Second Life as Pyramid Scheme

Fascinating Stuff:

It turns out that inside the game, counterparty risk is tremendous. In fact, entire banks will suddenly disappear. Or banks will simply renege on obligations without recourse. Worse yet, the very people who provide the source of nearly all demand-liquidity within Second Life, those guys at the top of the virtual playpen pyramid, are the same ones who effectively set the SLL/USD exchange rate. Mid-2006, they even owned the only practical exchange market, a fact which I believe is even more true today. (The company run exchange turns out to be impractical for real trades of any volume. It is more of an open currency auction than a spot market.)

What should have been a relatively small SLL/USD exchange trades given media claims about millions of dollars flying around per week in 2006, in reality caused the exchange markets to distort tremendously. We could not effectively move sums of more than a couple thousand dollars out of SL without the exchange market confiscating most of our returns (through rate reflectivity). Example: in July 2006 USD/SLL was 293.0/279.2 bid/ask on the primary open exchange. Our attempts to trade resulted in settlement bids of more than 350. Interestingly, these trades tended to net returns of right around 4%, which was the prevailing dollar deposit rate.M

Chris Hayes is the host of All In with Chris Hayes on MSNBC.

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