Capital markets 2.0

In the last few years, a variety of innovative capital markets have arisen to supplement and extend traditional large institutional capital markets. The new markets fill niches of demand for capital and investment, and allow greater granularity of investment information and capital direction. The currency may be money, reputation, ideas, social good or any combination of these. Some of the new capital market vehicles include:

• Virtual World Economies (Second Life, There, Entropia Universe, World of Warcraft),
• Peer-to-Peer Lending (Prosper, Zopa, Lending Club),
  
• Micro-Lending (Kiva, Grameen Bank, Accion),
• Social Capital Markets and Venture Philanthropy (GoodCap, Blended Value, New Profit),
• Ideagoras (Innocentive, The Point, Zooq) and
• Prediction Markets (Iowa Electronic Markets, Intrade, ZiiTrend).

The first category, virtual world economies, is burgeoning and complex and provokes an interesting debate about how these new market vehicles should evolve and integrate with traditional economies. The virtual worlds There and Entropia Universe have had a hands-on approach to economic regulation, for example approving parties for in-world banking licenses. On the other hand, the virtual world Second Life has been more laissez-faire at the outset but then stepped in with prohibitions where self-regulation has been inadequate. Gambling was outlawed in July 2007 and now banking activity has been effectively outlawed:

"As of January 22, 2008, it will be prohibited to offer interest or any direct return on an investment ... without proof of an applicable government registration statement or financial institution charter. (Full text here)"

Risk, Cost of Capital and Acceptable Return
One value of the new markets is that they provide capital in cases that are less attractive or irrelevant to traditional financing entities. These situations often have dramatically different risk, growth and timescale profiles than traditional investments and are conceptually similar in many ways to doing business in a high risk country.

The risk is higher, so the return too must be higher in compensation. Looking at annualized interest rates may not make sense in the accelerated time environment of virtual worlds where the economy (as measured by land and money supply) is currently growing 6% per month in Second Life.

What is an appropriate cost of capital? Anecdotal interest rates on Second Life loans have ranged from 7% per month to nearly 50% per month, and experienced a 20-30% default rate. This is the cost of capital for people who do not want to declare their physical identity details or seek other means of capital. In the physical world, it is not unusual for payday lenders to charge 300%+ per year to cover their high default rates. Peer-to-peer lender Prosper found that U.S. state-based usury laws did not allow the site to charge enough interest to cover subprime borrower defaults.

Virtual economies are chided for not having sustainable interest rates at the same time as the subprime lending crisis is crescendoing through physical world capital markets, itself a reprise of the 1980s RTC crisis.

Law, Regulation and Jurisdiction
The appropriate norm is to comply with traditional governing entity rules and laws, including being flexible with business models in order to do so. Peer-to-peer lenders had to structure their businesses in specific ways to obtain licensing and comply with U.S. usury laws which vary by state.

Virtual world economies will likely need to be even more innovative to receive physical world approvals. The pervasively global and anonymous virtual world medium suggests that geographically-based physical world regulation will be challenging to apply in reasonable and effective ways. However, anonymity is probably less important as an attribute for virtual capital seekers, as when a benefit is conferred, people are generally willing to give up anonymity. For example, peer-to-peer lenders found that people are perfectly willing to have their credit reports posted publicly on the Internet in return for the ease of potentially obtaining a loan.

In addition to traditional law and regulation, new capital markets may face another layer of compliance in the form of specific in-medium practices that develop. Complying with in-medium practices is important both reputationally and in the instance of in-medium adjudication and dispute resolution mechanisms.

Virtual world killer apps

Virtual worlds seem to be distinct from the Internet but are really the natural evolution of the web as a communications, commerce, information and computation medium; a move to real-time 3D interaction from 2D text.

Virtual worlds are no longer exclusively recreational, they are becoming increasingly routine for a wide range of professional activities. Will Sun Microsystems be the first to announce their corporate earnings simultaneously in-world as they do now on CEO Jonathan Schwartz's blog?

There are about 50 virtual worlds in various stages of funding, launch and adoption. Linden Lab’s Second Life is the largest and most complex with an economy in excess of $1.5m USD per day. With the surge in activity, killer apps are starting to emerge.

Consumer Killer App: 3D Immersive Shopping
Shopping could be the killer app of virtual worlds for consumers, just like email drew people to the Internet. Shopping, not in the sense of avatar couture, coiffeur and custom animation, although this is an important sector of the virtual world economy, but in the sense of physical-world retailers having virtual showrooms for customers to review and potentially purchase their products in a 3D visual immersive way, everything from cars to furniture to electronics to tax services to books and music.

Steelcase furniture showroom
Click here to teleport

EOLUS/SAP experimental shop
Click here to teleport

Business Killer App: the Interface
For businesses, it is not about the application but the interface, the interface is the application. Virtual worlds are the modern functionality-extending overlay for any existing application, a 3D real-time information-rich collaboration environment. Some examples include IBM's virtual NOC business, constructing VNOCs for their own and client operations, Intel's in-world Dev Zone developer network meetings and Coke's "Virtual Thirst," Cisco's "Connected Life" and Osram Lighting's "One Million Dollar Idea" virtual world creativity campaigns.

IBM Watson's VNOC (Virtual Network Operations Center)
Click here to teleport

Pervasiveness
Due to resource consumption, virtual worlds are not yet used pervasively by most people; they are an application to log into intermittently, just like the Internet was before broadband. It could be in five years that computer processing power and broadband speeds, including on the mobile platform, make virtual world pervasiveness possible. Even before then, it will probably be as natural to book an airline ticket in-world via a travel sim as it would be to go to Orbitz.

How could progress not be underway in an evolution from users to residents?

Unregulated stock exchanges in Second Life

A variety of unregulated economic activity has been occurring in the virtual world Second Life. In-world banks sprang up a few years ago and have experienced considerable volatility, mostly closing and reorganizing, for example the high profile collapse of Brazil-based Ginko Financial in September 2007. Some banks have extended their activities into in-world securities. Though eventually repealed in real life, Glass-Steagall provisions could be helpful in preventing conflicts in developing virtual world economies.

There are at least three stock exchanges currently operating in Second Life, the SL Capital Exchange (physically based in Syracuse NY, USA) with 20 listed companies, the World Stock Exchange (physically based in Australia) with 15 listed companies and the recently launched Ancapex (physically based in New Hampshire, USA) with three listed companies. There is even a Second Life Exchange Commission to provide standards of performance, operations and ethics for in-world market participants.

Listed companies have not provided detailed financial statements (much less third-party audited financial statements), have not indicated a dividend policy and do not have RL (real life) professional CFO/CPA personnel. A prospectus is sometimes provided (example) and the RL's CEO name and location may be optionally provided.

Nonexempt issuance
Considering offering and purchasing activity in the U.S., the stocks do not appear to qualify for any U.S. securities registration exemptions. The only nod to RL securities laws is a disclosure at SL Capex, claiming that the securities are a fictitious simulation, however given the easy conversion of Linden$ to USD and legal precedent in this situation, it is likely that the Second Life activity would be deemed securities issuance.

Are the SEC in the U.S. and other corresponding national securities regulators likely to take an interest or is the issuance too small, the venue too novel and the cross border challenges too great? If there is enough $ value of harm incurred by investors, an investor could file a complaint. But to whom? To securities authorities in their country, to Linden Lab, to the securities regulator of the exchange or listed company, to the Second Life Business Bureau or other in-world adjudication bodies?

While creating virtual world analogs to those in the physical world is to some degree laudable, the attempts might be ultimately more successful by incorporating a greater balance of physical world regulation and protection mechanisms to build a sustainable ecosystem.

Second Life reaches 10 million residents

Exemplifying the electric growth of Web 2.0 companies, the virtual world Second Life has grown from under 1 million residents to over 10 million in a little over one year.

While 10 million residents is perhaps not the best measurement metric for the world’s success (users may have multiple resident accounts and not more than 10% of them so far do anything more than have one quick look around), it is still an important milestone.

Source: Second Life Metrics

Other Second Life indicators reflect vigorous health, for example, a robust economy exceeding $1 million USD per day and a routine concurrency (the number of residents in-world at any time) of 30,000-40,000 with a new peak concurrency of 50,000 reached for the first time in early September 2007. Other statistics are available here.

The virtual world space is itself burgeoning, with 10-20+ worlds now available or about to launch targeted at different age segments (pre-teen, teen and adult). Second Life, There, ActiveWorlds, Multiverse and Kaneva are the best known, several of whom are coming together to develop standards for avatar, object and economic transfer between worlds.

Another growth indicator is the industry gatherings, the second meeting of the Virtual Worlds conference, Oct 10-11 in San Jose CA, attracted over 1,000 attendees, nearly doubling from the first conference. The third annual volunteer-run Second Life Community Convention, Aug 24-26 in Chicago IL, also attracted a crowd of about 1000.

Diverse Participants and Applications
Perhaps most exciting is the broad audience and variety of applications that virtual worlds are attracting; entertainment, enterprise, education, non-profits, governments and individuals are all exploring the medium amidst a flurry of both positive and negative press. Groups of every sort are coming to virtual worlds to collaborate in richer ways than have been possible previously. For example, below is a sim featuring LAX airport traffic data visualization.

Source: Daden Prime

Virtual currency and the attention economy

Market mechanisms are being increasingly introduced for more efficient exchange of capital and other resources (example: P2P lending marketplaces), for knowledge or opinion sharing, reputation building and preference indicating (example: prediction markets) and for now value attribution and broadcast in their latest launch, the enterprise email venue.

Seriosity, the Palo Alto CA-based serious gaming startup, initially reported to be focusing on enterprise applications in a World of Warcraft-like setting has now launched a virtual currency for the attention economy. The attention economy refers to the modern problem of information overload competing for a person's scarce attention. So far, the serios can only be used with Microsoft Outlook email, the sender applying a number of serios from their finite supply to indicate importance to the recipient and/or to vote on ideas, projects, etc.

The Serio Economy in Practice
The purpose of the serio economy is two-fold, directly indicating value and preference and also allowing meta relationships amongst participants to be seen. However, the importance of email is already generally known, by the sender or by the sender indicating urgency. Having serios attached to email may actually exacerbate the attention economy problem by encouraging people to read and evaluate emails they traditionally ignored. An interesting use case for serios would be charging for emails sent, thus perhaps limiting the number of people cc'd on email.

Regarding visibility into meta-relationships, Seriosity has an early study showing that serio economy relationship webs are different from those elucidated in traditional social networking email studies but it is not clear what new information or value this provides. Unlike prediction markets which have been shown to contribute important new information when appropriately executed, such as with anonymity, the serio economy is not anonymous and so is likely to do little more than codify the existing importance hierarchy and visible power relationships. If observed, people are likely to vote more serios in support of a supervisor's idea or for anyone else with whom a game theory relationship exists.

Since Seriosity is the central bank of the serio economy, issuing serios to market participants, some interesting future situations could arise if serios are transferable between organizations. For example, an individual could finally hedge their job, their long human capital exposure by taking an opposing position in the serios of a competitor or industry basket, similar to the way regional interest rate futures now allow individuals to hedge their long exposure in home-ownership real estate. SEC-attention attracting situations could also arise as individuals take arbitrage positions based on inside information.


There are a myriad of other interesting uses for virtual currencies, for example...

1) Work assignment facilitated by micro-economies
Virtual currencies could help workgroup micro-economies to develop, where arbitrary work assignment would be replaced by an economy. Managers could post projects to the micro-economy with assigned serio loads indicating project importance, drudgery acknowledgment, timeframes and requirements. Individuals and teams could signal available time, skills and interests and bid for tasks. The market mechanism could also reorganize schedules dynamically as priorities shift. Not only would a micro-economy more effectively clear supply and demand for work assignments but would also provide the side benefit of transparency, offering visibility into the direction and progress of the workgroup, sub-teams and individuals.

2) More effective shared resource allocation
Individuals and workgroups could use virtual currency allocations to more effectively allocate scarce resources such as conference rooms, office seating, computers and other supplies, food and drink preferences, vacation scheduling, etc. in a bidding process. Interesting workgroup cultural attributes could emerge from allocation behavior such as the engineering team putting all of their currency towards new computer resources while the marketing team puts more emphasis on conference rooms.

3) Information modulated with value
Just as there should be a rating system for all Internet content, a digg or "Was this helpful?" functionality for all news articles, blog posts, reviews and comments, either as a binary yes/no or as a quantitative rating, so there should be a rating system for an organization's internal and customer support forums. Readers could evaluate posts and postings could then be sorted by value, providing a means of distinguishing the usefulness of information and navigating the ever-growing sea of content that includes forum posts, blog comments, etc. Information modulation would be a higher order step in resolving the attention economy challenge.

4) Preference indication on organizational policies
Having a vote on organizational issues would be an important step in increasing individual inclusion and agency. Virtual currency (anonymously voted or not per the user) on the intranet would be an efficient way to discover majority preferences on issues ranging from preferred holidays, vacation policy, travel policies, preferred health care plans, 401k plans, degree of organization-wide executive communications and supply ordering to more sensitive situations such as lay-offs and salary decreases.

Our avatars ourselves

As companies and other organizations take to immersive worlds, it may be that new employees are assigned an avatar and virtual office space along with their security card and computer. Blogging is now part of some job descriptions and soon employees may be encouraged to spend time in-world for both corporate socialization and professional collaboration purposes within and across corporate lines.

There is a lot of energy around synthetic environments including a full track of virtual world programming at this week's SXSW Interactive in Austin TX and at the upcoming Virtual Worlds 2007 conference in NY March 28-29. Second Life is sneaking up on 5m users and a $2m/day economy and There engine Forterra has its hands full with enterprise and government clients for custom enterprise applications as well as government and medical simulation and training exercises. If you are not in-world somewhere for your company, you can work as an extra in someone else's world. Sim exercises are populated by "external role players," a new and expanding job category which simultaneously underlines the marketability and necessity of tech-savviness and another step in the Yochai Benkler shift to an economy of distributed individual participants vs. industrialized entities.

Professional avatars will likely be influenced by corporate guidelines and norms regarding appearance and behavior, analogous to the physical world; at least virtual suits are more comfortable! One result of this could be an even more diffuse exploration of virtual identity as humans have a closet full of avatars for all of their different professional and personal virtual activities. Other new job categories are probably already proliferating: avatar imaging, avatar reputation management and consolidation...

Avatar and other content portability across the different emerging public and private virtual world environments is also a non-trivial matter. IEEE avatar translation protocols and standards as well as intra-world authentication services could help facilitate avatar portability. Poor portability could mean poor rendering which could result in miscommunication, prejudice and other dynamics which can be theoretically avoided with virtual worlds. An avatar discrimination lawsuit re: virtual world employment practices would not really be a hoped for milestone.

Second Life exponentiates to 2 million residents

Today the virtual world Second Life welcomed its 2 millionth resident, exponentiating in growth from the 1 million resident mark on October 18, 2006 in less than two months and after barely having 100,000 residents at the beginning of 2006.

It is not Second Life’s 2 million residents, 10,000-20,000 of whom are in-world at any given time, nor its $650,000 per day economy ($237 million per year; $119 per capita, exceeding that of the Congo, Ethiopia and Burundi) that signals that the immersive world medium has arrived, but rather the existence of its opposition. The Register often highlights critical and problematic aspects of Second Life which it refers to as Sadville, for example citing "saddenfreude" and an analysis that time spend in Second Life contributes to global warming, as an avatar and a Brazilian consume roughly the same amount of electricity. (TV and media center electrical consumption was not mentioned.)

The brewing anti-SL movement has even moved in-world in hopes of better capturing SLer attention. The World Development Movement's anti-poverty campaign reminds passersby that there are still problems in what they refer to as "the Real World" such as a preventable child death every 3 seconds.

The ongoing presuppositions of the anti-SL movement are strange. They seem to think that SLers are 1) responsible for and 2) capable of contributing to world-problem solving in some unique way that TV watchers for example are not; and that 3) SLers are in fact not working on physical world problem solving in the physical world or via Second Life although there is much evidence to the contrary (such as the awareness raising Darfur sim where SLers can experience the refugee camp experience more closely).

When was the last time TV watchers or online Bix contest participants were blasphemed for watching TV or surfing the web instead of working on the world’s problems in their relaxation time?

Mainstream is not wowed by Second Life

Second Life is bursting at the seams - the immersive world is due to reach 2 million residents next week and has a burgeoning economy transacting over $650,000 worth of virtual goods and services EACH day.

More and more people are starting to learn about Second Life and there is one repeatedly recurring reaction: that people are affronted, even insulted that others would spend time in an immersive world.

This reaction has been expressed at least twice on NPR, recently when there was a commentator from Harvard's Berkman Law Center for Internet and Society and earlier from a Columbus OH caller on the October 24, 2006 Talk of the Nation segment (minutes 15:30-16:19 of the 30:20 minute program)

"I’ve never called in before ... I’m pretty disgusted by the whole thing ... there are so many real problems in the world ... this creative energy could go towards solving a lot of the basic problems and things that are going on in Africa ... I’m sure there’s some good coming out of it ... like new car designs ... but I’m very surprised at the amount of energy that people spend on things like this when there are people that can’t even have clean water …"

Ignoring the conflicting presuppositions and logic breaches, the key point is that something is different about spending time in Second Life versus with those other uber-productive activities that people might be doing in stead. There are several levels on which to examine this conflict.

1) What is objectionable about being in Second Life as compared with other leisure exploits like watching TV, watching YouTube, reading a novel, or playing video games?

2) What is objectionable about spending time in Second Life as compared with other creative exploits such as painting, carving wood in the garage, programming software or designing a video game?

3) What is objectionable about making a living in Second Life (which requires developing and using advanced technical skills) as compared with other remunerative efforts such as being a corporate drone, pornographer or gambler?

The response is so quick, visceral and negative that it is as if people are feeling personal rejection. Second Life is somehow different than other activities, even different than video games such as World of Warcraft (despite World of Warcraft racking up far more hours per user), perhaps because of the story of what Second Life offers, an alternative reality, and that people who spend time there are in some part rejecting the physical world and by extension its participants, non-SLers.

However, like the book, one of the original immersive alternative worlds, and in fact like most technologies (e.g.; radio vs. records) most people will probably come to realize that online immersive worlds offer more not less and supplement rather than replace the reality they experience.

Real-time 3D weather data visualization from NOAA

MLK "I Have a Dream" exhibit at the Second Life Library

How does the brain work at Uvvy Island

Climate crisis education at the International Spaceflight Museum

Countdown to 1,000,000 Second Life Residents

Metaverse World leader Second Life barely had 100,000 residents at the beginning of 2006, and enjoyed strong growth in the first half of the year, reaching 300,000 residents at the end of June.

Then Second Life makers Linden Lab changed the registration policy such that no credit card information was required. The world's registered residents began to exponentiate, particularly helped by international residents swelling from 25% to 50% of total residents. Certainly residents do not correspond to unique users, as people may have one or more "alts," alternative avatars.

The Second Life website tracks that about one third of total residents have logged in within the last 60 days and that there are an average of 10,000 residents in-world during Second Life (US Pacific Coast) prime time hours. Private estimates suggest that about 10% of total residents are actually active in-world.

$7 million of transactions were run up by Second Life residents in July and there are a factor of magnitude more SKUs available in Second Life than at Wal-Mart (hello Long Tail).

On its current course, Second Life will reach the million resident mark well before the end of October and probably even before the end of the upcoming weekend. w00t!