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.


 

2 comments:

One aspect that is overlooked in your analysis is that the majority of SL users are NOT in the US, so the artificial pegging of the Linden Dollar to the US$ creates a sense of "stability" only for a fraction of SL users.

For most of us, the Linden Dollar is in constant movement anyway. In particular, the Euro fell rapidly against the US$ in the last few months, and so Second life became more and more expensive for European users, see the charts on the VirWoX exchange.

So, the recent fall of the value of the Linden Dollar is just a "back to more normal conditions" for us European users.

Betty Betts said...
June 18, 2010 at 8:46 AM  

You are correct; the strengthening of the USD versus the Euro was an additional source of sell pressure on the LLD. But it works both ways: in late 2009 and early 2010 the USD was weak against the Euro, which eased sell pressure and probably masked some of the weakness of the Second Life economy.

The larger question of "how should the value of the LDD be managed" is a greater topic I hope to address in a future post.

Rifkin Habsburg said...
June 19, 2010 at 8:53 AM  

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