Second Life mimics real life where society needs and relies on money exchanging hands to support economic growth. As more real-world currencies are converted into Lindens (the financial unit of exchange in Second Life), more money becomes available for exchange between participants. “The Fed” (US Federal Reserve Bank) in the U.S. greatly influences the cost of borrowing money and setting its value through financial policy. In Second Life, Linden Labs has many of the same controls over the costs of capital, exchanges, its value, and availability of currency.

Economic Policy & Controls
Financial systems attempt to provide a stable and valuable currency used for the exchange of goods and services. Linden Labs (LL) places controls over its Second Life currency to achieve similar results; to provide stability by offering a set exchange rate from real world monies into Lindens. It is this set rate where LL acts as the US Federal Reserve, making policy and setting guidance on the actual value of its in-world currency. All other currency exchange, mainly through the LindeX exchange system at this point, are influenced by what LL offers directly and conveniently for currency conversion. Linden Labs has even gone outside its territory, controlling the value of its Second Life currency by placing bans on logins to people exchanging Second Life currencies outside of its LindeX.

The Second Life economy is also controlled by Linden Labs’ policies on stipends (regular payments to account holders) and LindeX trading “circuit breakers”. Stipend payments have varied over the years to qualified resident accounts, but the overall effect is to moderate the amount of in-world currency available. There is no incentive for savings in Second Life because you don’t earn any interest on your Lindens. What money you have, either goes to other residents, or back to Linden Labs to pay for your account and/or land tier fees.

The LindeX currency exchange has become more sophisticated over time as well. Back in 2006, an official blog by Phillip Linden discussed the ability of the LindeX to halt or suspend trading based on exchange rate fluctuations. The effect is no doubt to provide stability of the currency, minimize any “runs on the bank”, or inflationary pressures from speculators or real world economic factors. A review of LindeX market data reveals that at some point late in 2006, the value of the Linden has remained very stable, trending slightly downward over time.

Real Estate
Even in the virtual world, businesses need land to display their products and market their services. The real estate market has been one of the reportedly most profitable jobs in the early days of Second Life, but here too, LL flexes its control over the economy. Second Life’s economy is further influenced by land auctions and the availability of land, both controlled by Linden Labs.

Governor Linden sells real estate to the highest bidder in both Linden and US dollar auctions. Auctions regularly show 15-30 parcels for auction, many with no bids (over capacity). An average starting price for land is easily determined by a predictable per square meter cost of 3 Lindens for Linden land auctions and 1.5 Lindens for US dollar land auctions. This pricing has a very important role on the resale value of land. Real estate investors that I’ve run across attempt to rent out the land until a suitable buyer is found for the right price.

The availability of land, also determined entirely by Linden Labs, affects the supply side of the real estate market, and thus price. People looking to flip land are often fighting the same forces that have the upper-hand in setting market prices and availability. Again, LL has a policy with regard to land growth and average pricing. The expansion of new regions within Second Life over the past few years and recent pricing model changes for “open space sims” has had a major effect on land pricing, availability, location, and the economic viability of being a real estate speculator.

Income Earnings
“What can I do to make some money in here?”, the proverbial question of Second Life newcomers. Linden Labs provides economic statistics which many people chew on in the blogosphere, trying to come up with more meaningful interpretations of the data than what glimpses LL gives us. In a healthy economy, we need transactions involving lots of people. The data shows that Q1 for 2009 set a record for user-to-user transactions. I don’t think the given value of $120M is as important as the percent growth of transaction volume for the following reasons: Linden Labs sinks money (Lindens) into its economy through stipends, bolstering the supply of available money for transactions; and we don’t know the value of new, real money entering the system for the quarter which would tell us how much of this $120M is new money and not just recirculated. But the increased financial transaction volume means greater opportunities for capturing a bigger part of this volume. Or does it?

The distribution of wealth is equally important for our understanding of the Second Life economy. It not only sheds light on the capability of buyers, but also the opportunities for having a successful business in-world. Let me give you the 10,000 foot level view–it’s not pretty currently. Let’s say you want Second Life to support you by making enough monthly to cover your car payment. Taking the 6 month average of Second Life users in 2009 who made between $200 and $500 US dollars, we find 2,380 people. If you want more detail, you can see the data yourself. You’ll be in the lucky 0.3% of people making $200-$500 monthly, based on LL’s Q1 2009 “Monthly unique residents with repeat logins” (2380/732,526)*100

Exchange Rates
The prices of products in-world takes some getting used to. Another post will address pricing models and strategies, but for now, suffice it to say, at an exchange rate of approximately 260 Lindens to $1 US, you need to sell a lot of widgets to cover that car payment.

Jobs
A discussion of even a virtual economy would be incomplete without bringing up the topic of jobs. You can find a list of jobs posted on the Second Life website if you are interested, but true to life, unless you are self-employed in the metaverse, you are limiting your potential earnings. Second Life is a pseudo experiment in social gatherings (my words, not Linden Labs) with economic and educational modules thrown in for complexity. You are either a producer of products and services that support the social experience, or a consumer. This greatly limits the range of successful products in Second Life and the overall economic growth rate (unless of course Linden Labs creates the technology in-world that causes our avatars to get sick and allows drug manufacturers to create new medicines for our ailments).

Your standard-fare DJ, host, dancer, works for tips. Success varies based on the number of guests visiting during your working hours and their tipping habits. The seedier side of Second Life seems to bring in higher rewards, and escorts willing to be extremely interactive through use of voice or even web cams might be able to cover more than just a car payment each month.

Being a business owner. Stop, back up. Finding a suitable product in a world limited by the technology that supports it, and learning the tools it takes to create content that lends to the social aspects of Second Life is extremely difficult. Should you make a product and sell it, you will eventually come across a substitute or alternative product to yours at a lower price, or of higher quality. Let the pricing wars begin! But I am a business owner in Second Life as well as a socialite when I have the time. So, it isn’t really a matter of “beating the house” and betting it all. Let’s have fun, understand what our environment looks like, and then try to find new, refreshing ways to go about being successful in business inside the metaverse.