Gambling Velocity

or, "How I learned to stop worrying and love the FUD"

by Gigs Taggart, Correspondent

Gigs Taggart (Jason Giglio) is an active member of the Second Life community as a scripter and contributor to the OpenSL project, land developer, and proprietor of GT HQ Store and Arcade.

Reuters is running stories about an "economic crisis" in Second Life. The basis for this is the announcement of a platform-wide ban on gambling, a minor insider theft ($10,000 USD) at a "in world stock exchange", and a bank run on a major "in world bank" (which handles about 150 million in $L deposits). The result of this, they claim, is that the in world "spending" decreased from $2 million USD to about $1.1 million USD per 24-hour period, signaling an "economic crisis." This article examines why you shouldn't really worry.

While gambling was surely a segment of the economy, and banning it will have an economic impact, the metrics being used here are inaccurate. "Spending in world" is merely a measure of economic velocity. Velocity does not necessarily correspond to value creation in an economy. Gambling causes an artificial inflation of velocity. If we assume for the sake of argument, that the average payout across all gambling games was 70% (a low figure, many games have single-digit rakes.) then it becomes easy to see how gambling can inflate the velocity numbers. Lets assume a hypothetical person pays 1000 $L into a slot machine with 70% payout. On average, they will win 700 $L back. If it takes them an hour to do this, they've paid 300L$ for an hour of entertainment. The true economic velocity is 300L$. The apparent economic velocity is 1700 $L. This is almost six times the true velocity.

A more realistic example: Our person sits down at a poker tournament table, with a 1100 $L entry fee with 9 other people. 11,000 $L are paid to the host at the beginning. The top three winners will get something around 9000 $L between them. Here we have 20,000 $L in apparent velocity, with only 2,000 $L of true "spending", a 10X amplification in velocity. So, while the Second Life economy may appear to have lost about half its spending, the true amount of loss is likely less than 10%.

The aggregate demand for $L does not seem to have dropped sharply either. The exchange rate is still more or less fixed at 265 $L / 1 USD on the LindeX exchange. The volume on the LindeX is not abnormal. While aggregate demand for $L did drop last month as can be seen by the slight lowering in Supply Linden sales numbers, it it still safely in the "positive" range. The only danger comes if the aggregate demand for Linden falls to the point where Supply Linden is selling zero $L, and the stipends satisfy all demand for $L. There is no sign of this happening any time soon.

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