A lot was written a few weeks ago about the instability in the Second Life™ Lindex. Darrius Gothly wrote: The Math Behind the LindeX. It has enough misconceptions I am moved to provide a counter point and more accurate information.
I’m moved to do it at this time because of a recent post in the forum. Some one thought selling L$ at L$265/US$1 on July 29 was setting the price to high… high!?! No that is pretty low, for a seller.
Back to Darrius. He admits he isn’t a trained economist. But, one doesn’t need to be to understand a commodity market. If you have ever haggled over the price of anything you bought or sold, you understand the process, the economics, and how human nature fits into the process.
First a commodity is defined as: a raw material or primary agricultural product that can be bought and sold, such as copper or coffee. A boarder use of the term is any ‘thing’ that can be bought and sold. Americans tend to think of commodities as items that can be mass produced. So, something becomes a commodity when bought or sold in mass. Handmade items are often spared the designation but, that is a cultural nuance.
Currencies are unique commodities. They have their own markets. They are thought by many to NOT be a commodity. But, if we eliminate our preconceptions of currencies and look only at how people use money, the resemblance to a commodity is obvious. So, understanding the Lindex is easy when looked at as a commodity market. A currency exchange is just the name for a market trading only currencies.
Darrius says there is no regulatory agency or body of laws to control how the Lindex works. That is wrong. For the last couple of years we have been reading how the Lab is handling the exchange of L$ for various currencies around the world. Because of U.S. laws governing how the Lindex can operate and the U.S. Treasury Dept. being interested in the Lindex plus the laws of various countries many things have had to change. (Reference – 30k articles on subject.)
The Buy-Sell Gap Darrius refers to as being imposed by the Lab is just a normal part of any trading activity. It isn’t imposed by the Lab.
Look at gold, silver, or any commodity and you will find buy-sell prices. There is always a gap. The reason is simple, human nature. I’ll explain.
The price of gold changes based on supply and demand plus a number of other factors. Supply in this case is not just a matter of how much we can dig out of the ground. It is also a matter of how much people want to sell at any given time.
During times of economic crisis more people want to trade currencies for gold to protect their wealth and fewer people want to sell their gold for currencies and risk losing wealth. The result is demand increases, supply decreases and the price of gold in terms of currencies goes up… or more realistically the value of currencies goes down. Historically gold has a very stable price when measured by how much corn or wheat it will buy.
Risk is all in how we see the future. The future is unknown and uncertain. So, each of us evaluates it and decides how much risk there is for any action or decision we may want to undertake. The number of people deciding the risk one way or the other decides the market’s buy-sell prices. As more people disagree on what will happen we see the price gap grow. As people evaluate the risks at similar levels the smaller the gap. (Reference – 258 million explanations)
The price gap stops money laundering… On this one I am amazed. First money laundering is a high profit dangerous business. Illegal in all countries, AFAIK.
So, what is it? In general someone is getting money from some illegal activity. Let’s say drug sales of illegal substances. The IRS (in the US) watches what we spend. They compare that to our earnings to see if we are reporting all our income and paying appropriate taxes. So, before you can spend your ill-gotten gains you need to pay taxes and doing that requires you show how you got the income. If that is via illegal means, the IRS is going to rat you out to the proper authority (which depending which attorney you talk to is illegal). Big Problem.
So laundering is all about hiding where money is coming from. If you watched Breaking Bad, you saw Walter White, wife Skyler, and attorney Saul Goodman coming up with ideas on how to hide their drug money income.
If you cash L$ out to any RL currency you know you have to provide RL identification. This is the deterrent to laundering through Second Life. The buy-sell price gap is no deterrent. Think about it.
If you have millions stacking up in your closet and can’t spend it, it is basically worth nothing. So, how much of that would you spend to ‘clean’ the money? If I had to buy L$ at L$260/US$1 and sell it at L$275/$1 that’s not that bad a deal. Its only 5%. When BoA was busted for laundering money they were charging way more. (Reference – 194k articles on story.) So, the SL L$ gap is a good deal, an incentive, not a deterrent for money laundering.
Also, if you look at commodities you will find some buy prices are more and some less than the sell price. So, if only a high buy price stopped money laundering, there would still be a load of commodities that could be used for laundering. It’s the ID requirement, not the price that stops laundering. (Reference – 336k related articles)
Darrius is on about the stable and unstable nature of the Lindex and how it affects the Lab’s income. Anyone that uses the stock market or commodities markets knows that the broker, which is what the Lab is, makes money on every trade. The broker’s incentive is to induce more trades, more activity. In the US there are laws against doing that and they do apply to the Lab and their Lindex. The Lab cannot legally instigate trading.
An unstable market creates lots of activity and broker profits. But, it is a short term thing. A less volatile market encourages more people to trade and makes for greater but longer term profits for everyone. (Reference – 3 million market stability related articles.)
Upside Down Pricing
When considering pricing in a commodities market you’ll see lots of confusing statements. Most deal with what is a high or low price for something. The confusion comes from the sellers and buyers seeing price differently.
In the Lindex we can say a seller is selling L$ and buying dollars. If dollars are expensive it takes a lot of L$ to buy one. If a car is expensive we pay lots of dollars to buy it. Our frame of reference is what decides what is expensive and cheap.
So, for a L$ seller a price of L$239/$1 is cheaper than paying L$258/$1. But for a L$ buyer a price of L$268/$1 is more expensive than buying L$296/$1. In one case a lower number is better than a higher number while in the opposite case it is reversed and higher is better than lower. (Prices from 7/29/2016 – 8±AM)
Until someone is willing to offer L$ below L$258/$1 (bigger number is lower price for L$) or someone is willing to bid more than L$268/$1 (smaller number is a high price) nothing happens, no transactions.
About the references, they are a mix of articles that support and disagree with what I have explained. In general they support my explanations. You have to read them with skepticism and thought and make your own decisions.