Financial Analyst Calls Second Life a Pyramid Scheme

Petey_Alchemist writes "Silicon Valley gossip rag Valleywag is carrying a story about Second Life being a new spin on the old pyramid scheme. The article, which consists mostly of selections from the report of financial consultant Randolph Harrison, suggests that not only are most people deceived about the amount of money they can make in Second Life, but also about how easily they can withdraw it. It says 'Like the paid promotion infomercials that run on CNBC, sadly SecondLife is a giant magnet for the desperate, uninformed, easily victimized. Its promises of wealth readily ensnare those who can least afford to lose their money or lives to such scam in exactly the same way that real estate investor seminars convince divorcees with low FICO scores to buy houses sight unseen with no money down.'"

Comments

Can't the same be said about the stockmarket?

[ArsenneLupin]

... or any other thing that may give money to the lucky?

Re:Can't the same be said about the stockmarket?

[FleshMuppet]

... or any other thing that may give money to the lucky?

No, because the value of a company's stock is based on real assets, liabilities, and income: all of which are easily translatable to real money, and which commonly pay cash dividends. This is commonly referred to as liquidity- the ability to transform whatever type of investment one has made into actual cash. The article asserts that transferring money from Second Life 'assets' to real-world cash is much more difficult than people are being made to believe, and that the only way to make money is to pass off those 'assets' to some other sucker.

Re:Can't the same be said about the stockmarket?

[PrvtBurrito]

No. First the stock market is guided by US and International law. Second, much like copyrights and IP, they too are also protected by law. Second life property and currency has no more value than selling property on the moon. Finally, the stock market does not only give money to the lucky, the past 80 years have shown that, over time, it gives money to everyone.

Re:Can't the same be said about the stockmarket?

[ArsenneLupin]

No, because the value of a company's stock is based on real assets, liabilities, and That would be the so-called "book value". However, many healthy companies are worth much more that their assets...

income: This is a more realistic source of value. Value is based on income versus risk. However, even here, many companies are/were tremendously overvalued (no way the company's income (even future income) could justify the share price), especially during the period before the bubble burst...

...the only way to make money is to pass off those 'assets' to some other sucker. ... as is the case with most shares as well (yes, some companies do have share buyback programs, but these are the exception, rather than the rule...).

Liquidity of the stock is usually the result of having enough "suckers" around to be interested in the assets.

Re:Can't the same be said about the stockmarket?

[CreatureComfort]

Except that if you rely on luck for your stock picking, you really need to get out of the market. No, really. Day traders and the ignorant make the jobs of real investors much more difficult. Not impossible, and really not even less profitable, just more difficult.

On the other hand, if you do your research, long term investing in well run businesses with good financials has far less risk and higher return than almost anything else you can do with your money.

Re:Can't the same be said about the stockmarket?

[Mr. Slippery]

No, because the value of a company's stock is based on real assets, liabilities, and income: all of which are easily translatable to real money, and which commonly pay cash dividends.

Not for a long time. Most do not pay dividends, and their value has little relation to any actual assets a company might have.

Stocks are like baseball cards: pieces of paper with collector's value.

Re:Can't the same be said about the stockmarket?

[JeffSh]

The US Dollar isn't based on anything other than trust now - fiat money. What makes second life, or any other currency, any different?

Currency gets its value thanks to simple acceptance.

Re:Can't the same be said about the stockmarket?

[FleshMuppet]

Okay, I realize that you are simply making snide comments about the value of traditional investment vehicles, and that I might be feeding a troll here, but I am simply explaining the argument the analyst takes in the article, which you seem to not have read or are ignoring altogether. It does not matter what you think of the stock market, etcetera. The analyst has stated clear, identifiable criteria that differentiate the stock market and what they regard as a market in Second Life. You can dismiss the value of trading ownership in a company, but that doesn't change the fact that it is different than what the analyst claims is happening in Second Life.

Roughly speaking, a Ponzi scheme is one in which the perpetrators make false claims in order to lure investors. Once they have some investors coming in, they begin to pay back the earliest investors in order to create hype and garner more investors. People make money in ponzi schemes, but only by being at the top of the pyramid. What separates a Ponzi scheme from an actual market is that in an actual market, the items being traded have value outside of the system itself, and that access to liquidity is therefore available at levels other than the top. The article claims that because cash exchanges and the corresponding exchange rates are controlled by the people at the 'top', they are the only people with the ability to achieve substantial liquidity, and therefore, to make any money. This is why they say it resembles a Ponzi scheme more than an actual market.

That would be the so-called "book value". However, many healthy companies are worth much more that their assets...

This is a more realistic source of value. Value is based on income versus risk. However, even here, many companies are/were tremendously overvalued (no way the company's income (even future income) could justify the share price), especially during the period before the bubble burst...

Differences in valuation and perception are what make the stock market work, and why people make and loose money speculating in the market (and in other markets and industries as well). You can pay too much for anything, be it a stock, a pig, a bushel of corn, or necklace with fake diamonds you find on ebay. That doesn't make the market a pyramid, because those things have value outside of the market itself, and can be transfered independently of the market place. On the other hand, in a pyramind scheme, the items traded generally have all of their value because of the scheme itself, not because of their value to the outside world, and access to liquidity is not independent of the people who sold you the item.

... as is the case with most shares as well (yes, some companies do have share buyback programs, but these are the exception, rather than the rule...).

This is simply false. Shareholders not only control the company, determine who gets serves on the board, and other items of fiscal policy, but they have very well-defined avenues of legal recourse. Not only that, but the company itself has no control over the valuation of its stock other than how it presents its performance to the outside world. Which once again, is strictly regulated. Once again, you may have issue with the way that the stock market works, but it is clearly different than the way that a pyramid scheme operates. TFA claims that all access to valuation is controlled (and manipulated) by the people at the top to their financial gain, and the detriment of others, and you can make snide comments about how the stock market operates, but it does clearly operate in a manner different than that of a Ponzi scheme.

Re:Can't the same be said about the stockmarket?

[mumblestheclown]

Day traders and the ignorant make the jobs of real investors much more difficult.

Arguably the dumbest 'smart' statement I've seen on slashdot in a while. The reality is that without day traders and the ignorant, things like heuristic trading schemes set up by large investment banks would be far less profitable. Real investors LOVE day traders and the ignorant, as they are the ones who are giving them money.

Re:Can't the same be said about the stockmarket?

[UbuntuDupe]

On the other hand, if you do your research, long term investing in well run businesses with good financials has far less risk and higher return than almost anything else you can do with your money.

Actually, that's about as wasteful as day trading. Don't bother figuring out which company is good or bad. Other people are already doing that in an attempt to appropriate value the stocks. It's not enough to know which businesses are good; you have to know which ones are good relative to the price their stock is selling for, which is a much, much, much more difficult problem.

The alternative? Buy an index fund. They simply track the relevant broad market (large cap, small cap, foreign, bond, whatever). They don't have to pay for research and they don't rely on a manager's hunches.

No, this isn't sarcasm. Anyone not trying to sell you on a manager's stock picking ability will tell you the exact same thing. Slate has a great series going on now detailing this: see here.

Re:Can't the same be said about the stockmarket?

[UbuntuDupe]

This is an important issue that's kept my attention. How do I know my dollar will keep any value? Why do people value dollars? I've spent a lot of time researching this question, and quite frankly, monetary theory will drive anyone insane because of the intricacies involved in thinking about money. There's no limit to the number of crank theories about money (social credit, Freigeld, bimetallism, gold bugs) that it's hard to even know if the Federal Reserve is not itself based on a shoddy theory.

You are correct in at least one respect: if you ask anyone why they accept dollars as payment, they answer is always: "because other people will take it as payment". But isn't this fundamentally a house of cards? ("I thought you were watching the kids." "But I thought you were watching the kids!") With no *separate* reason to value them, we're forever exposed to the risk of the value quickly evaporating (cf. hyperinflation).

However, based on what I've learned about the Fed, large financial institutions expect it to sell its assets for dollars if the dollar drops too low, in effect, propping it up that way. It's like this: let's say I get investors to give me 100 silver ounces and I issue them 100 notes redeemable for a silver ounce (ozAg). But then, let's assume I suspend convertibility on demand. Can the notes still have value? Yes, if people expect me to buy them back. Let's say on the market, merchants start demanding more than one note for an ozAg. Well, then I can dump my ozAg's on the market at the prevailing price. If the price of an ozAg on the market stubbornly refuses to return to exactly one note, then I can buy back all the notes, and keep the extra silver as a profit. And merchants won't let that happen.

So yes, it's possible for dollars to have value, even if they're "unbacked" like in the above, as long as people expect the central bank to do what's necessary to keep its value up. Once that stops ... well, then we're screwed.

Re:Can't the same be said about the stockmarket?

[MicktheMech]

This is absolutely false. The stock markets (at least in developed countries) are efficient, so the share price is a good estimate of the company's value. There are many ways to value a company, it's more an art than a science. However, it's generally agreed that the value is the sum of discounted future cash flows. So, while income and book value do contribute to the estimation of those cash flows they aren't the only drivers behind share price. The price a stock is trading at is then basically an average of analysts' estimates of the company's value.

If a company is not paying dividends there will still be future cash flows, since every company will eventually either start paying dividends or it will be bought out. Assuming the company is earning a reasonable return on retained earnings (i.e. the market rate), shareholders should theoretically be indifferent whether the company pays dividends now since that cash will be as valuable to them when they get it as it is today.

Re:Can't the same be said about the stockmarket?

[ArsenneLupin]

Okay, I realize that you are simply making snide comments about the value of traditional investment vehicles,

Well put. Actually, I was just trying to make a first post. Of course, once the people took that FP seriously, it was very hard to resist the temptation and run with it... ;-)

... in the article, which you seem to not have read or are ignoring altogether. Well, if I had read the article, I would have been unable to get FP.

That being said...:

Roughly speaking, a Ponzi scheme is one in which the perpetrators make false claims in order to lure investors. Well, that also happens in the stock market, see the recent article about spam-based pump & dump schemes.

This is simply false. Shareholders not only control the company, determine who gets serves on the board, ... Correction: majority shareholders control the company. Small-time investors are out of luck most of the time. And yes, the larger investors are in a perfect position to fleece the smaller ones.

...but they have very well-defined avenues of legal recourse. True. However this only sticks for the most blatant cases of abuse (cooking the books, etc.).

Not only that, but the company itself has no control over the valuation of its stock other than how it presents its performance to the outside world. If it has a stock-buyback program, it does.

Re:Can't the same be said about the stockmarket?

[rlp]

>> Roughly speaking, a Ponzi scheme is one in which the perpetrators make false claims in
>> order to lure investors. Once they have some investors coming in, they begin to pay back
>> the earliest investors in order to create hype and garner more investors. People make
>> money in ponzi schemes, but only by being at the top of the pyramid.

> So, you mean like the stock market?

No, more like 'Social Security'.

Re:Can't the same be said about the stockmarket?

[TheWizardOfCheese]

The US Dollar isn't based on anything other than trust now - fiat money. What makes second life, or any other currency, any different?

What are you talking about? Neither the article nor the post you replied to said anything about the value of the US dollar. The point is that if there were really a market for exchanging SSL and USD, as claimed, then there would be some price that represents the relative value of these two commodities that is "simply accepted", in your parlance. It doesn't matter what these values are "based on."

You cannot hit the bid in signficant quantities, but you can lift the ask in any volume you like - showing that this "market" is a scam.

Re:Can't the same be said about the stockmarket?

[archeopterix]

So, you mean like the stock market?

Yeah, like the stock market, only for all the people involved, not only the uneducated who decide to buy stock because it has grown 30 percent last month or because their barber told them to.

Re:Can't the same be said about the stockmarket?

[inviolet]

The US Dollar isn't based on anything other than trust now - fiat money. What makes second life, or any other currency, any different?

True enough -- but it is trust in something that has a certain reliability. Anyone who accepts US dollars in exchange for real goods is trusting that the US government will behave a certain way. That's a reasonable article of trust -- it is not the act of faith that some imply it is.

Trusting the government of Weimar Germany to behave similarly would be an unjustified act of faith.

Same for US treasury bonds. The buyer of such bonds is trusting that the US government will not default on the necessary collection of taxes and repayment of mature bonds, and that the US economy will not crash bad enough to be unable to make such payments. That too is a justifiable act of trust.

Of course we all disagree over just how justifiable that trust is. The world's collective estimation of our trustworthiness is expressed in the interest rate that bonds fetch on the open market. Trustworthy countries get to pay lower interest rates on their bonds; risky countries pay higher interest rates... just like any consumer loan.

Re:Can't the same be said about the stockmarket?

[homer_s]

The problem goes back to something having inherent value vs some thing that does not have inherent value.
In a barter system, there is no question of valuation because whatever you are bartering (wheat for beef) has value to you. You don't care if the market for wheat collapses the next day, because the wheat has inherent value to you.

The problem is that bartering does not work for the number of products (and services) people want. So, you need a product to *represent* value - gold, silver, cigarrates, money, etc. It is important to understand that this product does not need to have inherent value - it only represents value.

Say we agree that plain white paper will be the mechanism by which value will be represented. The problem is that while some people work hard to create products with inherent value, I might just print plain white paper. This does two things:
1. I get to make 'money' without working as hard as you, which is not a problem in itself.
2. I dilute the value of plain white paper thereby indirectly stealing from you (this is called inflation).

This is why gold or any other rare commodity is a good currency (but not perfect like barter). I just cannot do make tons of gold and dilute the value - I have to do real work to mine the gold. The moment someone figures out a way to create tons of gold, it will not be a good currency.

The problem with fiat money is that the govt. can print it (or rearrange electrons) at will and steal money from you indirectly. The financial institutions (who you say will 'prop up' the dollar) always want more money pumped created so they can lend it out and make more money.

Re:Can't the same be said about the stockmarket?

[UbuntuDupe]

I actually used to agree with all of that 100%, but over time, I've had to re-evaluate it based on new perspectives, so maybe you can help satisfy my concerns.

It's true that the Fed can print money without having extra assets to back it up, thus devaluing it. But as long as people *expect* this to happen, interest rates will be such that by holding your money in a money market account, it will grow and erase this effect, right?

And again, I'm not trying to justify government control of the money supply. I'm just saying: is what you're describing really one of the impacts of fiat currency?

The financial institutions (who you say will 'prop up' the dollar) always want more money pumped created so they can lend it out and make more money.

Well, I was saying the Fed, not financial institutions in general, does this. And it does it by having real assets to back the money. If its value falls farther than justified by the Fed's holdings, they can sell assets to restore its price. But the *expectation* that it will do this typcially suffices to prevent excessive inflation.

Moreover, I'm not sure financial institutions care one way or the other. They care about profit. Having more money to lend doesn't necessarily help them; keep in mind they have to pay more interest to depositors.

Finally, if the risk-free interest rate really does persistently stay below the "true" inflation rate, can't that be arbitraged away? Say, someone holds a basket of commodities that are "really" inflating instead of lending it out. That should keep the risk-free rate above inflation, yes yes?

I will agree with you that most of the "problems" with a gold standard are due more to stupid decisions people make while on a gold standard (fixed mortgages with no pre-payment option, anyone?), but I think you could say the same thing about fiat currency!

Re:Can't the same be said about the stockmarket?

[zrobotics]

"The financial institutions (who you say will 'prop up' the dollar) always want more money pumped created so they can lend it out and make more money"

This is pretty much flat-out untrue. Financial institutions (e.g. banks) don't wait for the government to print more money so they can lend it out. While the U.S. government does print new money, most of the 'new' money that enters the economy is created by banks. Average Joe decides to buy a house, so he goes to the bank. The bank loans him money, and Joe buys his house. Wham! New money. That money didn't exist before, the bank just gave him money drawn from other people's accounts. So, while the bank is out this amount of money until Joe repays his loan, the bank doesn't tell the account holders that their money isn't in the bank, they need to wait for Joe's loan to be repaid. The bank simple hands them money out of the hard currency it has on hand. This effect is much more significant when banks loan large amounts of money to investors/corporations to create new businesses or expand existing ones. So, while the government does create some new money each year, most of the new dollars pumped into the economy come from banks.

Re:Can't the same be said about the stockmarket?

[FallLine]

So please explain how "pump and dump" (http://it.slashdot.org/article.pl?sid=07/01/21/20 29210) via spam will increase a company's stock value.

Did the spam somehow suddenly increase the value of the company's assets, liabiliies, and income?

Uh, these pump and dump schemes that the spammers orchestrated all targeted OTC/Pink Sheet stocks. In other words, the average price per share was only about 60 cents and the average number of shares traded in a day was only about 2K-3K. In other words, in a given day only about $1800 was trading hands with these stocks. All these spammers need to do is convince a very small number of unsophisticated people, a couple dozen tops or just %.001 of their spam recipients, to drive the stock price up. They could never work these in more expensive and non-thinly traded stocks. Similar scams are conducted all the time with physical goods and services as well.

Look at Enron. The day before the scandal happened the stock value was high. Not much after, it was worth less than a dollar. Did the actual value of the company's assets change in that short period? If the later price is "correct" then why was the price so high for so long? If the former price, then why did it drop so much?

Investors can be stupid and investors can be lied to. That does not make the entire pursuit worthless, nor does it mean that we have a better system. Hwang Woo-suk, the Korean scientist the forged his stem cell work, was payed very well, given a lot of funding, published in major journals, given academic support, and more.... up until the revelation that he was forging his work. So does this mean science is bad? No. It means that people are people and any human system is bound to have liars, frauds, crooks, etc. The trick is to pursue them to keep the great majority honest.

The financial markets, for all their high-paid analysts and smart people, are really fickle, ruled by the whim and fancy of investors and by herd mentality.

I wouldn't completely disagree with you here, but all institutions have the same kind of problems as they're staffed by people. We don't have a better alternative. It's better to allow people to under and over-react than to not allow them to react at all. In general the market prices things fairly efficiently -- the fact that it is very hard to beat the market consistently demonstrates this fact.

Re:Can't the same be said about the stockmarket?

[Snowmit]

Yeah, like the stock market, only for all the people involved, not only the uneducated who decide to buy stock because it has grown 30 percent last month or because their barber told them to.

But... my barber is wealthy...

Re:Can't the same be said about the stockmarket?

[El Cabri]

And after we have "destroyed", as you say (are you 13 years old or 12 ?), how exactly is it that we get our iPods/beamers/cheap clothes ? I mean to produce these things you need factories, a functionning society, shipping routes, etc... So we're back to what I've said : we get cheap imports willingly produced and shipped by foreign nations, not out of fear that we would misbehave, but out of conviction that we won't (or that we cannot)

You mean like First Life?

[jesuscyborg]

Sounds a lot like the promises of becoming rich in real life that few actually obtain due to those pesky land barons^W^Wcorporations.

WoW!

[Kirin Fenrir]

I've known World of Warcraft was a money-sink from day one. So this guy is saying MMO's cost money? I know Second Life has no monthly fee, but come on...a pyramid scheme?

It's not easy to make money in your First Life either, therefore, real-life must be a pyramid scheme. Damn you, God, you sly bastard!

Re:WoW!

[ciggieposeur]

Though I know where you're coming from (having read The Screwing of the Average Man many years ago), you might get further traction if you pick your numbers more carefully.

The bottom edge of the top 5% sorted by income isn't obscene -- I think that is somewhere around $300-$500K USD per year. It's hard to dismiss the value of a $500K CEO whose wheeling and dealing keeps two hundred other people employed at $40K+ each -- that's $500K propping up $8 million in salaries.

Now, the bottom edge of the top 1% is getting there -- I believe that is near $1-$3 million. At $1 million you're talking near $500 per hour or $8 per minute. That means it costs a Fortune 500 company $50 every time a VP takes a piss.

The trick is to get the IRS figures and find good values to delineate the range between "making a lot of money by producing a lot of value for others" and "making so much it literally is obscene". I used to have the numbers handy back when I liked to argue about things, but I've forgotten them now.

But it's a pyramid scheme with...

[KDan]

BDSM and Virtual Sex...

Daniel

One born every minute...

[Zeek40]

I'm sorry, buy if you consider investing in virtual property in a Video Game a good idea, you have absolutely no business managing your own funds. You'd probably be better off investing in a pyramid scheme ( aside from the fact that they're illegal ). At least most pyramid schemes have some sort of actual product that moves around, rather than just a collection of bits on some hard drive somewhere.

Just like first life....

[BVis]

there are people who will seek to take advantage of others for financial gain. It's generally referred to as "capitalism." Those same people who are deceived by con artists in Second Life are the people who watch the infomercials on late-night TV that have the guy with seventeen mansions and a 25 foot speedboat and hot and cold running girls, etc. and believe what they're saying.

The same adage works in both worlds: "If it sounds too good to be true, it usually is."

I've spent considerable time in SL, and have spent a grand total of $20 in my time there. I've made small amounts of in-world cash through various jobs. I tune out the scammers in SL just like i do in RL.

Anyone that gets scammed like this (in either world) deserves to be parted from their money. Anything we can do to make stupidity painful (or at least expensive) is OK in my book.

Re:Just like first life....

[kalirion]

Anyone that gets scammed like this (in either world) deserves to be parted from their money. Anything we can do to make stupidity painful (or at least expensive) is OK in my book.

You must just love it when grandmas who have only just discovered the internet lose their life savings to PRESIDENT UBUNTA OF NIGERIA.

Re:Just like first life....

[kobaz]

You must just love it when grandmas who have only just discovered the internet lose their life savings to PRESIDENT UBUNTA OF NIGERIA.

[rhetorical]Why does the internet have anything to do with this?[/rhetorical]

If grandma received a letter in the mail from the PRESIDENT UBUNTA OF NIGERIA what are the odds of the scam working? I would say it's less likely to work with snail mail based on purely nothing other than I think that since the internet is much more convenient and "magical". It's almost effortless to for people to just click reply and think, well, it can't hurt.

A previous landlord of mine, who I figured was quite intelligent (he did have a phd in geology and was a professor) received a friendly note from our friends in Nigeria. He mentioned it to me and I explained to him how the scams work in detail. He said he was going to try seeing what he can get out of it, since some guy from "Canada" (since it's not Nigeria it's okay right?) had contacted him. Four checks came in with the sum of about 100k, he cashed them. I told him to not do anything at all, don't send these guys money, ever. Few weeks later he stopped by my place and said: "I'm sorry, but, you were right, I'm in the hole 300k. I've made arrangements with the bank to start repaying the money". The bank actually managed to recover all of it eventually (he had wired some people money and then the Nigerians withdrew even more). I can't believe he was actually thinking about just paying the bank back over 40 years.

I really don't know if it's just pure stupidity or not.

Re:Just like first life....

[jidar]

Ah. Blaming the victim.
Blaming the victim is trait that has become more common in the average American. Most educated people would agree that this common sentiment is not a good trait to have, and many say it's a sign of our increasing callous attitudes and selfishness, but what is the cause?

It has been proposed that one cause of victim-blaming is the "Just World Hypothesis". People who believe that the world has to be fair, may find it hard or impossible to accept a situation in which a person is unfairly and badly hurt for no cause or reason. This leads to a sense that, somehow, the victim must have surely done 'something' to deserve their fate. Another theory entails the need to protect one's own sense of invulnerability. This inspires people to believe that bad things to those who deserve or provoke it (Schneider et. al., 1994). This is a way of feeling safer. If the potential victim avoids the behaviours of the past victims then they themselves will remain safe and feel less vulnerable.

Supporters of this view (once referred to as "Job's comforters") must perforce accept that to do otherwise would require them to give up their belief in a just world, and require them to believe in a world where bad things -- such as poverty, rape, starvation, and murder -- can happen to good people for no good reason. The cognitive dissonance in doing this becomes too great, and results in victim-blaming.

So BVis, what do you think is wrong with you that makes you think this way?

Re:Just like first life....

[BVis]

This isn't blaming the victim. It's asking people to be responsible for themselves and their loved ones.

The world isn't fair. Once you accept that and take steps to be responsible for your own safety and your own actions, you'll do a lot better.

Re:Just like first life....

[mfrank]

Read "The Jungle" by Upton Sinclair. Very early 1900's were pretty friggin' unregulated capitalism. It takes place in the meat packing district (of Chicago, I think) and the publication of this novel pretty much led to the establishment of the Food and Drug Administration. The last chapter has the main character attending a Communist Party meeting and "seeing the light" (Sinclair was a major league commie).

Purely unregulated economies dont' work. But there's more to a society than the economy.

Re:Just like first life....

[PhiRatE]

Man. What complete crap.

You're not wrong, in the sense that there are plenty of people who suffer from that "Just World" problem. But using it as a method to attack anyone who judges another at fault for failing to apply even the most basic thought to a a significant action does not require that you subscribe to the Just World hypothesis.

People who subscribe to that will blame another for what essentially constitute random accidents - a car hits yours when you had right of way - why didn't you do a defensive driving course? people are idiots you know!

However it's not the same thing to find fault with someone who, due to their own failure to apply common sense to a significant action, suffers loss (not the same as requiring common sense for an everyday action, attention is not always available).

It is also not the same to find fault with someone in the abstract, vs a particular person. Ie, to say that in general, those scammed by 911 mails should have known better, that the entire thing is both too dodgy and too good to be true, is not the same as berating your grandmother because it happened to her.

People are always more willing to deliver an objective assessment in the abstract, when it actually happens to your lovely old grandmother who spent years in Nigeria in her youth helping their education system the cause-and-effect of judgement suspension is easier to follow and natural sympathy for a member of your tribe comes into play.

The tragedy is that people with a strong belief that you are correct result in a less resilient population. Believers who end up in politics attempt to create a legal environment based on the idea that people cannot be trusted to think, a self-perpetuating cycle once it gets bad enough - if you don't normally have to think while going about your day to day activities, it becomes harder and harder to blame you for not thinking when anything unusual happens, so more and more things have to be regulated to the point where it is impossible to come to harm no matter how stupid the action.

Not only is such an environment unsustainable (at least given our current technology level), it is severely counter-productive. Safety is easiest to apply to a narrow range of possibilities, and thus laws are made which subsequently restrict peoples ability to act in an intelligent, but uncommon manner, resulting in heavy efficiency losses overall.

So jidar, why are you mis-representing the views of people in order to make yourself feel superior, and why are you screwing up my society?

Probably more like Vegas than pushy realitors

[antifoidulus]

Some will go in desperately believing that it will make them a lot of money then wind up losing a ton, some will be smart and/or lucky and go in and make a lot of money, and most will go in with the expecation that they will enjoy themselves, if they make some money great, if they lose it it sucks but they know that going in and set aside a small amount for that purpose. And of course, the house, aka Linden Labs, always winds up a winner.

Second Life?

[EveryNickIsTaken]

I'm beginning to think that some media conglomerates must hold a stake in Second Life, and that's why we keep reading/hearing "news" on it.

Compared to other online communities or games, Second Life is miniscule.

"...only are most people deceived about the amount of money they can make in Second Life, but also about how easily they can withdraw it."

Yeah. Right. The reason people start playing Second Life is because their First Life is boring or sucks. Not because they "heard how much money they can make off it."

Re:Second Life?

[cybermage]

Not because they "heard how much money they can make off it."

I think that you are right about the majority of people using Second Life, but I personally know people who do Second Life for a living.

There are people who hear stories about making money from Second Life and pick it up for that reason, but I think the point that the article fails to get is that it is not the creators of the game saying it.

Re:Second Life?

[HorsePunchKid]

I'm beginning to think that some media conglomerates must hold a stake in Second Life, and that's why we keep reading/hearing "news" on it. You may be on to something...

Deceived by whom?

[Rob T Firefly]

I've only recently started playing this game, and me getting into it had nothing to do with any hype about perceived money-making opportunities. I had seen some friends playing, and seen some screenshots and things, and was mildly interested. When the client went OSS I respected that move enough to dissolve my last bit of resistance and try it out myself, and it turns out I enjoy it so far.

Never in the game's help files or the blogs I read did it talk about using this thing as some huge income-generator. It's a game, and I find it pretty good at being a game. If on the other hand I wanted to work and make money I'd get another job.

This "OMG MONEYS!" hype seems to be confined the more sensationalist news outlets which I don't really take as gospel, and some third-party stuff. From my own short experience playing the game the actual financial rewards appear, just as in real life, to come to the people with the skill, time, and wherwithal to put into making stuff other people want to buy.

So who is doing any deceiving here?

Re:Deceived by whom?

[cowscows]

Exactly. There are some people who've had the mixture of talent, time, and luck with SL, and have managed to make some money through the game. For many of those people, as their SL bank account grew, so did their ego. And so they make a big deal about themselves, it gets picked up by some of the media because it's kind of a strange story, and some lazy people with free time think they can maybe get in on that action.

These people are only fooling themselves, making money in SL requires time and effort just like in real life. If you want it to provide income, you're going to have to treat it like a job. A job in a bizarre and very unpredictable economy, but still a job.

The really sucky part about this whole phenomena is that as these people gain publicity, their clout with the SL developers grows, and so the whole setup starts shifting in the favor of those who treat it as a job, at the expense of the majority, who treat it as some sort of a game. Linden Labs needs to be very careful with how they balance those two sides, because if all the "gamers" leave, then the bottom of the economy falls out, and all those virtual moguls won't be able to save SL.

Ads

[Cutie Pi]

I love the ads that go along with this article:

Get a (Second) Life
Live out your virtual dreams with this official guide to Second Life!
www.amazon.com

Want a Easy $9000 a Week?
Not MLM and No Selling Fully Automated and Get Paid Daily
www.MillionaireSuccessCourse.com

Load of junk

[Anonymous Coward]

I make $1500 US a month from Second Life, whilst the ease of making money is definately overstated it has nothing in common with a pyramid scheme and it is very easy to withdraw your money (Not so much if you are trying to withdraw less than $50 due to the fees involved). This article talks about "banks", which no real business should be touching as the are run by residents and are unofficial and unapproved. This is the equivalent of giving your gold to another player in World Of Warcraft who tries to make you interest off it through loaning it to other players.

He also seems to have no grasp of how the currency exchange system works, either you sell automatically at the lowest asking price or price it yourself. Trying to buy and sell currency is worthless due to the fees involved and the relative stability of the market.

Any actual SL business will sell content to people, then cash this out on the official currency market every so often. It's really not hard to make a few dollars with no overheads. He does have a point on the circular nature of the market though, there are very few money sinks and the market is only healthy due to the fact new users are constantly joining.

Re:Load of junk

[roman_mir]

The 'goods' that are sold within SL have no value in real life, which makes the SL a closed system, which sustains itself only due to the new users who are constantly joining as you yourself stated. It is a pyramid scheme.

Re:Load of junk

[Redwing]

The "goods" that are sold at the iTunes Store have no value outside of mp3 players, which makes iTunes a closed system. It is a pyramid scheme. /sarcasm

Who says entertainment has no value?

Re:Now on computers!

[udderly]

"SecondLife is a giant magnet for the desperate, uninformed, easily victimized. Its promises of wealth readily ensnare those who can least afford to lose their money" Just like the lottery.

Problems

[Fist! Of! Death!]

Hey I am still having problems running First Life. I mean the resolution and refresh rate I am getting is AWESOME, but maintenence on my avatar is disturbingly difficult. It takes weeks to modify the look of my avatar (many users have reported a similar problem), and all my support queries to the Developer seem to be piped to /dev/null.

And not ONE cheat code has surfaced yet. I ask you!

Well..

[argStyopa]

...I'm NOT a fan of Second Life - I think it's feeble, clumsy, laggy, antiquated in every technological way, and pointless - but even I draw the line at calling it a pyramid scheme.

That's just silly. If anything, it's closer to a pure meritocracy than anything - there are some stunningly creative people in there (apparently with LOTS more time than me). There are a lot of things I'd be interested in exploring DESPITE the horrendous lag and 1992 graphics. Hopefully these creative people can sell their work for Linden$ and turn that into cash based on market forces.

At some point, people have to be responsible for their own actions. It's 'caveat emptor' for the computer world, which itself is capitalist Darwinism that is essentially no different than any OTHER non-computer capitalist mechanism.

If I enter 2nd Life with no knowledge of what I'm doing, and expect to "make ton$$$ of money!", I'm probably going to waste my time (and if I'm stupid enough to spend real money, I'll lose that too). How is this ANY different than if I buy a franchise restaurant without knowing anything about the business, or start day-trading stocks knowing NOTHING about the market? In every case, my ignorance will cause me to make mistakes (at best) or even be exploited by more savvy actors (at worst) but either way, the ending will not be happy for me.

In that sense, 2nd life is no different than the real world.

SL economy is not a traditional economy

[bitkari]

I think a lot of people have failed to realise some things about the economy of Second Life. Unlike our real-world economy, the world of SL doesn't have the same economic limits and drives that we're used to. If we do look at what's really going on there, we can see how things might change in our "real" economy in the future - and I don't just mean trying to do the same old "real" stuff virtually:

• Apart from land (the price of which is set by Linden Labs), there is no real scarcity. If I want something (anything!), I can make it myself.
• In the world you have no needs. You don't need any food to eat, you don't even need a place to live.
• While it is described as a "game", there is no real game in SL. As such there is no struggle to gain resources to achieve game success.

Now, the only real reason for any money in this game is for people to be able to buy items from other people that have created. However, if this system were to be abandoned in favour of, say, a FOSS-like model, people would simply make things that they enjoy creating, freely distribute them and likewise obtain items that they like from others without need for any financial exchange whatsoever. There certainly are many people already in SL who just give their creations freely without seeking any real payment other than a simple "thanks".

There is no reason that this shouldn't happen other than we're quite used to dealing with a capitalist system based on scarcity. If we ever hope to grow beyond our current real-world economics, it's certainly worth trying to experiment with alternative systems virtually.

Re:SL economy is not a traditional economy

[vadim_t]

SL has scarcity of a kind. Boxes in SL are everywhere. Custom made things are scarce.

People in SL won't abandon the economy for a "FOSS approach", and I say that as an OSS advocate myself.

The thing is that no real cash would actually make SL a less impressive place. Let's suppose you want for whatever reason to look like your RL self. Right now you can hire an artist who will tell you what sort of photos they want of you, and will then create textures and clothes in the right shape. They get cash, and you get to look like yourself.

On the other hand, who will bother with that in a pure "FOSS" environment? It's tedious work. The same way, OSS does badly in areas like accounting packages. Working on the kernel is interesting. Writing code for dealing with some obscure tax regulation is boring. Making some random guy's nose look just right is boring.

Yes, people can and do release all sorts of things for free. Say, avatars. But who wants to be cybergoth #12342? All of them would look exactly the same. If you want to look unique there are only two things you can do: make it yourself (which is hard unless you're skilled), or get somebody else to make it. And so far we haven't come up with a better way to motivate people to make custom stuff than paying them for it.

Bullshit

[vadim_t]

It's very possible to make money in SL. But of course taking it as a stock market is stupid. What sells in SL is services.

SL is simply an environment capable of connecting buyer to seller. You provide a service: drawing a custom picture, making a custom script, building something, the buyer provides the cash. This way of doing things simply CAN'T be a pyramid scheme.

Banking in SL is stupid - that I can agree with. People in SL simply aren't patient enough to handle a sane interest rate. Most people work with amounts like $5 USD, which they consider significant. Only maybe 1% of all people in SL works with amounts of money where a 5% interest would amount to something. So SL banks offer really insane interests, possibly operating as a Ponzi scheme. I haven't used any SL banks, but my feeling is that they're very unreliable.

Calling all of the SL economy a pyramid scheme is bullshit though. If you act as a scripter/artist/builder for hire you can make some money without problems. Build something pretty, put it on sale, and if people buy it, you get cash.

Now, indeed, you won't get rich in SL very easily. Earning say, $10 or $20 in SL is easy. Earning something approaching a real income is very, very hard. It'll take dedication, an impressive quality (there's tons of competition), selling things much below what they'd cost in the real world (meaning, what you get per hour of scripting is probably noticeably below what you can get per hour of coding in your country). Through all of it, you'll have to be your own programmer, marketing department and businessman, because involving any more people makes it even less profitable. Through all of that you have to contend with that everything in SL is intangible. With no materials other than perhaps hosting costs for things that require external servers, anything you offer for cash, somebody else could offer for free.

Now, despite all this, I'll say that selling things in SL can be a very nice experience, despite the low income you get from it. At least for me personally having something I made byself get used by several hundred people and personally hearing feedback gives a much nicer feeling than being a faceless drone in a corporation, even though the corporation pays a lot better.

It's a game!

[Thumper_SVX]

It's not a game in the classical sense that there's a goal to be accomplished, scores and so forth... but it is nonetheless a game.

I got into SL a few months back mostly out of curiosity. I didn't buy into the hype being generated by the media and checked it out because I was intrigued (as I have always been) at the concept of virtual realities. I was always a big fan of Gibson and the Cyberpunk novels in general and so I already had a "primer" in the thoughts behind virtual worlds.

Now, SL is not perfect. Not by a long shot. It's sometimes laggy, crash prone and buggy... but it IS enjoyable. I have friends I made through SL whom I probably would never have met in RL. I used to get on IRC a lot about a decade ago, and this provides similar interaction in my opinion. I enjoyed IRC because at the time I lived in East London, and getting on IRC provided me a way of meeting and communicating with people all over the world. Although now I've not logged into IRC in 7 or 8 years some of those same people are still my friends, and they were instrumental in helping me when I decided to move to the US 10 years ago. I don't predict I'm going to make another similar move, but SL provides me with the same sense of community I got back then.

Now, as far as the pyramid scheme thing goes... please! Take a look through secondlife.com (the official site). Although the idea of selling your creations or renting property is discussed, it's not plastered on the main page "Make Massive $$$$$$ Now" or something like that. Linden Labs for all their faults are selling SL as what it is; a virtual world, a community and a creativity tool. If you are creative enough and good enough with the built-in building tools, then you can sell your wares to others and make a little cash. I know some people who do this and make enough in-world L$ to "shop" occasionally. Sometimes they even make enough that they can "own" a small plot of land and have their monthly fees covered by their sales. I have never known anyone personally who makes a massive profit. In that regard, it's more like real-life... if you have a marketable skill (avatar building or building models of ships, houses, furniture etc.) and know how to market it properly you can make some in-world money. If not, you won't. It's that simple. There are no more huge opportunities to make "phat cash" in SL than there are in real life. The only advantage of SL is that it's still a relatively untapped market if you're creative enough.

Hell, I make some L$ in-world by creating real art. I draw, sometimes ink and paint... then I upload a texture and map it onto a simple prim with a nice frame... voila... one saleable item that people will buy to hang in their property. I don't make much, but I cover expenses... and I get to keep the original :) Plus I get kudos from friends who check out my store when I create a new piece... or comments (positive or negative) depending. I like that... it's communal. I don't expect to get rich from it... in fact I doubt I'll ever have to worry about withdrawing L$ from SL so I can't speak to how easy it is to withdraw.

The media has created the pyramid scheme, not SL... and certainly not the majority of the denizens of that virtual world. They're the ones selling the idea that you can get rich quick in SL... Linden I don't think has ever claimed that. Oh, and the SL "millionaires"? Have you seen the exchange rate of L$ to USD? An SL "millionaire" probably has as much in their "bank account" (read that as SL account) in real world $ as I do in my bank account. I am not rich... in fact there are months I juggle bills like everyone else. Plus, I have to note that there were probably more scams being thrown at me in IRC 10 years ago than I have seen in SL. It's just the media ignored IRC because it wasn't "cool" to be geeky back then. The same things have happened... they just have an extra coat of polish and eye-candy.

Poor Judgement costs money

[DLG]

I have had a second life account for over a year. I have some typical number of Lindon dollars. I have never bought more. I have never spent any. I have no real understanding of the economy, except that if I want to import a graphic image into the system it costs money, so I don't.

I am sure I am missing out, but lots of people have GIVEN me things that I assume cost someone money at some point. That of course dilutes the value of the investment. The pay back probably involves social status, similar to potlatch societies where whomever gives away more is the 'wealthiest'.

Clearly the actual issue is how to convert ANY of that into real value, in a way that economists can equate either directly or analogously to real world value, such as income or return on investment.

What this article does most effectively is highlight the lack of support for predictable commerce. The same is true in countries with unregulated financial systems, and the factors of anonymous commerce, no legal system, and essentially no reliable contract, means that the only commerce that is effective for most people involves commerce in which there is a low stake, which means that actual use and accumulation of wealth is both hindered, and less valuable.

This is a vending machine economy. Its based on a million players putting in a quarter in a slot machine, or buy a new outfit, face, body etc... Things that are specifically part of the online environment (playing with toys or enhancing your visual representation)...

-----

Second Life really is more interesting because it is the equivalent of a Graphical MUSH where all the users have the ability to create items. I can create any number of items, and give them away or clone them. A good item may be worth something but since any good item can be reverse engineered and distributed at no cost, there is little value to developing quality code except for social praise. Real designers and coders actually can earn good livings in the 'FIRST WORLD' so most of what you see is toys made by people for fun, which makes alot of sense.

-----

Last but not least, its a crappy environment for real development. It is harder to output text in any meaningful format. Thats an intentional crippling to force people who want to create content to have to pay to input graphics, rather than write code to actually draw graphics. Pretty regressive considering the direction of the web, which enables REAL commerce and has created a good amount of wealth.

------

When SecondLife stops being a scam, and supports real internet technology and openness, perhaps it will also draw the kind of mindshare that will create real value and an honest marketplace, but that is a different economic model. For now, its mostly a place to play john and whore and part of that means paying, and if that happens to let your one dollar turn into 250, then the game seems more exciting. If a grown woman and parent of two actually believes that earning 185 dollars a month for being a whore and a mule for money laundering is good money, then I guess thats what she deems herself worth. Hard to argue with that sort of capitalism.

Yes and no

[bytesex]

But there seems to be a very vague understanding of what is a pyramid scheme among the /. crowd. A pyramid scheme is not just plain old deception, nor is any pyramid scheme illegal. A pyramid scheme is a market that can only go up because the amount of participants increases. Given a growing population, the housing market is an example of a pyramid scheme (that is, if you assume that nobody ever fixes up their house, or that houses don't automatically degenerate, but if you do that, and you get in early, then you're bound to win). The stock market in the nineties was a bit pyramid-like (it went up largely because the amount of players increased dramatically, and they all needed stock - any stock). I suppose 2nd life does generate value of its own (people are meeting other people, for example), so it's not entirely a pyramid scheme, at least.

The Linden is just another fiat currency.

[gd23ka]

The first sentence of the Wikipedia article on "Fiat Currency" (http://en.wikipedia.org/wiki/Fiat_currency) reads:

"In economics, fiat currency or fiat money is money that enjoys legal tender status derived from a declaratory fiat or an authoritative order of the government."

It should read: Fiat currency is money that is backed by the trust in the promise that goods will be delivered in exchange.
Neither the Euro nor the "modern" Federal Reserve Dollar are backed up by anything but promises, they are fiat currencies.
What's more, the dollar is given out by a _private corporation_: "The Federal Reserve".

If you give it enough tought you will find that the Linden has no more and no less substance than the US dollar. The only real
difference between the two is that the USD is backed by a bunch of exceedingly tougher thugs who may or may not suffer the
Linden.

Other Pyramid Schemes

[Skevin]

Real Estate must be a pyramid scheme because every time land changes hands, it's usually because the previous owner is selling it for more than he bought it for, never mind when each owner has developed the property some more.

My stock shares of Coca Cola must be a pyramid scheme because (accounting for inflation) I paid more for them than the person before me, and he paid more for them than the person before him.

The Dow Jones Industrial Average (12560.56 at last glance) must be a pyramid scheme because it represents people selling stocks for more than they bought it for. It's going to crash, I tell you.

Scientific research might be a pyramid scheme because many successive discoveries rely on knowledge gleaned from past discoveries.

Why is it that insufficiently educated journalists can point to value-added commodities with accusations of the P-word for the sake of sensationalism? Has it ever occurred to them that "Pyramid Schemes" are neither illegal nor unethical as long as something of value changes hands, and especially if that particular something can be developed or improved? It becomes morally wrong when that something in question changes hands with an artificially inflated price that does not properly demonstrate its commensurate worth. Whitewater could be thought of as an illegal pyramid scheme. Ponzi's operation was an illegal pyramid. "Make Money Fast!" was an unethical pyramid, albeit not illegal.

There are many legitimate operations that can be thought of as a pyramid scheme, but if one starts thinking of them that way, please refrain from thinking the P-word is a bad thing.

Solomon Chang

Re:Other Pyramid Schemes

[alienmole]

"A pyramid scheme is a non-sustainable business model that involves the exchange of money primarily for enrolling other people into the scheme, usually without any product or service being delivered." So no, none of the things you mention are pyramid schemes.

The article's point is not that the economy within SL is a pyramid scheme itself, but rather that "withdrawing money from the Benchmark-backed virtual world is about as hard as cashing out of a pyramid scheme". In particular, he's referring to the alleged $220m "GDP" of SL, most of which is almost certainly not convertible to real dollars.

Re:Other Pyramid Schemes

[indigoid]

Want to sell your Slashdot UID? ;)

you must be new here!

Warning: small novelette ahead

[mentatultima]

The problem is that they are "investing money" into lindens and hoping the exchange rate changes. Linden Labs as specifically "pegged" the linden to the dollar. I track it and it usually has been consist to about 1000L for abojut $4/US. Lindens are strictly controlled, it is not easy to just make large amounts of linens, ( I know I have tried :) ). Most of this is planned, they hired an economist to help control the economy. Linden labs makes $.30 US on each buy and about 3.5% on each sale. Sales of lindens tend to act as stocks, meaning you put in a sell order and wait for some to bid on the lindens. buys are typically much faster though.

There is one example of linden dumping to control linden prices, quote: "In the second half of September we sold L$20,117,994 to prevent rapid appreciation of the L$. " . http://blog.secondlife.com/2006/10/03/linden-dolla r-economy-update-2/ it is on there blogs.

From the website (https://secure-web4.secondlife.com/currency/descr ibe-transaction-fees.php): Fees for Buying L$ You will be charged a fixed fee of $0.30 per transaction regardless of the amount of L$ you purchase.

Fees for Selling L$ Sellers of currency pay a fee of 3.5% per transaction. Proceeds will be credited to your US$ account balance.

Yes there are limits to trading, unless you apply for higher limits:
https://secure-web4.secondlife.com/currency/descri be-limits.php

So if you read the article, he was trying to do currency trading on a pegged currency, not the greatest idea. He got the same amount going in as going out minus the trasnaction fees, gee go figure.

And if you want to look at the economic statistics: http://secondlife.com/whatis/economy_stats.php Which also lists the sources and sinks, most of the money made by linden labs is from transaction fees, tier fees (fees for owning land or islands), and membership fees.

Linen exchange market data: http://secondlife.com/whatis/economy-market.php More useful economic statistics: http://secondlife.com/whatis/economy-graphs.php

Another interesting thing is that lindens are not produced, except by "allowances" given to residents and non-residents weekly. In WOW (world of warcraft) the server producers more gold when creatures are killed. Hence the lindens in Sl are an artifical scarcity, which is what all real world currencies are.

Not everything is sunshine and roses though:

There are some problems with the economy though:

1. land prices have gone out the roof. It is nearly impossible to buy land without spending around $100US worth of lindens. land prices for purchase vary between 17L and more per M. How and what you can build on the land depends on the conventant or contract for the land and how much land you own. For the covenants, think home owners association. Plus for private islands you may not actually own the land, and if the island owner does not pay up his tier fees then the island itself may go into remiss.

   Yes, you can get equivilent work much cheaper in SL by paying in lindens. Although the prices needed for contracted services have been going up steadily. I have had several friends in SL quit doing contracting because it does not pay enough for the effort even corporate sponsorship. I do know of some contracting companies that make enough to survive on though.

   Problems with stability during the updates, this can be especially painful as shops cannot sell when SL is down, and sometimes products break during updates or on rare occassions inventory disappears during updates.

   Land values going down or becoming unusable due

Banks have to build trust

[clawsoon]

It turns out that inside the game, counterparty risk is tremendous. In fact, entire banks will suddenly disappear. Or banks will simply renege on obligations without recourse.

This is not a sign of a pyramid scheme, it's a sign of underdeveloped institutions. It happens in most societies which are first developing banks and stock markets. (Shouldn't a finance writer remember John Law and the Banque Générale?)

Banking institutions develop in roughly three stages.

First there's the banks-disappearing stage (John Law et al), where fabulous returns are promised, but half the time you never see your money again. Europe went through this stage in the early 1700s.

Then there's the Neoclassical stage: Banks build impressive buildings to let people know that they plan to be around for a long time, and to give the impression that they have been around for a long time. This stage arrived in China in the 1920s, when governments weren't stable enough to provide client protection, so banks had to give the impression that they could shoulder the burden all on their own. An impressive building and serious/professional bank managers/tellers help maintain the impression, which is critical if people who got burned in the first stage are going to be convinced to bring their money out from under their mattresses. (Banks built in the 1930s in small-town America have much the same look.)

Finally, there's the government regulation/deposit protection stage. Banks can tuck themselves into the corner beside the Starbucks and the tellers can chew bubble gum, because we know that the government will, most of the time, enforce regulations needed to keep our deposits safe. We don't need the impressive facades anymore, because we trust the institutions.

It sounds like Second Life is still at the first stage. Over time, if the economy continues to develop, expect the Neoclassical stage to develop. Certain players, or groups of players, will build up a reputation for dependability; they will enhance that reputation with professional presentation. Will they build banks with fluted Corinthian columns? Maybe not, but they'll have something equivalent.

Interestingly, these trades tended to net returns of right around 4%, which was the prevailing dollar deposit rate.

This is not a pyramid scheme. This is an apparent arbitrage opportunity that turned out not to be an actual arbitrage opportunity, but, rather, a fairly conservative, boring investment.

Legitimate profit from Second Life

[TenMinJoe]

My sister works in Second Life. She has a job, paying real money (UK pounds, not Linden dollars) with a real, bricks and mortar design agency, and every day she goes to work in their real office, sits at her desk, logs in to SL, takes her avatar to work inside their virtual office, and gets to work.

Her company is paid by e.g. bands or designer clothing brands to create a "Second Life Presence" for them inside "the grid". It's a lot like hiring a web designer to build a web site - you hire a Second Life design company to build you a virtual tropical island, or whatever. People come to your virtual island, maybe you have virtual examples of your virtual products there, they like them, they buy them in real life... profit!

This seems like an entirely legitimate and mutually beneficial arrangement for all concerned; Second Life definitely can be used to make real money without scamming anyone. That's not to say it's not ALSO scamming people, of course.

Re:What people don't know about the US Dollar...

[DarenN]

That used to be true, but not any more! Now it can be bought in Dollars AND Euro

Re:Now on computers!

[MrPinstripeCom]

Hey! I won the UK lottery 173 times last year, and I NEVER EVEN BOUGHT A TICKET.....So NEENER NEENER NEENER. My Nigerian friend also needs help with his investing, so he MIGHT be the one buying me all those UK lottery tickets......Regardless, I gave 'em all my banking information, and I'll have the money any day now.

What we need is a Ponzi Scheme WITHIN second life....I'm going to start offering real estate acquisition courses and start offering all the second life citizens with poor credit financial security in the future.

Then I'm going to take all their fake fake money, and steal it.

and buy more lottery tickets.

Nope.

[Estanislao Mart�nez]

The 'goods' that are sold within SL have no value in real life, which makes the SL a closed system, which sustains itself only due to the new users who are constantly joining as you yourself stated. It is a pyramid scheme.

You're assuming an untenable boundary between the "real" and the "virtual" here. If people are paying real money to obtain those goods, they certainly have a real value.

There are plenty of business models that rely on more money coming in constantly for an indefinite amount of time. For example, the food industry. What's missing from this argument is a condition that's critical for something to be a pyramid: it must rely on an unsustainable continuous inflow of new money. There is no reason in principle that forbids that from happening in the Second Life case; if the demand for Second Life goods can be sustained indefinitely, then it's no different than any other commodity.

If you read TFA and think about it, you'll notice that the "pyramid" claim is the least precise and careful claim made in it. The real smoking gun, to my mind, is the claim that Second Life currency is controlled by a cartel that accepts real money in exchange for virtual money, and then puts in a price structure designed to do two things: (a) keep the said virtual money from being converted back to real money, and (b) prevent other people with big pockets to come in and compete with them. They certainly earn short-term interest on the real money that people trade into their pockets; TFA notes that the penalties they were looking at for big trades closely matched short-term interest rates, which supports the hypothesis that these penalties are, essentially, the cartel's way of charging you for the interest they projected to earn on the real money they're trade you back.

SL not Pyramid

[Gilzors]

Of course it's not a pyramid. I've noticed a distinct lack of mummies!