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Thursday, September 29, 2005

ABBATOIR ECONOMICS

A leading virtual currency exchange site decides to call it quits, and the in-world economy feels the churn...

It's sort of like what would happen to the economy if a major commodities exchange suddenly closed its doors. Though if the Chicago Board of Trade up and decided not to deal in pork belly futures any more, I'm guessing it wouldn't adversely impact a French woman who's putting herself through art school by selling virtual fetish wear in an online world.

"Be careful with it when you travel in some drama toxized zones," Kyrah Abbatoir warns me gravely, when she hands me one of her black rubber gas masks. "It's all over Second Life of course, spread like a powder trail." She means the fallout from the recent announcement that Gaming Open Market, the premiere 3rd party exchange site for Linden Dollars, was closing down on October 2nd. "For peoples like me it might even have real life impacts," she says in between the gasping hiss of her breathing respirator. "I depend on my SL funds. I need it to pay my school-- gonna be harder." There are other 3rd party sites that buy and sell Linden Dollars for US$, but to her, none have the utility and freedom of GOM. She runs a brisk Second Life business selling leather suits, stiletto heels, handcuffs, and other bondage gear, and depends on GOM to expedite her tuition payments. "My school cost me around $1600 every two months," Kyrah tells me. "Problem is the school is more or less already paid. They have the bank notes for all the year. But on my side I have to provide the money for these banknotes when they cash 'em out. If I don't, 'big problems'. Banks doesn't like banknotes that have no money tied to them."

Just a sample of the reaction, from street level. On a market level, the news has boosted the value of Linden Dollars from $3.35 for L$1000 to about $3.50, currently.

"Since we announced our intent to suspend trading the exchange rate has, unsurprisingly, gone through a period of high volatility," says Ricky Zamboni, CEO of Gaming Open Market. "It seems now to have settled down at a somewhat higher price level than it has been trading at in recent weeks. I attribute this to the idea of people 'stocking up' on L$ while they can."

The decisions behind GOM's suspension-- and Linden Lab's response to them-- after the break.

According to Zamboni, GOM itself isn't closing, or being put up for sale. 'We've simply suspended Linden Dollar trading," he e-mails me. "We are planning on using the time freed up to be able to develop the platform further... to make the software that runs GOM as flexible and general-purpose as possible." That may include opening their exchange to other MMO currency. "We have several ideas for new markets including, but not limited to, other games," he says.

The decision to suspend operation is at least partly motivated by a recent Linden Lab announcement that a US$-L$ exchange would soon be built into the Second Life website and interface itself.

That would, says Zamboni, "be a major setback for us. They have access to SL users' credit card and billing information, can integrate directly into the client, and have a far greater ability to mitigate losses due to the inevitable credit card fraud that will occur. It's tough to go toe-to-toe with someone when there is such a significant power imbalance."

Many Residents have begged them to stay and compete with this coming internal system, Zamboni adds, "arguing that when launched, Linden Lab's market will only list orders from sellers, and our ask-offer market structure would still have a niche to fill. However, that would only last as long as Linden Lab permitted it, and it's difficult to move forward when your competitive advantage exists solely at the whim of someone who holds such a dominant position."

Before their decision to end operation, Zamboni continues, "We were working to convince LL to adopt a protocol by which an XMLRPC-based order query API would be implemented. This would have allowed users to purchase currency through Secondlife.com or the SL client by pulling 'best price' quotes from any new or existing currency exchanges in real-time, and presenting the quotes to the user, who could then choose whichever she wished. The instant purchase and L$ transfer would have been handled by Linden Lab to keep the user's experience simple, but market making and order listing would still be handled by the users. Unfortunately, the decision was made to move forward with an internal market service."

Reached for his response to Zamboni's comments, Linden Lab CEO Philip Linden, unsurprisingly, sees things differently.

"Clearly because we already have the credit card information, and because most currency purchases will be small or impulsive, competing with Linden Lab on efficiently collecting payment information makes no sense," he acknowledges. "Of course this is the reason why it is so important that we do it-- because it can make the market so much larger by making buying so much easier." Philip Linden believes there are numerous currency and banking related services that Resident-run businesses can still provide, after this. "Things like more feature rich trading systems targeting larger block traders with better stats and more complex order filling and management schemes, better rates for volume, or different payment methods (how about all the international niche payment methods like Premium SMS or other examples like that). There there are advanced services like leveraged options, interest-bearing holding accounts, and so on. The list goes on.

"I think there are a ton of ways to compete successfully with any exchange Linden creates," Philip Linden continues. "Our focus will be to maximize the overall flow by making buying currency extremely simple... It makes more sense to build a feature into the platform that everyone can use (like our new exchange) and move forward, as opposed to unnaturally advantaging one provider."

Regarding the XML features Zamboni enjoined Linden Lab to add, he continues, "We are definitely going to add a set of web APIs that make it even easier to build something like Gaming Open Market or other financial services, or to place and manage orders in our system. It would have taken longer to provide those features, and we didn't want to wait given that a basic system would be adequate to start increasing the overall volume, which benefits thousands of producers of content in Second Life. GOM said they would not put trades into our system unless we created that API first, and we didn't think that it made sense to stop the process. The interfaces themselves make total sense." He expresses a hope that the Second Life community somehow keep Gaming Open Market part of the economy. "We'd definitely support an effort like that in any way that we could."

For now, however, that doesn't seem to be an option. Leaving Residents to guess what will happen to the dollar value of their in-world currency, between the time GOM closes shop and Linden Lab launches its own trading system.

"Once we've left Second Life," Zamboni speculates, "I imagine the spread between buy and sell prices on [3rd party currency] vendor sites will widen significantly. Our existence has meant resellers... have had to keep the buy-sell spread comparatively tight, frequently within 10%-20% or so. When one looks at the buy-sell spreads in other games, they're often close to 100% markup. It wouldn't surprise me in the least to see buy and sell prices of $2.50/L$1,000 and $5.00/L$1,000 respectively in the future. Perhaps once Linden Lab opens their marketplace this will tighten somewhat, but I think in order to really pull that in, a two-sided ask-offer market is needed."

On October 3rd, Zamboni and his partners will make the rounds in Second Life, removing their ATMs from the world. "I'm a firm believer in 'keeping Second Life beautiful'," he says. "When the ATMs are gone, customers can still withdraw any L$ left in their GOM account by using the 'Pay My Avatar' function on our site."

Many Residents consider GOM an integral part of the community. (And they've certainly been indispensable in raising US cash funds for various non-profit fundraising efforts, most recently with Katrina relief.) "We've met some really great people here," Zamboni reflects. "Had some good times. Tried to help the community grow and thrive. Now it's time for us to pull back and work on other things..."

As for Kyrah Abbatoir, as she waits for Linden Lab to launch an alternate trading service, she's thinking about trying to run a real life version of her business. She could suspend her in-world work to create real latex body suits and other fetish wear, and it would probably earn her twice as high an income. She hesitates, however, because "here I make what my heart beat for."


Other thoughts and opinions on Gaming Open Market's closing at the Second Life Herald here and here.

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Comments

This kind of reminds me of Star Wars. Kyrah is like Luke Skywalker, set against a backdrop of Imperial intrigue. Altho there's only one sun and stuff.

Didya get to see her "snowplow" that automatically terraforms land, Ham?

Posted by: Torley Wong/Torley Torgeson at Sep 29, 2005 9:31:12 PM

"GOM said they would not put trades into our system unless we created that API first, and we didn't think that it made sense to stop the process."

So much for doing things the right way on the first try. Web 2.0 is here, we need API's... I want to mashup SL's services. I thought this was our world? There are plenty of web API's to follow.

Ebay Developers
Amazon Web Services

And many others...

It usually costs more to go back and retrofit software, than to design it correctly the first time.

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Hamlet. Just the choice of title alone. Rocks my world, journo-boy.

(Hmmm? Oh, nothing; just one half too many margaritas at lunch.)

Bravo!

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The only thing I see that LL would want to do, is take our ability to "choose" away. If LL was smart in this aspect, they would take this intergraded function and make a stock ticker out of it. Allowing you to choose what 3rd party company (ei: LL or GOM) to buy and sell $L. This way they could in fact create a Second Life stock market, a place where you can buy and sell $L.

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