DEFINITION of Second Life Economy
A vibrant marketplace where virtual goods and services are bought and sold in a three-dimensional gaming world called Second Life. The Second Life Economy simulates a free market economy where players can buy and sell virtual goods with virtual or real money.
BREAKING DOWN Second Life Economy
Digital technology is greatly improving the way businesses interact with their clients. One rapidly developing form of technology is virtual reality which is a way of using technology to change the way humans interact with their environments. This technology is used by companies for scenario-based learning, workplace training, and experiential learning. Companies that invest in virtual reality programs hope to understand their consumers better while saving costs on operations. A virtual reality game that has gotten a lot of companies and entrepreneurs involved in its economy is Second Life.
Second Life is a virtual world created by Linden Labs and launched in 2003. The game simulates the real world in that users (known as residents) can roam the world freely, meet and socialize with other residents, engage in communal activities, build residential and commercial properties, own lands, and conduct transactions in virtual goods and services using real or virtual currency. Virtual goods traded in the economy range from art pieces and clothing to houses and cars. Some individuals and businesses thrive in the economy, while others struggle and may be forced into bankruptcy just like the real economy. It is estimated that Second Life has about 1 million active users per month. In 2015, the GDP of Second Life economy was estimated to be approximately $500 million dollars with its gross resident earnings averaging $60 million.
Goods in Second Life’s marketplace are bought and sold with a centralized virtual currency called Linden Dollars(L$.) To get Linden Dollars, residents convert their real money, e.g. euros, into Linden Money at the game’s official currency exchange site known as LindeX. Like a traditional exchange platform, market and limit buy and sell orders are conducted among the residents. Linden Dollars are themselves worthless, and their value is potentially subject to currency manipulation or other adjustments to monetary policy by the developers at Linden Labs, who issue the currency. That said, the floating exchange rate between Linden$ and USD has remained fairly stangnant throughout Second Life, and has generally hovered around $250/1LD$ for the past few years.
Because Linden dollars has a determinable value in the real market, the Financial Crimes Enforcement Network (FinCen), a bureau of the United States Department of the Treasury, recognized Linden Money as a convertible centralized virtual currency in 2013. This means that there are tax implications for any transaction involving Linden Dollars. The virtual currency is not viewed as real money, but as property for tax purposes. Property tax laws therefore apply to Linden Dollar transactions. A taxpayer is required to include the fair market value of any Linden money obtained when calculating his gross income. If the taxpayer used the virtual currency strictly for investment gains, any capital gains or losses from the investments made are taxed appropriately.
Virtual goods in the economy can also be purchased using legal tender like US dollars. A resident who wants to build a home or business needs to purchase land from Linden Labs. For example, a 65,356m2 of land in the economy costs $1,675 in US dollars. A resident who has multiple lands may be charged a monthly fee by Linden Labs for use of the virtual land. This fee is used to pay for renting space on the game’s server and increases as more land is purchased by the resident.
Second Life Economy is a centralized marketplace. This means that Linden Labs, the economy’s administrator, retains the power to issue more of its currency, withdraw its currency from circulation, keep a ledger of transactions made by residents, and change the dynamics of the game. In 2007, following an FBI investigation into gambling practices in Second Life Economy, Linden Labs changed its games dynamics by banning all forms of gambling in its marketplace. This move led to casino owners canceling their virtual land use agreements for the use and operation of casinos, which contributed a significant amount to the GDP of the economy and huge revenue in monthly fees to Linden Labs. Even banks in Second Life Economy were affected as some of them had a lot of ATMs in the major casinos. This led to bank reserves been depleted and a resulting insolvency that ensued with the amount of withdrawal requests and virtual bank runs.
Individual Second Life users have accumulated vast fortunes by operating in the Second Life economy. The most publicized example is that of Anshe Chung, a Second Life avatar of a real-life individual who, via the Anshe Chung avatar, has established a booming virtual real estate business within Second Life. Beginning by selling virtual furniture, fashion and property designs, Chung reinvested her profits into buying up virtual property, and eventually become a real estate magnate. The example illustrates the ways in which the Second Life economy mirrors the activities of an economy trading in fiat currency. Today the individual behind Anshe Chung is a multimillionaire and employs dozens of virtual designers and programmers to support their Second Life activities.
Additionally, real world companies are known to have taken advantage of the three-dimensional virtual market available in Second Life. Some companies operate in the virtual economy to promote charitable causes, others use it as a recruitment platform, and still others use it to market their brand. Kraft showcased its new products through its virtual supermarket in Second Life. IBM and Intel conducted virtual meetings. Calvin Klein’s new perfume release was promoted through the platform. Companies and schools use the market as a training tool for their employees and students on the virtual reality world.