Upcoming changes to XStreetSL

This came out awhile ago, but Linden Labs has announced changes to the way it operates its online XStreetSL marketplace, a significant player in its virtual economy and source of a wide variety of virtual goods for use in Second Life.

The major change seems to be to the way in which XStreetSL will handle free items, or “freebies”. Despite being given to other residents for free, these items will now have a monthly listing fee of L$99, or about $0.40 USD each. At the same time, other costlier items will be subject to new rates for listing and commissions on the site.

The possible economic consequences of this move are interesting, especially given the polarizing nature of the availability of free items within the virtual world. The so-called “freebie economy” of Second Life, which provides free items to residents who do not feel like paying for virtual goods, has frequently been criticized for harming the overall economy. However, the freebie economy also attracts residents who may later begin to make paid purchases that do feed into the paid economy.

Despite the standing criticism of freebies, the reaction to this news – ostensibly designed to clean up the marketplace – has been critical. Discussions around changes to XStreetSL have been largely negative, with New World Notes and its readers reporting that some content creators are starting to remove their goods in retaliation. The common theme seems to be that the new listing requirements on XStreetSL may work to limit the freebie economy which, based on the number of low-cost transactions made in any given month, is a highly compelling element of Second Life. At the same time, there is also speculation that this change will work against creators who offer high-quality niche or specialized goods that do not sell quickly. Implementing higher listing fees will likely force their removal from the marketplace simply because the fees are too expensive to be covered through sales.

The full roadmap of upcoming changes can be found here.

Resolving Goldfarming through Concealed Validated Auctions

Guest post by Jan Pontzen on a RMT free trade mechanism for MMORPGs and other virtual worlds.

Introduction to the problem

The exchange of goods is an integral part of any social system. People buy goods to satisfy their personal needs, to honor their traditions, or to strengthen their social bonds. People sell produced goods to make a living, to pay their monthly bills, or to make profit. Community members can obtain wealth through adherence to the overarching system’s ruleset, through contribution to the ongoing persistence of the system, and through the accumulation of commonly agreed-to status indicators, e.g. the amount of children, land ownership, crop seeds, or money. The same applies for online world societies.

Online world users, however, can as well take a shortcut. They can have others obtain those status indicators for them in exchange for surplus acquired through their regular day-to-day job. If used in ways that are not intended by the game developers and not under the control of the game operators, this so called real money trade (RMT) threatens the integrity of the affected online world systems. RMT contractors accumulate money used in the real world by exploiting resources provided within online worlds. That way, the system-internal online world economies are flooded with easily obtainable goods and commodities. The values of rather common goods are highly deflated. Uncommon commodities become highly inflated as users seek to reduce their losses through obtaining rare goods.

This so-called MUDflation causes frustration for both the users and the operators of online worlds. The efforts and commitments of the users to the integrity and well-being of the online world system are devalued, which reduces the overall systemic quality and social stability of the online worlds. The operators of online worlds have to invest substantial funds into combating real money trade while simultaneously facing the challenge of users leaving their online worlds due to RMT-based frustration. Their costs increase while their revenues decrease. Under careful calculations based on previous research by Prof. Edward Castranova, the annual losses caused by RMT add up to at least $300 mio., but very likely significantly more. Obviously, a way to resolve that issue has to be found.

Approaching the solution

One way to approach the problem is via the analysis of the process performed throughout an RMT transaction. Each real money trade transaction consists of two transactions, one per system involved. First, the buyer transmits the agreed-to amount of money to the seller, e.g. via credit card payment, and provides info on his virtual identity, e.g. the name of the buyer’s avatar. Second, the seller transfers the acquired virtual commodities to the buyer via means provided by and within the online world, e.g. via a trade window or a PO box. Game operators may try to resolve the issue of RMT by not allowing any trading at all between avatars within their online world. As stated above, however, the exchange of goods is a vital subsystem of any society. Taking it out of the online world would greatly reduce the amount of social interactions performed.

The problematic interaction is the verifiable exchange of goods between two specific online world users. If there is a way to verify a transaction within an online world, both buyer and seller of an RMT service can track the completion of an ex ante agreed-to and paid-for exchange of goods. Thus, there must not be any exception to the following described mechanism. It has to apply to all transactions. Else, the exception, e.g. an allowed direct exchange of “cute glade flowers”, will become the norm, glade flowers will become the new inofficial currency, and users will start complaining about RMT glade flower farmers.

Several identifiers can be used to verify a transaction: location, price, name, and time. Detaching transactions from this trade information could provide means to enable trading within online worlds, but disable trading between two parties involved in RMT. This full concealment of all transaction identifiers could be achieved via the following mechanism.

The proposed solution: secret auctioning

All avatar-to-avatar transactions are performed and mediated via a trade platform that establishes the exchange of goods between designated trade partners. To conceal the time identifier for transactions, all trade is performed after the expiry of a trade cycle, e.g. with a duration of 24 hours per cycle. At the beginning of each trade cycle, all goods put up for sale before the initiation of the trade cycle are listed on the trade platform. Additional amounts of commodities that were already listed at cycle initiation may be added at any time while the trade cycle lasts. New commodities will be listed at the initiation of the next cycle.

The actual amount of offers placed is kept undisclosed, as well as any information regarding the demanded price and the identity of the seller. Users can determine which commodities are listed for sale at trade cycle initiation, but cannot identify prices, seller identity, or available amount. Suppliers may modify their price at any time while the trade cycle lasts. They may not, however, offer the same commodity for different prices, e.g. one shoulder armor for 10 gold, one for 7.5 gold, and one for 5 gold pieces. This similarly applies to buyers: if they are interested in buying a commodity available on the trade platform, they can place one secret bid per commodity, and modify it anytime while the trade cycle lasts. That way, both suppliers and bidders reveal their actual individual willingness-to-pay or willingness-to-be-paid-for. All information that might lead to the identification of the buyer or seller, e.g. price, name, or time of bid / offer placed, is kept secret.

During the trade cycle, involved users reveal their individual willingness-to-pay or willingness-to-be-paid-for to the trade platform and deposit the according items or funds. The price information can be used by the platform at the end of a trade cycle to aggregate supply and demand and to determine the market equilibrium for each commodity, based on full market information, which is only available to the automated transaction mediator.

So far, however, this would not prevent certain RMT-related transactions where a user would offer a commodity of very low value which the RMT seller would then buy for a very large amount of online world money, which would effectively establish a real money trade transaction. This issue can be addressed via a transaction validation procedure.

Increasing economic stability through a transaction validation procedure

Computer-controlled shopkeepers, so-called NPC vendors, provide according means to validate transactions. Acting as buyer machines, they usually pay rather unsatisfying prices to the users, based on a formula that determines the base value of each commodity. This formula greatly varies from online world to online world, and can be based on various factors like i.e. rarity, commodity properties, or avatar requirements. Via that formula, computer-controlled vendors effectively establish a minimum price for each commodity. There is no need to keep this minimum price information undisclosed to the participants of the platform-mediated trade. It provides an anchor, a minimum relative orientation for the initial evaluation of each offered commodity.

Based on the trade data input by the users, the supply and demand curve and the market equilibrium for every single commodity can be determined. In addition, NPC shopkeepers establish a minimum price for each commodity via the general base value formula. Based on that information, a range of valid transactions can be identified.

The intersection of the minimum commodity price and the supply curve (pmin = S, xmin) is declared the minimum valid price. The intersection of the demand curve and the minimum amount of performed transactions (pmax = xmin, D) is declared the maximum valid price. That way, all offers and bids between the minimum valid price / maximum valid bid and the market equilibrium are declared valid. All remaining offers and bids are declared invalid. The according suppliers and bidders are refunded their items and funds. Valid bids are sorted in descending, and valid offers sorted in ascending order.

Suppliers with low validated prices have, in relative comparison to the other trade participants for the according commodity, proven their commitment to the integrity and well-being of the online world’s economy. This similarly applies to bidders with a relatively high willingness-to-pay. They did more than they were required to and are thus rewarded accordingly: the lowest validated supplier is served first to the highest valid bid and so on, until a transaction cannot be established any longer due to missing commodities or bids.

A trade cycle ends. All validated transactions are performed, all invalidated offers and bids are refunded to the according users. No-one knows who bought what from whom but also, no-one is worse off than before participating in trade. All bidders and suppliers are either refunded their deposit, get what they wanted for the price they were willing to pay (bidders), or get even more than they asked for (suppliers). The Pareto-criterion is met. Due to first degree price discrimination, the welfare within the range of validated transactions is maximized (economists like this). A new trade cycle begins. All market power and information obtained during the last trade cycle is reset, while all market experience is kept. Effectively, a non-discriminatory black market is installed.

Conclusion and criticism

By applying the above described mechanism, online world users can still exchange goods between each other, maintain and nurture an integral part of their day-to-day interactions, and work to achieve goals related to this subsystem of the online world community. As a trade-off, users would have to wait until the end of a trade cycle before they may receive their goods. Immediate needs could no longer be met. In addition, this mechanism would prevent any form of materialistic gifting. According social interactions would need to be replaced, e.g. by shared collaborative activities, which might actually prove beneficial to the online world’s society.

The goal of the mechanism is achieved. Illegitimate or unintended RMT transactions are effectively eliminated: when this mechanism is used, there is no way for suppliers and customers of RMT services to verify the delivery of goods within the online world agreed-to and paid-for outside it. The economy of the online world is kept unbiased from interests external to the online world. The integrity of the online world’s economic system is preserved. Meanwhile, trading becomes a game, based on secret bids and educated guesses.

Author’s bio: Jan Pontzen, Dipl.-Kfm. (German equivalent to MBA), graduated in Media Economics at Ilmenau University of Technology, Germany, in March 2009. The full master thesis that this article is based on can be downloaded here. Jan is currently working as an Assistant Product Manager at Acony, a Germany-based games developer that is readying up Parabellum, a free-to-play tactical MMOFPS, for open beta.