...don't confuse that there is trade among players inside the game with a trade for dollars outside. If Ted's $814M tried to be traded on eBay for dollars instead of inside the games for the game's currencies, then who would buy? ie: If everybody sells, then who buys?"

This is a common first response to Ted's figures (it was certainly among my own), and it's hardly incorrect. But keep in mind that the same can be said of almost any kind of aggregate valuation. The stock of a company; the wealth of a nation -- whatever. IBM may be valued at $N billion, based on its stock price, but if every stockholder suddenly decided to sell, its value would be something else altogether. Value -- especially exchange value -- is a precarious thing, as much as we like to think otherwise.

The great thing about looking at virtual economies for me is that they have opened my eyes to how virtual "real" economies already are. But the flipside of that is that virtual economies are for most purposes just as real as the others -- whether or not the value traded in them ends up converting into U.S. dollars at the end of the day.

Linden dollars, it turns out, already *are* "real cash." So are Britannian gold pieces and EverQuest platinum. So, for that matter, are Romanian lei and Turkish liras. A great portion of the wealth denominated in these currencies would not find buyers if it all went up for auction at once. Does that make them less real?

[Hiroshi Yamaguchi]

5.

I classify the virtual currencies in MMOGs as a kind of LETS (Local Exchange Trading System), because;

1) These currencies are used only in some limited communities (i.e., VWs);

2) People outside the VWs generally do not accept the virtual currencies for exchange (except for the Gaming Open Market (http://www.gamingopenmarket.com/), but it is the exception); and

3) There are no central banks that control money supply in VWs, and the typically the virtual money is "produced" by the activities of players.

This argument is partially motivated by my wish to keep VWs out of money-driven people or tax authorities. I'm not sure about situation in other countries, at least in Japan, LETS are not considered as taxable asset.

In this sense, focusing only on the value denominated in dollar makes me a little uneasy. I am a little concerned about that the government might be interested in VW as a new "colony" to exploit (For clarification, I'm not saying Ted and other guys here are sensationaling the issue).

I am more interested in questions like; i) how various attributes (hedonics) of virtual land affect their prices, and ii) are there any differences in real estate markets between VWs and the RW? and so on. Since my PC can not run 2L, I would like to hear if somebody knows.

Hiro

[Bruce Boston]

6.

Ah..., um.., ok...; sorry Ted.

So I'm not so sure about the methodology to get the $814M number, or the 'annual per capita' values. If for no other reason than the fact that the formula may not work even within 2L itself.

We are basically using the formula ((7.76M * (1/186))*52 *(Total VW Population/2000) = Total Activity in any VW

By saying $2.17M =((7.76M * (1/186))*52

And then deriving:
$814M = ((7.76M * (1/186))*52) * (750,000/2,000)

Clearly the 2,000 number and the 750,000 number represent two different classifications of a population.

Unless I'm mistaken, by definition 'per capita' numbers should be Gross Activity divided by Total Membership. In the case of the $1,084 number, we have Gross Activity divided by 'Total Consumers+Total Producers'. My guess is that number of 'who actively engaged in trading' is not equal to 'total membership'. Thus making this not a 'per capita' value.

By this same account, if we wanted to use these numbers to find an equivalent figure for Sony, shouldn't we be discounting the total membership by a factor that gives us 'Total Consumers+Total Producers' and then multiplying the $1,084 figure?

Maybe something closer to:

((7.76M * (1/186))*52 * (750,000*R/2000) = $814M*R
* with R being the ratio(%<1) of (consumers+producers)/(total membership)

Again, a 'per capita' equation of ((7.76M * (1/186))*52 *(Total Population/2000) = $2.17M doesn't work in 2L unless population = 2,000 which it seems it doesn't.

-bruce

[Edward Castronova]

7.

Bruce: right, the 2000 number refers to people who did trade in 2L that week. If only 25% of SOE users traded, the number would be $200 million, not $800 million. If 75% traded, the number would be $600 million.

But still, even at $200 million, the SOE-alone internal market is bigger than the entire external market. Which is just another hint - that's all we have at this stage - that the total internal market is many multiples of the total external market.

[Nonsanity]

8.

One thing that should be noted here is that the land auctions used for these calculations are all "produced" by Linden Labs, and not by any of the players. At this time, a player can not put their own land up for auction in this way.

On the other hand, trades between L$ and US$ in the Gaming Open Market trades ARE player-to-player directly. From recent activity, the current US$ to L$ exchange rate is US$1 to L$275-L$300.

But there IS a difference in land auction closing prices between the L$ and US$ auctions, with the US$ auctions selling for more. This can best be explained by newer users, who do not yet own land and do not have a large supply of L$ to use, using US$ almost exclusively. This puts a larger "market" of users into the US$ auctions, out-balancing the pricing.

Is this a sign that the value of the L$ will continue to rise? Or is this just a symptom of a system in flux due to the many new economic changes 2L has gone through.

It's going to be interesting to watch. :)

[SL player]

9.

Stop calling it 2L for the love of god. Everyone calls it SL, why should you be any different?

[SL player 2]

10.

Heh, I thought 2L was short for LL (Linden Labs).

[Edward Castronova]

11.

OK, OK! SL! I thought it was 2L. Castronova = n00b < all.

[Ren]

12.

Though SL apart from being a type of Mercedes could be sixth life, seventh life etc.

[Bruce Boston]

13.

NonSanity> Is this a sign that the value of the L$ will continue to rise? Or is this just a symptom of a system in flux due to the many new economic changes SL has gone through.

More likely the second of the two. Clearly the L$ hasn't reached an overall equilibrium, as its only been traded for a very short time.

At the same time it isn't unusual for currencies to have multiple exchange rates. For example, the exchange rate of US$<>J.Yen depends on where you trade it. If you trade it at the airport today you might get 93 yen for each of your US$, while if your Toyota, you might get 108 yen for each US$ you bring back to Japan today.

Personally, I would expect that direct land purchases continue to have the lowest exchange rate in terms of L$ to US$ because the trades are quick, easy and with a highly credible source.

NonSanity> On the other hand, trades between L$ and US$ in the Gaming Open Market trades ARE player-to-player directly. From recent activity, the current US$ to L$ exchange rate is US$1 to L$275-L$300.

Exchange rates are funny things, and one of GOM's challenges is going to be how to teach all their customers to read their number's correctly. For L$ to be in the L$275-L$300 it would mean that blocks have been trading in the US$0.85 to US$0.90 range. (L$250/block)/(L$300/US$) to (L$$250/block)/(L$275/US$) = US$0.85/block to US$0.90/block or US$1 to L$275-L$300.

For the past few days, GOM has been trading at between $1.13/block and $1.21/block or $1.13/L$250 and $1.21/L$250 or L$221 to L$206 per US$1. Making GOM 10% to 20% cheaper than trades made directly with Lindon through land auctions. This is pretty much in line where I would expect GOM to be at this point in their business. (not that I have been trading L$, well ok, so I have :)

So I think the real question, is will the L$ move vs. the US$, and frankly I think its too soon to tell. Which brings up a interesting question... Anyone know what the monetary policies of Lindon are?

-bruce

[Cory Ondrejka]

14.

Bruce> not that I have been trading L$, well ok, so I have :)

Have you been doing well? Out of curiousity, have you been sticking to GOM or have you been playing with IGE as well?

Bruce> Anyone know what the monetary policies of Lindon are?

What would you like to know? For context, the system currently works as follows:

Sources:
- Users receive L$250 for trying SL and L$250 for converting to basic accounts (this is the one-time charge of $9.95 plan)
- Users receive L$250 for trying and L$750 for conversion to Premium accounts (this is the monthly plan)
- Users receive L$2000 for referrals
- Basic users who were in world during the previous week receive a weekly stipend of L$50 per week
- Basic users who were in world during the previous week receive a weekly stipend of L$50 per week
- Premium users who were in world during the previous week receive a weekly stipend of L$500 per week
- Users are eligible for rating and dwell L$ bonuses that range from L$40 to L$1000 (or more) per week
- Some weekly events are Linden sponsored, so L$ are supplied for prize money and for the coordinator

Sinks:
- Taking snapshots, uploading textures, and uploading sounds costs L$10 per upload
- For L$30/week, a user's land can be listed in the land finder (useful for stores, clubs, people who like guests, &c)
- Land is auctioned for both L$ and US$ (this provides the right to purchase the land)
- L$ may be used to pay your monthly land fees at the rate of L$2000 for US$1

Exchanges:
- Users may exchange L$ freely with no gift or income taxes
- L$ are used for in world transactions with no sales or income taxes
- Users are free to exchange L$ via GOM or other 3rd party sites

Creating objects, scripts, avatars, clothing, notes, &c, costs nothing. Teleporting around the world is free.

Any of these could be changes if needed, but the economy is currently operating as predicted, so we're quite pleased with the changes we made in December.

[Bruce Boston]

15.

Cory> Have you been doing well? Out of curiousity, have you been sticking to GOM or have you been playing with IGE as well?

Just been trading on GOM. But, gotta love it when I can go out for lunch due to a quick trade on GOM. Currencies almost always go up in the first few months of trading, so its been pretty easy to make $3-$4/day for lunch.

However, after reading your monetary policy, I wish I could short sell L$. It's pretty clear why IGE would want to jump into this market at this time as there are plenty of short-term arbitrage opportunities.

Two quick questions:
Can users that obtain land though a L$ auction resell it for US$ in-world?

Why is the Lindon purchase rate fixed at L$2000/US$ when clearly the market is trading at 8-11 times that rate?

-bruce

[Cory Ondrejka]

16.

Bruce> Just been trading on GOM. But, gotta love it when I can go out for lunch due to a quick trade on GOM. Currencies almost always go up in the first few months of trading, so its been pretty easy to make $3-$4/day for lunch.

It's great that there is enough volume in L$ trading already to support your lunches :-)

Bruce> Can users that obtain land though a L$ auction resell it for US$ in-world?

If users want to broker deals on eBay or however that is their business but there aren't any in-world system for US$ exchanges. Of course, they can resell it for L$ and then head for GOM.

Bruce> Why is the Lindon purchase rate fixed at L$2000/US$ when clearly the market is trading at 8-11 times that rate?

Because we haven't yet decided on whether we want that value to float and/or follow an external index. Ultimately that is our most tunable sink, but since we are currently adding customers and land more rapidly than plan, internal inflation hasn't been a problem so we're leaving it alone.