Lindex Continues to Fall

Wednesday, June 23, 2010

The Lindex has stabilized enough that my graph is working again. But the picture that it paints is not very pretty.

The graph shows the total number of L$ for sale, within 10 Lindens of the best price. There's two key features to note. First, the total number of Lindens for sale has remained fairly constant—around 210 million. Second, there are visible bands sloping slowly downward.

What this means is that the people who have posted L$ for sale at 261-265 have gotten impatient, cancelled their sell orders, and reposted them at the higher (devalued) rate, 267L$/USD. There's still far too many L$ for sale. At the current size of the Second Life economy (and it's been this size for some time), the Lindex can only maintain a balance of half that size, around 100M L$ in outstanding sell orders. If it gets much more than that, it takes too long for a sell order to be filled, and people start to move their orders to cheaper prices so they can convert their L$ to USD.

So how long will the L$ continue to fall? In the best-case scenario, it will eventually reach an equilibrium where it becomes cheap enough that it entices more buyers to enter the market. If and when that happens, we will start to see the total volume of outstanding sell orders begin to drop. So far, though, I don't see any sign of that happening.

The Secret Plan to Stabilize the Lindex

Saturday, June 19, 2010

I've been thinking about what options Linden Lab has to stabilize the Lindex. It doesn't seem like they have a lot of options. In the past, when the Second Life economy was stronger, they could stabilize the LLD simply by selling through Supply Linden. But they don't have that option any more.

And then I thought of a plan so diabolical, so secretive, that it seemed perfect for Linden Lab's style of management.

To review, Linden Lab needs to balance the Lindex, either by increasing the number of buyers, or decreasing the number of sellers. How might that be achieved?

Buy LDD on the Lindex
Linden Lab could use Supply Linden to buy LDD, just as he has been selling before. Most people agree this is a non-starter. Linden Lab has been losing money, as evidenced by the recent layoffs. They can't afford to spend large sums shoring up the Lindex.

Increase LDD Sinks
If they can add more ways to vaporize LDD, it would mean less of them for people to sell. It's clear that they've started along this road, with offerings such as the Voice Morpher. But any sinks created in this way will be pitifully small compared to the number of LDD they need to soak up. This can be a component of a stabilization plan, but not the primary means.

Let landowners pay tier in LDD
This has been mentioned in the past as a possibility. But it's a huge and unwieldy hammer. Most of the LDD for sale on the Lindex are there because of landowners trying to buy USD to pay for their tier. Letting everyone pay for their tier in LDD could possibly unbalance the Lindex the other way.

Also, Linden Lab would lose out on the 3.5% fee they charge people to sell LDD. Again, not something they can afford.

But... what if Linden Lab allowed a select few landowners to pay their tier in LDD? If they controlled who paid in LDD and who paid in USD, then they could manage more exactly how many LDD were on the market to sell. They couldn't make this public, of course, because they can't afford to have everyone pay their tier in LDD. They would have to contact the few landowners they wanted to privilege with this gift.

Linden Lab already has a semi-secret program in place to allow a select few landowners to purchase land at a discount price. They could simply expand this program to include LDD tier-selling capability. It would be a perfect way for Linden Lab to stabilize the Lindex in a controlled fashion, without causing any panic or and more lurid Lindex news stories.

Lindex Meltdown

Thursday, June 17, 2010

On Wednesday, the Lindex collapsed, with the value of the Linden dollar plunging from 260/US$, at one point going as low as 300/US$, before stabilizing around 275/US$. It fell so fast that it broke my Lindex statistics graph, shown above.

It's not too hard to figure out what happened. In my previous post, I noticed with concern the glut of sell orders on the Lindex, and wondered what Linden Labs would do about it. T Linden, in his quarterly report, stated that the drop in sales from Supply Linden was a result of more people signing up for premium accounts -- in other words, they couldn't sell Linden dollars because they were giving them away. But the numbers don't add up. The number of Linden dollars given to premium accounts, per month, is far less than what Supply Linden was selling.

The real explanation is that the value of the Linden dollar is the strongest indicator of the strength of the Second Life economy in general. If the Second Life economy is strong, people want to buy Linden dollars, and the Linden dollar gains value. If the Second Life economy is weak, there are fewer buyers, and the Linden dollar falls in value. No matter how many press releases Linden Lab puts out saying that the economy is great, they can't deny that the Linden dollar is falling.

The Second Life economy has been in decline for many months. At first, this meant that Supply Linden could no longer sell Linden dollars. That cut out a big chunk of Linden Lab's income. Perhaps that wasn't the only reason for the recent layoffs, but it had to be a part of it.

Next, sell orders started stacking up on the Lindex. The usual balance of 50-100M L$ in sell orders ballooned to 200-250M.

This meant that it too longer for sell orders to execute. with only 50M in sell orders, if you placed your order it would be executed in a couple days. But if you put your order in a line of 250M, it could be a week or longer before your order was filled.

That's too long for some people. So the situation moved to the next stage, where people started placing orders at higher levels. The ask price moved from 259 to 260 to 261. And then we hit the final stage of the crisis.

When the Second Life economy was strong, Linden Lab could stabilize the Lindex using only sell orders. But now they've lost that tool. So the Lindex market is vulnerable to manipulation by speculators and griefers. People realized that once again they could move the market by placing orders at ridiculous prices. So we saw orders jumping to 270, 280, and eventually 300. The market was broken.

What will happen next? Linden Lab has few options. One remedy that has been mentioned in the past would be to allow land owners to pay their tier in Linden Dollars. That would relieve the market of the huge sell pressure from land owners selling Linden Dollars to pay their tier in US$. Land owners are predictably salivating over this possibility, because it would be a huge boon for them. It would also be a huge loss for Linden Lab, because they would lose the 3.5% fee they charge people who sell Linden dollars (the fee that land owners would no longer have to pay).

Or, Linden Lab can simply cross their fingers, wait, and hope that the Lindex stabilizes at a new level. It's not certain that that will happen, though. They key point is that it has to stabilize without the sell orders stacking up again. If it finds a new price level, but the sell orders start to pile up, then people will once again become impatient and move the value lower, and the whole cycle will rerun. They point is, for the size of the Second Life economy where it is now, the Lindex can only process about 70M of Linden dollar sales/day. If the sell orders start to exceed that level, then the market can't stabilize.