Real money guy thinks so.

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.

This didn’t make sense. After all, the liquidity supposedly existed to support these simple, smallish trades. Well, when the guys running the banks and the exchange trading floor are the guys with most of the SLLs, it’s no surprise that outsiders are not permitted to extract any significant returns.

We concluded that we weren’t playing in a market at all. We were suckered in by a classic pyramid scheme, albeit one with a pretty new user interface. New entrants plow real money into the game. Only the guys at the top can extract that money with any volume (and in excess of the risk-free rate of return). Attempts to move anything more than token amounts out of the game generally result in real-returns of almost exactly the prevailing USD deposit interest rate.

It is my conjecture that the perpetrators of this scheme are themselves utilizing the mispricing of USD to SLL vis-à-vis in game rates (whether implied rates or explicit rates) to arbitrage everyone else. Or in other words: a financial ponzi scheme. Each new sucker is encouraged to bring in more new suckers, supposedly helping the economy to grow so that they can start cashing those SLL checks. And if you’re really successful and even more lucky, you’ll get about 4% real return for all that effort and risk.

So given that:

• One cannot profit at greater than the risk-free rate of return for investments into Second Life;
• “Virtual labor” performed by the denizens of the game on their various Second Life business projects is always compensated far below the real-world USD equivalent;
• SLL are effectively illiquid beyond small volume trades –

What you’re left with is lots of people putting USD in, and a small group taking those USD out, leaving the rest with no financial claims on anything – just an imaginatively sexy avatar.