FINANCIAL TECHNOLOGY & AUTOMATED INVESTING FINANCIAL TECHNOLOGY
Second Life Economy
By
JAKE FRANKENFIELD
Reviewed by
ERIC ESTEVEZUpdated Jun 1, 2021
What Is the Second Life Economy?
The Second Life Economy is an in-game marketplace where virtual goods and services are bought and sold in the immersive gaming world called Second Life. The Second Life Economy simulates a free market economy where players can buy and sell virtual goods with virtual money known as Linden Dollars, named after the game's creator.
Users of Second Life, known as "residents", can pay real money (e.g., in U.S. dollars) to acquire Linden dollars. Linden dollars (L$) can be used to buy, sell, rent, or trade virtual land, digital goods, and online services. Linden dollars can also be exchanged for U.S. dollars based on a floating rate. But Linden Labs stop short of allowing this currency to be a full-fledged fiat currency or even cryptocurrency.
KEY TAKEAWAYS
Understanding Second Life Economy
Second Life is a virtual digital world created by Linden Labs and launched in 2003 that is still in existence. 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 $60 million.1
Goods in Second Life’s marketplace are bought and sold with a centralized virtual currency called Linden Dollars(L$.) 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 stable throughout Second Life, and has generally hovered around US $300-400/1L$ for the past few years. 
The Linden dollar is a closed-loop virtual token for use only within the Second Life platform.
Linden Dollars as Virtual Currency
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.
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 $1,675 in US dollars. A resident who has multiple lands may be charged a monthly fee by Linden Labs for use of the virtual land. This fee is used to pay for renting space on the game’s server and increases as more land is purchased by the resident.
The company's terms of service state that players have no financial or legal claim to their L$, which are classified as a consumable entertainment product that can be revoked or deleted at any time without reason or warning.
Gambling Inside Second Life
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 game 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 virtual banks inside the Second Life Economy were affected as some of them had a lot of "ATMs" located in the major online casinos. This led to $L bank reserves being depleted, resulting in insolvency as the number of withdrawal requests mounted and led to virtual bank runs.
Real-World Wealth
Individual Second Life users have been reported to have accumulated vast fortunes by operating in the Second Life economy. One publicized example is that of Anshe Chung, a Second Life avatar of a real-life individual who, via the Anshe Chung avatar, had established a booming virtual real estate business within Second Life.2 Beginning by selling virtual furniture, fashion, and property designs, Chung reinvested her profits into buying up virtual property, and eventually become a virtual real estate magnate with $L worth more than US $1 million.
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 web personality and influence who 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 in their virtual reality world.
ARTICLE SOURCES
Related Terms
Convertible Virtual Currency Definition
Convertible virtual currency is an unregulated digital currency that can be used as a substitute for real and legally recognized currency. more
Linden Dollar Definition
The Linden dollar is the official currency of a virtual world Second Life. more
Closed Virtual Currency
A closed virtual currency is an unregulated digital currency used as payment only within certain virtual communities. more
Macau SAR, China
Macau SAR, China is a special administrative region of China that has limited autonomy in its government and economic activities. more
Silk Road Definition
The Silk Road was a digital black market platform that was popular for hosting money laundering activities and illegal drug transactions using cryptocurrencies for payment. more
Digital Money
Digital money or digital currency is any type of payment which exists purely in electronic form and is accounted for and transferred using computers.more
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