[I'm a] PC Site has been following the currency system of Second Life, Linden Dollars, for some time now. The virtual currency is used to buy and sell real estate and accessories in the game, and is exchanged for roughly 250 per USD$1. Tyler Cowen, economics professor at George Mason University, has a post on the currency economics of Linden Dollars. First, for context, he writes: (links mine)
Free banking economists used to debate whether a private sector fiat currency could succeed. Hayek, in his Denationalisation of Money, said yes but most other people said no. The obvious problem is time inconsistency, namely that the fiat currency issuer will at some point inflate away its value to the seigniorage-maximizing margin, noting that such a margin changes with the passage of time and not necessarily in a favorable direction.
Id est, the currency issuer’s incentives are diametrically opposed to those of the currency user. However, as Linden Dollars are issued by the same entity that stands to profit from transactions in Second Life, this does not seem to be the case here. Cowen continues: (link his)
Who would have foreseen that maximizing income from “land” sales might check this outcome? I think of Linden Dollars as akin to legal tender currencies: you can’t buy anything in Second Life without them. Since the goods and services in Second Life have value the currency does too.
Who had expected that the next generation of private currency suppliers would make it work by, in God-like fashion, supplying accompanying worlds as well? What other problems can be solved this way? Or are Linden Dollars the next bubble waiting to burst?
I would point to evidence that the Second Life boom is liable to turn into bust to answer the last question, but the workability of Second Life in some respects does not preclude its unworkability in others.
Tags:
economics,
second life 
