Analyst dismisses Second Life as a 'pyramid scheme'

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Analyst dismisses Second Life as a 'pyramid scheme'

Storm rages as financial researcher questions validity of virtual world's

An article claiming that the economic system in Second Life is a "pyramid selling scheme" has created a furore of debate about the way business is conducted in the virtual community. 

The article was written by financial analyst Randolph Harrison and published in the Capitalism 2.0 blog. 

Harrison claims in the article that the economic system in Second Life has become a " Ponzi scheme" that promises monetary gains for everyone, but ultimately benefits only a select few. 

The analyst said that cons and cheats in monetary deals are rampant, that virtual banks routinely spring up and disappear over night, and that Second Life 'residents' are quick to take each others' money and run.

Harrison claimed that the markets in the game, in which people exchange virtual 'Linden Dollars' for real-life money, is "virtually rigged" to yield the least amount of money to players looking to cash in their virtual currency.

"Second Life is not a dramatic taste of our future in which markets are virtual, currency is free from government control, taxes are non-existent, and normal people can become real millionaires simply by clicking their mouse a few times," he said.

"Second Life is a classic pyramid scheme. Or, more of an Amway-like pyramid: partially legitimate, partially Ponzi."

Harrison acknowledged that the system works fine for recreational users who visit the online world strictly for entertainment.

But the claim that Second Life is an emerging economy ripe for the picking by everyday people turned entrepreneurs is, by and large, a scam, according to the analyst.

Supporters and residents of Second Life were quick to criticise Harrison's article. Blogger Tateru Nino suggested that the assertion was like comparing "Buicks to boysenberries". 

"There are truths in there certainly, but very deceptively phrased ones, and chunks of the material are apparently no longer current or accurate," said Nino.

Nino claimed that Harrison's observations on the exchange market were not based on Second Life creator Linden Lab's own Lindex exchange system, but on smaller private exchange markets operated by users.

The rates in Harrison's exchange study were inflated because such a large amount of money was being traded, artificially creating a low rate, according to Nino.

"By his own figures, Harrison tried to cash out more than three per cent of the then total currency in motion at once, and was distressed when supply and demand worked the way supply and demand does," he wrote.

John Zdanowski, chief financial officer at Linden Lab, told that the Lindex exchange system is not wholly dependent on supply and demand.

"While the exchange is based on a floating rate, Linden Lab maintains some indirect means with which to maintain price stability, including control over the stipend that is offered to users and the pricing of various Linden Dollar 'sinks'," he said.

Linden Dollar 'sinks' are the price of uploading images, for example, or posting classified ads.

Wagner James Au has worked as an 'embedded' journalist in Second Life since 2003, and currently runs the New World Notes blog which chronicles the virtual community. 

Au told that users looking to "get rich quick" in Second Life will, like their real-world counterparts, often fall victim to con artists and scams.

"If you are looking for a quick buck you are probably going to lose your money," said Au. "The people who are successful, in my observations, are the ones who establish themselves, build a trust network and build their businesses. "

The revelation of a grand scheme being run by wealthy users to con new residents out of their money is an extremely rare occurrence, according to Au.

"What will happen is you have someone who started out and something will happen; they will run out of time in their real life or they will get annoyed with the people they are working with and leave," he said.

Among those who invest substantial amounts of time and money, however, a merchant's reputation can make or break a Second Life business.

"What [Harrison] is missing is the day-to-day in-world social activity," said Au, noting that residents have even gone so far as to establish a Second Life chamber of commerce.

"There is this tight social network of content creators who are watching after each other," he said.

Au explained that most users will spend several months in the Second Life community before attempting to establish a business.

At that point, he said, players have grown much more savvy to the way the market works, and the amount of time and currency invested in the virtual business makes users less likely to try and cash out all their Linden Dollars at once and experiencing the sort of inflation noted by Harrison.

"For the serious content developers, it is in their interest not to take out a lot of money at once," Au said. "What the most successful people do is take out their money slowly."
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