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Monitoring the Linden Supply

The Second Life currency seeks stability vs. the dollar.

The quantity of currency in the virtual economy is on the rise, and it could lead to big problems for the Second Life economy.

Second Life, the massive multiplayer online world, allows anyone to log on through the Internet at any time and create 3-D computer-generated identities. These avatars are then free to explore the world that San Francisco-based Linden Lab has synthetically created.

While many are using Second Life (SL) as a social tool or as a means of communication, others sell virtual items or services for a profit. Members can enter their real-world credit-card information and get a number of Linden dollars, the main currency in SL, for every U.S. dollar.

Purchases can be made using the Linden currency for virtual land space to build on, different clothing for their avatars, or even adult-related content. As of 9 a.m. EST, nearly $600,000 (real U.S. dollars, not Linden) had changed hands among 1.2 million users over the previous 24 hours.

Linden also can be exchanged for U.S. dollars and other foreign currencies through SL's own LindeX currency exchange. Linden Lab offers market data and history on the Second Life Web site, enabling users to monitor changes in the exchange.

During October, users saw daily volume on the LindeX surpass 20 million Linden for the first time, which figures to roughly $73,000. The LindeX reached the 20 million mark a total of eight times over the course of the month.

Wagner James Au, who has covered Second Life since its infancy as an embedded journalist on his blog

New World Notes, said that October was one of the biggest months in SL history. "Beginning of September, Second Life had around 600,000 total accounts. Within a few weeks, hundreds of thousands of new accounts were created, and from the period between mid-September and mid-October, Second Life had added over 500,000 accounts, exceeding a million."

The LindeX market data also show that the Linden saw a decline in high, low, and average exchange rates in October. While the change may be small compared with fluctuations in previous months, the fact remains that the U.S. dollar was certainly worth more Linden to begin the month.

In fact, over the last three months, the exchange rate has steadily dropped from $305 Linden per U.S. dollar to $274 per U.S. dollar, where it stands currently. That's a 10.2% rise in value for the Linden.

The Linden's value changes depending on the quantity that enters and exits SL's system. In September, Linden Lab reported 34,367,829 Linden in sinks (exits), compared with 92,062,397 in sources (entries). That means that more than $125,000 left the SL market in September, mostly through fees associated with uploading images, sounds and animations to SL or through charges for classified advertisements.

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On the other hand, more than $337,000 was added to the SL market in September, mostly through stipends paid to premium users and monthly sales of the Linden through the LindeX. Premium users pay a monthly subscription fee of $9.95 in order for the right to own "land." Each premium user is given a weekly stipend of 400 Linden, or roughly $5.86 a month.

While reductions in October look to remain unchanged from September's level, a large increase in sources of Linden already can be seen. A month-to-month rise by roughly 42 million Linden is expected, as the number of Linden sold through the LindeX has more than doubled. In addition, the monthly stipends paid by Linden Lab also jumped by more than 13 million Linden, an increase of nearly 20%.

What does that mean for the virtual economy going into November? Over time, Linden Lab has needed to increase the number of sinks in SL and reduce the number of sources in order to stabilize the quantity of Linden in the system and its value.

As noted, the largest catalyst for a further devaluation of the Linden is an increase in stipends paid to premium users. As more and more premium users sign up, the larger the Linden source becomes. However, Linden Lab is taking sensible steps to curb this rise.

New premium accounts that are registered on or after Nov. 1 will have a weekly stipend of 300 Linden, down from 400. Stipends for current premium accounts will not be affected. Some older premium accounts were originally offered a weekly stipend of 500 Linden that remains in place for now, as these accounts are considered grandfathered.

"Second Life has nearly doubled in size in about a month, but buying and selling of Linden is not something this new wave of immigrants is engaging in," says Au. "I have to think Linden Lab is looking at ways to encourage them to do so, and decreasing the Linden stipend may be part of a larger trend of policy decisions in that direction."

While the difference is 100 Linden, or 37 cents, the reduction gives Linden Lab some control of the sources entering the market. By keeping a lid on volatility through monitoring stipend payments, swings in valuation for the Linden are becoming more controllable.

However, questions still remain about what the change will do to membership. It will be interesting to see if the reduction in stipend payments will be the deciding factor for users planning to open premium accounts in the coming months.

"The upcoming stipend change will substantially increase activity on the LindeX, as Linden Lab taps down on the amount of 'free' Linden they put into the world," Au says. "That'll keep inflation in check, while also nudging Residents to buy and sell L$ on the LindeX more."

Also, will Linden Lab do away with the entire idea of stipend payments as a measure to exercise more control over the Linden currency? While these grandfathered premium accounts seem immune for now, only time will tell what's in store.

Robert Holden is staff reporter Robert Holmes. He reports often from Second Life.