Sleconomics

It seems this blog has had a spike in readership lately. Yay! Anyways, enough with self serving celebration…

 As mentioned months ago, I take part in the game virtual world Second Life. Specifically, I play the teen version as I am still journeying through the high-school environment. Despite its irrelevancy to the topic of this post, a picture of me:

Yes I’m an cyborg alien and I am blue.

I also build spaceships now and then in in Second Life. Usually this means 10 to 20 meter long fighter spacecraft that the various “military” groups (really groups of people role-playing as infantry men from various scifi first person shooters) use. But, to me that’s not much of a spaceship. I build 50 to 100 meter long spaceships packed with features. I’ve made a decent amount off of only two of these. (A third one, which you will see sometime here is being worked on still). This leads into the real reason for this post: economics in Second Life. As a small time businessman and creator in the world of Second Life, I narcissistically care about the state of the economy. If the economy is vibrant, business has a greater change of booming for me.

[Read more about the economies of virtual worlds....]

The catch to all this is that I don’t partake in the greater Second Life economy. The teen version of Second Life – Teen Second Life or the ‘Teen Grid’ – has its own economy with no interaction between it and the economy for the adult version of Second Life – also known as the ‘Main Grid’. There have been quite a few proposals in the past within the Teen Grid to unify the two economies (I’ll get to ‘why’ in a bit); for legalistic reasons this hasn’t come to pass yet. In the long-term, the world’s creator – Linden Lab – has a small project to create a connection between the economies of the Main and Teen Grid. For now, Teen Second Life is more closed off than Edo-era Japan.

Why would the teen residents desire to merge with the adult version of Second Life? Primarily (and bluntly) the Teen Grid economy sucks. At least, that’s what it feels like, especially compared to the super-powered distant cousin, the Main Grid. But, I’ll save my thoughts for how to improve the Teen Grid economy for possibly another day. What a poor economy and a desire for a solution lead you to do is think about how a virtual economy works.

(I can’t cover everything. The nature of economies is to be more complex than they are portrayed. So, I’ll discuss what I can before I feel like ending this post.)

Like nearly every economy today (I don’t know about the economy of Cuba or North Korea), the basis of a virtual economy is its currency. Its the medium by which economic value and goods are exchanged and moved throughout a society. This monetary supply is controlled and backed by some institution, the creators of the virtual world in the case of a virtual economy. This is right off presents a somewhat unique situation. A business, with the interest of making a profit, operates and controls an economy, which necessitates an institution willing to effect economic controls to stabilize and promote growth of the economy. Most modern nations accomplish this by having a budget deficit. The United States used to aim for a zero-sum budget before World War Two. A company must thus perform what might seem like the impossible: run an economy that creates a budget surplus every year. Thankfully, they have the real world economies to help them out: selling products, merchandise, and services related to their particular virtual world. Many have set up a subscription service for their world.

Linden Lab derives its revenue from primarily the economy of Second Life  and services for Second Life. Every-time you buy a chunk of the in-world  currency with real money, they make money. Every-time you sell a chunk of in-world  currency, they lose money. Furthermore, they make money off of a premium monthly-subscription service and a land rental system (even though you may ’own’ land, you are only renting it from Linden Labs) that forces in many cases money lost by Linden Labs from selling in-world currency to cycle immediately back to Linden Labs. The services (land rental and premium access) they provide is undoubtedly the primaries means by which Linden Lab makes a profit.

It is the money cycling techniques detailed above that lead us to the next major feature of a virtual economy: sources and sinks. A source is a process by which currency enters a virtual economy. A sink is a process by which it leaves a virtual economy. Combined, they control the monetary supply of a virtual economy. More sources than sinks will expand the monetary supply. Likewise, shifting the balance in favor of sinks will contract the monetary supply.

In Second Life, the sources and sinks are, generally, as follows:

Sources

• Stipend (A weekly allowance paid to a certain fraction of residents)*
• In Game Currency being bought by residents
• Sign-Up/Referral Bonuses

Sinks

• Service Fees
• Land Fees
• In Game Currency being sold by residents*
• Uploads
• Saving Money**

The two stared items have the potential to permanently alter the currency supply. Everything else generally affects how the in game currency flows within and close to the economy.

**Saving Money has been included because it can temporarily remove currency from the an economy. It thus has the same effect as burning money for the duration that the money is being saved.

However, the point of this detailed process is that an economy is controlled by the sources and sinks of currency. These sources and sinks are arbitrarily chosen in the design of the virtual world and are mostly static, coded into the game environment.

The third and final defining feature set of a virtual economy is the means by which currency flows and people economically interact within the virtual world. While a major part, the details of this process are minor. Simply, this set is composed of businesses and people buying and selling goods and services within the virtual economy. Each Virtual Economy has a different paradigm for this. Most MMO’s task the players with quests to gain items or ways of mining. Second Life’s paradigm is based off of buying and selling objects created with an in-world simple 3d modeler, land, media files uploaded to the game, and a variety of services. The economic activity and processes within the third feature set control the dynamism and growth of a virtual economy.

Virtual economies are thus simply based around three key aspects:

• A currency with a value determined by the Virtual World’s creator.
• A set of currency sinks and sources that control the currency supply.
• The flow of currency and goods within an economy.

Arguably, these are the main features of a Real World economy. But, I know little of actual economics to judge a real world economy.

With that, I’m set up to criticize the Teen Grid economy when I feel like writing a post on it.