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Making Money in Second Life

Linden Lab’s CFO explains how the economy works in the virtual community.
August 14, 2007

Last week there were reports of financial woes, including a bank run, in Second Life, the online world that had more than 1.6 million residents active within the past 60 days. (See “Money Trouble in Second Life.”) So Technology Review asked Linden Lab CFO John Zdanowski, who is responsible for managing the economy of the virtual world, to explain how the virtual economy operates–and the meaning of Linden dollars. Residents of Second Life can make clothing and build other virtual objects, buying and selling products using Linden dollars. And the Linden dollars aren’t mere Monopoly money: they can be traded for U.S. dollars on an exchange called the Lindex, at a rate of about US$1 to L$270. Technology Review checked in with Zdanowski on the workings of the Second Life economy and how it has been affected by recent happenings “in world.”

Virtual banker: John Zdanowski (avatar shown here) is the CFO of Linden Lab, the company that runs the popular virtual world Second Life.

Technology Review: What is the reason for having a virtual economy in Second Life, complete with its own currency?

John Zdanowski: To give people the incentive to create things in world, we implemented the Linden dollar and the Linden-dollar economy in order to facilitate a market for these virtual goods. In July, for example, there were about 12 and a half million transactions that made up the economy in the world. But the average transaction size is quite small, and you couldn’t use credit cards because the fees are too high.

TR: What exactly is the Linden dollar?

JZ: It’s a limited license right to certain features of Second Life. Just like anything in limited supply, if people want it, then it has a real money value. Linden dollars are a point tally, if you will, that people can use as a mode of exchange. At the end of the day, it’s not currency. Only governments can issue currency, and we’re by no means a government.

TR: About how much money gets traded on the Lindex, and what do people do with the proceeds?

JZ: In the second quarter, we facilitated the exchange of over US$20 million worth of our Linden dollars. The average sale transaction is about US$200 dollars, and the average purchase transaction is about $20. We match about ten buyers to one seller, and charge about a 5 percent fee to facilitate that exchange. Second Life residents can use their proceeds from the exchange in two ways. They can use it to pay their fees–probably 45 to 50 percent of the proceeds from Lindex sales are used to pay land fees, buy more land, or pay maintenance fees–or they can cash it out.

TR: Linden Lab encourages people to trade U.S. dollars for Linden dollars, while some online fantasy games, such as World of Warcraft, have discouraged this type of trading. Why is this?

JZ: The fundamental difference is that in World of Warcraft, the company, Blizzard Entertainment, makes all the content in world. In Second Life, our users make substantially all the content. And World of Warcraft is a game. If you buy something that advances your powers, you’re sort of circumventing the rules of the game. Second Life isn’t a game: it’s a platform for collaboration and interaction. When people build something, it has value, and they have intellectual-property rights to it. It’s those intellectual-property rights that other games specifically restrict and Second Life specifically allows.

TR: Some people make all or part of their real-life incomes in Second Life. Who are they, and how many people do this?

JZ: We have about 45,000 profitable business owners–accounts that have positive monthly Linden flow. That’s up from about 25,000 in February. About 150 of them make over US$5,000 dollars within a single month. These are the creative people and the very technically talented people who’ve built most of the content in Second Life, and they’re able to reap value from that.

TR: While your model is built around people building in-world content, such as airplanes and furniture, some residents have also built financial institutions, such as stock exchanges and banks. Recently, there was a run on Ginko Financial, one of these virtual banks. What do you think about this?

JZ: There’s really no purpose for a bank in Second Life. The fact is, Linden Lab is the bank. We’ll hold your Linden dollars for you, and we’ll keep them secure. We’re obviously not giving you an interest rate on them, because there’s no way to earn an interest rate from them. If they’re offering a high interest rate, then it’s too good to be true. I would warn our residents against doing speculative things like that because they’re risky. I don’t know, but there could be fraudulent activity going on there. If we became aware of it, we’d shut it down.

TR: Linden Lab recently shut down the Second Life gambling industry. How has this affected the in-world economy?

JZ: We’ve always restricted illegal activity in Second Life, and now we’ve specifically called out gambling. I think gambling might have been 10 or 15 percent of the economy, so there is probably an overhang of economic activity that’s no longer happening. Last month, we sold L$159 million on the exchange. We haven’t sold very much at all yet on the exchange in August. I think it’s got to work its way through the system. In terms of it affecting other aspects of the economy, so long as the exchange rate stays stable–and so far it has–it shouldn’t affect other parts of the economy.

TR: I’ve heard that some casino owners were upset about the loss of their businesses. What do you think of this?

JZ: They shouldn’t have been operating casinos because they’re illegal in the real world, and they’re illegal in Second Life. If people are operating illegal businesses in Second Life, they’ll eventually get shut down. If people are operating legitimate businesses, then just like I hitch my fate to the success of Linden Lab, so do they.

TR: What’s the nature of the property people hold within Second Life?

JZ: When we say “land,” it sounds like property, but it’s not physical property. It’s intellectual property. People don’t have property rights in Second Life because there isn’t any property.

TR: What about the emotional value of these words? Even if the land is virtual, don’t people get attached because it’s called “land”?

JZ: I think virtual worlds can have a very emotional impact on people. The more time I spend in Second Life, the more I view my office space in Second Life as a real place. In that way, Second Life is having a profound impact on how people think and how people feel. The fact that it can seem so real to people is exactly what makes me most excited about working here.

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