Economics

Second Life’s vibrant in-word economy is one of the defining characteristics of the virtual world. In Second Life, Residents buy, sell and trade virtual creations and services.

How it works

Linden Lab provides its Residents with a suite of 3D modeling and scripting capabilities, allowing users to create unique virtual products and services. Combined with transactional tools that allow for the easy transfer of virtual micro-currency between Residents, these two factors create a rich, innovative, entrepreneurial environment. Unlike similar scenarios in other virtual worlds, Second Life users retain intellectual property rights over their creations, further fostering creative output.

Linden Lab’s microcurrency, known as the Linden Dollar, can be bought or sold for real world currencies such as the US Dollar. In this way, Residents who create and sell in-world content, such as clothing or housing, can accumulate Linden Dollars and then sell them to other Residents for real world currencies. Consumers buy Linden Dollars in order to purchase items in-world.

The Linden Dollar

The Linden Dollar, or simply the L$, is Second Life’s official unit of trade. Linden Dollars may be bought or sold using real-world currency on the official LindeX exchange, in addition to other third-party exchanges. In this way, Residents who create and sell in-world content, can accumulate Linden Dollars and ultimately sell them to other Residents for a real world profit. While technically the L$ simply represents a limited license right to use the Second Life service, there is real-world value associated with them, due to their limited supply and the demand for their use within Second Life.

The LindeX

The LindeX exists as a peer-to-peer trading platform that facilitates the purchase and sale of Linden Dollars. On any given day, thousands of buyers and sellers will trade Lindens for dollars, and vice versa. The Linden is not pegged to any real-world currency, but rather floats according to several supply and demand factors. Linden Lab maintains control over the supply of L$ through various means. With these controls, Linden Lab is able to keep the fluctuations of the exchange relatively small.

Control mechanisms
Linden Lab maintains some indirect means in which to maintain stability over the exchange, including control over the size of the stipend made available to premium users, the pricing of various Linden Dollar “sinks” (the price of uploading images or posting classified ads for example – both common activities in-world), and the volume of new Lindens made available for purchase by the company.

Growth in money supply
Because Second Life has experienced a steady growth in Residents over its lifetime, it exists as a system in which there are typically more buyers of Lindens than sellers. To compensate for this disparity and combat scarcity (and the rapid appreciation of the Linden), Linden Lab sells (effectively mints) new Linden Dollars to meet the excess in demand. In general, Linden Lab sells L$ on the LindeX exchange, relative to the L$ fees (or sinks) that it collects in-world for assorted services (as described above).

Liquidity
As with most economies, liquidity is based on trading volume and will always be limited by it to a degree. Recent LindeX trading volumes have been around USD$250,000 a day, providing a significant degree of liquidity to an economy of that size.

FAQ

How big is the Second Life economy?
As of April 2007, economic activity averaged over US$1.5 million per day. This number represents the US Dollar equivalent of all Linden Dollar transactions in a given 24-hour period. Up to date statistics can be found here, under the heading ‘US$ Spent Last 24h

How much money is traded on the LindeX?
As of April 2007, LindeX trading activity has averaged over US$250,000 a day. This number represents the trading activity between Linden Dollars and US Dollars, in a given 24-hour period. Up to date statistics can be found here, under the heading ‘LindeX Activity Last 24h’

What is the exchange rate with the Linden Dollar?
While technically floating, the Linden Dollar exchange rate remains relatively steady at approximately US$1 to L$270.

Are Linden Dollars a legitimate, virtual currency?
Linden Dollars represent a limited license right to use a feature of the simulated virtual environment — namely the commercial aspects of Second Life. L$ derive value in their ability to be redeemed by other Second Life Residents who have a desire to engage in these commercial activities. L$ will retain their value as long as there are Residents interested in using them.

What kinds of items are bought and sold?
There is a near endless array of products that can be created within Second Life. Common items include clothing, avatar hair and skin, vehicles, furniture and homes. These items are sold by a rich variety of in-world brands, and increasingly by virtual outlets of real life brands.

What sort of real world companies have a presence in Second Life?
IBM, Sun Microsystems, Toyota, Nissan, Dell, Reebok, Reuters, and NBC to name a few.

How is the Second Life economy different to real life?
Trade and commerce operate in essentially the same way that they do in the real world. One of the key differences is that once content has been created there is an effectively limitless supply. As a result, there are no economies of scale in Second Life, which means that small merchants can trade on an equal footing with large established brands. The prices of goods are purely driven by demand, which means high-quality designs can command higher prices without the risk of