Second Life Headed for a Great Depression?

The Wall Street Journal has a great article about the shutdown of the Second Life banks. For those unaware of what Second Life is, it is a virtual world in which users can create their own custom avatars and participate in all the same activities that they do in real life. It is currently the most active virtual world on the web with over 187,000 active users in the U.S. alone and tens of thousands of active users in countries across Europe, Asia and South America.

In the whole scheme of things, Second Life is still extremely small in comparison to the massive social network behemoths MySpace and Facebook but there are some extremely dedicated users on the site. One of the key components of Second Life is the virtual currency that can be used to purchase products and services throughout the virtual world. A few groups took it upon themselves to open up banks within the virtual world and promised extremely high interest rates, one of which offered a 200 percent yearly interest rate.

That bank currently owes depositors $20,000 and claims that they will be repaying depositors the remaining amount. While $20,000 is absolutely nothing for a real-world bank, $20,000 is substantial for a bank owned by one individual. Linden Labs, the creators of SecondLife, announced two weeks ago that they would be shutting down the privately run banks and as a result there was a run on the banks. It appears that rather than the same thing that happened prior to the great depression, these virtual banks are actually capable of honoring all depositors requests.

The Wall Street Journal describes one of the individual bank owners, Joshua Zarwel, who is a 29-year-old graduate student in New York:

Mr. Zarwel’s avatar, named Teufel Hauptmann, used the deposits — averaging $25 per user — to buy and sell Linden dollars on the Second Life currency exchange, known as the LindeX. He says he parlayed his currency arbitrage into about $15,000 in actual profit. “It started as a hobby and grew into something more,” he says.

Joshua was able to pay depositors a significant 24 to 30 percent per year, far beyond the interest rate provided by any real-world bank. It appears as though the Second Life banks have become more of an educational experiment for financial buffs rather than significant institutions. For the time being, Second Life will be able to avoid a great depression while in the real world we try to stave of a significant recession.

Recommended articles