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Second Life Currency Crisis?

So-called 'sinks' increase in November, raising concern about the Linden currency's stability.

Money has been funneling out of Second Life's economy through the first week in November, posing a threat to the balance of the Linden currency against the U.S. dollar.

Second Life, the massive multiplayer online world, allows users to log on through the Internet 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.

Real-world money can be exchanged for Linden, the accepted currency in the Second Life world. Linden can be used to purchase

virtual land space to build on, different clothing for their avatar, or even adult-related content. As of 12 p.m. EST, nearly $520,000 had changed hands among 1.28 million users over the previous 24 hours.

Linden also can be exchanged back for U.S. dollars and other foreign currencies through SL's own LindeX currency exchange. Linden Lab offers economic data and market history on the Second Life Web site, enabling users to monitor changes in the exchange. Currently, $1 will get residents roughly 272 Linden.

Volume has been steadily climbing with the influx of new members. During October, users saw daily volume on the LindeX top 20 million Linden for the first time ever, which figures to roughly $73,000.

The LindeX would go on to reach the 20 million mark a total of 8 times over the course of the month. Volume has yet to fall below 20 million in November; at its peak, volume surpassed 27 million on Nov. 1.

Linden Lab is now dealing with an increase in the exchange rate's volatility as the population in Second Life explodes. Heading into November, Linden Lab observed the need to increase the number of sinks (exits) in Second Life and reduce the number sources (entries) in order to stabilize the value of the Linden compared to the U.S. dollar.

The Linden's value changes with fluctuations in the quantity of currency that enters and exits Second Life's system. The dramatic rise in both resident count and volume on the LindeX is worrying members that the exchange rate won't remain stable. Supply and demand set the value on the floating exchange rate. With demand rising and supply dwindling, residents are concerned about the value of their Linden currency.

During a "town hall" meeting on economics in Second Life earlier this year, Lawrence Linden (the in-world name of the man responsible for developing much of the LindeX exchange) acknowledged that "the market has grown substantially, as has the community. With that, we've seen the need to make changes to how new Linden are injected into the system.

"Having a more stable exchange rate benefits businesses and socially oriented residents alike," he added. "Having a stable exchange rate helps in-world pricing stay more stable and competitive as well."

Residents' fears stem from the difference in inflows compared with outflows between October and what's occurred so far in November. In October, Linden Lab reported that sinks totaled 36,401,711 Linden, compared with 157,637,800 in sources.

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That means that more than $130,000 left the SL market over the course of the month, mostly through fees associated with uploading images, sounds and animations to SL or through charges for classified advertisements, while more than $580,000 was added to the SL market in October, mostly through stipends paid to premium users and monthly sales of the Linden currency through the LindeX. The difference between sinks and sources meant a net inflow of $450,000 during October.

While November's first week of sinks and sources are mostly congruent with October's numbers through one week, there has been a jump in what Linden has dubbed "other sinks." Linden attributes these miscellaneous sinks to Linden currency removed from the system from cancelled accounts, gift promotions, educational event support and other temporary transaction types.

Through only one week in November, that miscellaneous number has pushed total sinks higher by 47.3% compared to October's monthly total. Roughly $185,000 in sinks have been removed over the past week from Second Life's world, compared to just $58,000 throughout all of October. Meanwhile, just $76,000 has flowed into Second Life. Through November's first week, outflows have outpaced inflows by $109,000, reversing the previous month's trend.

However, Linden Lab Chief Financial Officer John Zdanowski is abating fears by clarifying why money is exiting Second Life so quickly just one week into November.

"The increase in other sinks is related to

the clean up of some cancelled accounts that had Linden balances," says Zdanowski. "Effectively, these Lindens were already out of circulation, so I would expect no impact to the exchange rate overall."

In addition, Linden Lab has decreased the amount of weekly stipends paid to new users,

as reported here. By keeping a lid on volatility through monitoring stipend payments, swings in valuation for the Linden are becoming more controllable. As more and more premium users sign up, the larger the Linden source becomes.

Furthermore, there has been an increase in Linden supply sales through the LindeX. Sales have been spurred by the decrease in stipends paid to new users, forcing those who want to spend money in the so-called metaverse to pony up their own real-world earnings instead of relying on "free money."

Based on current levels, Linden supply sales are set to increase 33% in November from the previous month, and that number could continue to rise throughout the month as more residents join SL and purchase the currency through the LindeX exchange.

In truth, the exchange rate between the Linden and the dollar hasn't fluctuated much yet. The only aberration came on Nov. 1, when the Linden hit a maximum rate of 293 per $1 before retreating to 272.

"The Linden has been trading at a stable rate on increasing volume for the past two months demonstrating the diversity and strength of the Second Life economy," assures Zdanowski.

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