Second Life, Second time: Ponzi, Pyramid or Profit?

So, I've been doing some more research on Second Life, both reading up on other people's writings and talking to people who I trust to give me honest information on their experiences.

The most interesting thing I've read so far is this: http://kunikos.blogspot.com/2006/12/is-second-life-elaborate-pyramid-scheme.html

So is Second Life a pyramid or ponzi scheme? To try to answer that question its good to start with definitions.

A pyramid scheme is one where people are ordered in a hierarchical pyramid fashion. The owner of the pyramid is the top and then there are N people under her and N people under each of them, and so on. It costs a fee to join the pyramid and that fee is paid to the people above you, who in turn pay a portion of the fee to the people above them, and so on. So called "multi-level marketing' schemes are basically pyramids with just enough control and real value to keep them on the right side of the law, at least in theory. (This is why Amway for instance has a great big bold lettered rule saying you must sell most of the product you buy, not consume it yourself. However every Amway meeting I've ever been at the people organizing tell you to ignore that rule. If you do, you've just become a pyramid participant.)

Its easy to show mathematically in such a scheme the majority of the money flows to the people at the very top and the majority of the people, the base of the pyramid, lose money. Most crooked investment schemes bleed the last people in. This is the so called "last-sucker" principle.

A Ponzi scheme is also a "last-sucker" scheme, but in a Ponzi scheme its even more dishonest. In a Ponzi scheme investors are typically promised some hard rate of return for invested money over some period of time. Initially, the Ponzi operator pays this. He does so by using the cash of brand nw investors to pay the old. However since the money isnt actually invested, hes really using the investors principle to pay mock interest. As long as enough new people keep joining he can keep this up. The principle he doesn't use for interest, he puts in hgis own pocket. At some point he is "broke" and stops paying everyone. Noone gets their principle back (its gone) and in general what they've been paid in "interest" is less then they put in. Everyone gets burned, but the newest guys in get burned the most.

So, how does Second Life compare to these schemes? The cost of a Second Life "business person's" initial Linden Bucks is their "investment" in the scheme of Second Life. They are putting their real-world value into the economy of Second Life. Like both Ponzi and Pyramid schemes, "investors" buying Linden bucks are buying nothing of actual value. There is no place outside of the scheme (in this case, Second Life) that they have any value. Their only real world value, as I showed in my first Blog, is in getting new investors to buy them by investing their real money in the Second Life economy.

This has all the earmarks of a Ponzi scheme. The last "investors" when noone wants Linden Bucks (or when Second Life shuts down) will lose the entire value of anything they have invested. The original "investors" will lose anything they still have in Linden Bucks. Some second lifers believe that Linden Lab will rescue them in the event of a Linden Buck crash by buying on the market, but they do not have any obligation to. Nor do they have a clearly earmarked and documented fund by which you can gauge how much of a crash they can absorb.
This is the reason for FDIC insured accounts. They were created after the depression to put a cushion agaiunst crash in the banking syste. However even our government cannot stop a full scale crash. When Chemical Bank was threatening bankruptcy 30 odd years ago, the government created all sorts of incentive for them to be bought hy another bank because, if they failed, the FDIC couldnt cover all their obligations.

Second Life though has none of these real world concerns. If the market crashes, they can just close the game and walk away with the money. Even if they honestly tried to support the market it is unknown how much they could absorb without going bankrupt and having the same effect.

So, like a Ponzi scheme, your return on your Second Life investment of both money and time is dependant solely on new blood coming into the game. Also like a Ponzi scheme, Second Life skims their cut off of the new money coming in (again see my previous blog.)

So, what do you think? I know my conclusion.

In my next blog I'll talk about someone I've found who actually is making some significant money in Second Life-- and all the reasons no same investor would ever invest in his "business."