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Chapter 8: But isn’t Everything Old, just New Again? …and what about
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more than 20 million digital assets across platforms such as Roblox and the Sims463, got its start in 2011 by creating and selling digital fashion in Second Life and, by 2016, was making $1 million / year selling digital clothing in Second Life.464
Second Life was arguably ahead of its time and it has been plagued by problems including: technology failures (DDos attacks, updates that took the game offline for long periods of time), copyright infringement, avatars behaving (very) poorly, management departures, community revolts, economic mistakes, needing to set up a money transmitter subsidiary in order to allow legal convertibility of the Linden Dollar to USD (see below), and a steep learning curve to understand the game465. Also, while I refer to Second Life as a “game” due to its virtual currency and UGC elements, one of the reasons I think Second Life never achieved its full potential is that it didn’t encourage users to create games within its virtual
world466. Ironically, Roblox was founded the year after Second Life and did exactly that, growing to the $24.9 billion business that it is today (down from $77.9 billion at its peak in November 2021). I recently heard Philip Rosedale, founder of Linden Lab, speak at an event and he addressed the issue of “why didn’t Second Life scale”
and he also made an interesting comment on how he views “metaverse experiences”
as distinct from “games.”467
On the first point, Rosedale says that the inability for avatars to display realistic non-verbal communication is partly why metaverse experiences like Second Life, which is intended for adults, have not grown as much as one would expect given advances in technology since Second Life launched. Rosedale says that avatars need to communicate as well as humans for experiences like attending concerts, school, and business meetings to work well in virtual worlds. Rosedale suggests that the Mark Zuckerberg/Lex Friedman interview468 is the closest he’s seen to acceptable face to face communication, but even that isn’t good enough for two adults who don’t know each other. Rosedale believes that kids, unlike adults, don’t really care about these issues; they’re happy to be “blocky avatars.” This is something I had not considered before listening to Rosedale’s talk and it’s a subset of Second Life potentially still being ahead of its time – 20 years after the company’s founding.
On the second point, Rosedale says that games and the metaverse are two very distinct and separate experiences. In the metaverse, you’re always interacting with real people who you often don’t know and these real people are the only reason
463 https://venturebeat.com/gaming-business/house-of-blueberry-launches-roblox-fashion-collection- inspired-by-clueless/
464 https://observer.com/2022/10/house-of-blueberry-has-been-outfitting-digital-avatars-for-a-decade/
465 Rosedale himself said it took the average user 40 hours just to learn how to interact with Second Life
466 Although, during the Spring of 2004, a game called Tringo took off in Second Life!
467 https://vimeo.com/venturebeat
468 https://www.youtube.com/watch?v=MVYrJJNdrEg
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you go to a virtual space. Rosedale says games, on the other hand, are themselves so delightful and fascinating that gamers don’t care who else is in the game and/or, at most, the gamer is happy to play with her IRL friends. I have the utmost respect for Rosedale and consider him a true futurist, but I mostly disagree with him here.
Research shows that younger gamers are primarily motivated to game for social and competitive reasons, which implies playing solo isn’t ideal.469 Where I potentially agree with Rosedale is that research indicates older generations may enjoy gaming as more of an escape or way to unwind470, which possibly implies solo gaming (but equally possibly does not, “escaping” and “unwinding” are often more fun with IRL and/or virtual friends). Further muddying this, 71% of gamers age 65+ say they play games to help bond with friends and family, which implies a social motivation to game. 471 In any case, I continue to view the metaverse as a component of gaming and not as something separate.
I don’t think Second Life will get a second life in web3 (nor do I think its residents want that). The platform isn’t culturally relevant for Gen Z and Gen Alpha, many of whom already don't want to hang out IRL with their parents, let alone with avatars their parents' age. But that’s okay! Second Life has a sticky, older community that is extremely loyal. Second Life didn’t become a large, publicly traded company or score a big exit, but I still think there is a tremendous amount web3 game developers can learn from Rosedale and from studying Second Life’s economy.472 For example, in the early days of Second Life, the community revolted against the monthly subscription-based model then in place and the Second Life management team consulted with economists to help them figure out what to do:
“what makes a country successful and helps a third-world developing country grow? It’s the ability of the people who live there to build something. In order to do that, they have to have access to land because land serves as both a place to build and also as collateral.”
Hernando De Soto, the Peruvian neoliberal economist opined:
469Newzoo’s Generations Report: How Different Generations Engage with Games
470 Id.
471 https://www.fandomspot.com/us-senior-gamers-study/
472 Other prominent folks to study and learn from include: Eyjolfur Eyjo Gudmundsson (a.k.a. Dr.
Eyjo), former lead economist for CCP, creator of EVE Online; Yanis Varoufakis, former economist in residence for Valve; and Edward Castronova, author of Virtual Worlds: A First-Hand Account of Market and Society on the Cyberian Frontier. I personally also enjoy listening to Phillip Black, Game Economist, on Deconstructor of Fun and reading the essays on his site, including the
insightful and very applicable: What is a Game Economist and Why Now? I recommend checking out Phillip’s latest essay “How to Solve THE web3 Problem: A Staircase Tax” in which he offers an interesting solution for the problem of inflating supply in games, which is particularly challenging for web3 economies given tradeability.
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“They have to be able to reap the benefits of their labor, which means that they have to have both ownership and financial reward.”
Based on these discussions, Second Life decided to scrap the subscription business model and instead sell virtual land and charge usage fees for its
maintenance. Second Life also elected to allow Linden Dollars to be bought and sold on the open market for fiat and to allow residents to retain the IP rights of the designs and depictions of the 3-D objects and scripts they created in Second Life.
These decisions around IP rights, ownership of virtual land, and virtual currency exchangeable for fiat currency then led to an economic boom in Second Life with the creation of virtual businesses including clothing design, engineering and
architecture, and entertainment.
Overall, I think it’s important for folks in web3 to ask and thoughtfully answer:
• Why will brands interacting with web3, including games enhanced with web3, succeed when they were ultimately unable to when interacting with Second Life?
• Why do we believe web3 experiences will sustain and scale while Second Life was able to sustain, but not to scale?
• Does web3 technology (and modern technology more generally) solve some of the problems Second Life experienced?
While I believe that I’ve provided food for thought for each of these questions throughout this essay, it’s up to the creators / developers in web3 to determine how and why web3 brand and game integrations will lead to mass adoption and scale where other platforms like Second Life were unable to do so.
All that said, the primary reason I wanted to cover Second Life relates to US Federal and State money transmission regulation. So long as game economies are
“closed loop”, meaning that in-game virtual currencies can only be used for in-game activity (e.g., PokeCoins, Vbucks, Rbux) and there is no ability to “cash out,”
Financial Crimes Enforcement Network (FinCEN), Money Service Business (MSB), and state money transmitter license (MTL) rules aren’t triggered. However,
generally, once a game platform allows users to directly “cash out” or convert from an in-game virtual currency to fiat or for an asset that is a “convertible virtual currency” like a stablecoin or bitcoin, these rules may be implicated. I won’t bore everyone with all the problems with defining “convertible virtual currency,” but there are many and I strongly advise talking with the lawyers I’ve dropped in the
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footnotes if this is an issue you may need to grapple with.473 Do note that while these rules clearly apply to cashing out fungible in-game assets into fiat and certain cryptocurrencies, different questions arise with respect to cashing out NFTs. Let’s consider physical artwork — even though it can be exchanged for cash, it doesn’t somehow turn the artwork itself into money. That’s the line we’re trying to apply to NFTs, but of course this gets blurry if you have a series of 10,000 NFTs distinct by serial number only that are trading at the same value. Kind of sounds like US dollars, right? Every US dollar has a unique serial number but trades at the same value and is treated as fungible. Second Life, which allows players to cash out Linden Dollars directly for a variety of different fiat currencies solved for these issues by setting up a subsidiary, Tilia Pay474, which is a FinCEN registered MSB and has all its MTLs in the United States. In a model like Second Life / Tilia Pay, Tilia effectively conducts all regulated activity for Second Life’s gaming platform, including compliance services like KYC / AML and monitoring in-game transactions for fraud and money laundering.
The foregoing is critical for web3 game developers to understand for at least two reasons:
o In an ideal gaming experience, you don’t want gamers to have to leave the gaming experience to cash out, e.g., force a gamer to move in-game currency to Metamask, send that in-game currency to Coinbase, and then convert to fiat or have to create a liquidity pool for that in-game asset on Uniswap, convert to USDC, and then cash out to fiat at Coinbase.
o Obtaining and maintaining money transmitter licenses and the New York BitLicense is cumbersome, time consuming and expensive.475 For these reasons, web3 game developers who would like to enable conversion of in- game fungible assets to fiat will likely want to work with a company that has the appropriate regulatory licenses (e.g., Tilia or Provenance Technologies, which was incubated by Forte).
473 Dave Teitelbaum at Sidley Austin and Lewis Cohen and Angela Angelovska-Wilson at DLx Law are the best in the business with these issues and are substantively deep when it comes to the intersection of money transmission legal matters and web3. If you want to legal nerd out, you can also read a letter that I wrote to FinCEN in January 2021, which addresses some of these issues.
474 Tilia recently spun out of Second Life and took strategic investments from JP Morgan and Dunamu, which owns South Korea’s largest crypto exchange, Upbit.
475 Aston Waldman, CFO of Linden Lab, said it took Tilia over three years and many millions of dollars to obtain the state licenses. Similarly, Forte CFO, Bela Pandya said it took a company that Forte incubated, Provenance Technologies, three years to obtain its MTLs as well as a NY
BitLicense.
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