Philip Rosedale is a digital pioneer and founder of Second Life—one of the first virtual worlds and still a leading social platform for adults. Linden Lab, Second Life’s parent company, now has two decades of experience in managing an online world, including development of a virtual currency traded around the globe. He talks to Global Finance about what they’ve learned and larger hopes for the metaverse.
GF: What is the metaverse?
Rosedale: When people say ‘metaverse,’ they think of a live social version of the Internet, combining two changes. First is moving from 2D to 3D. Many things we do on the Internet will make more sense in 3D. Second is interaction with other people in real time. But it’s an aspirational term. Nobody has built it exactly yet.
The use cases aren’t strong yet. If you're talking about kids between seven and 14, everything they're doing is video games, but at the same time, I don't think they really care to have a metaverse. When 20-year-olds communicate with each other, they do not use avatars, they use their real faces or audio. The interesting question of the metaverse is: If you're older than 14 and want to go online and be with other people, how would that work? What would that be like? Other than Second Life and a couple of other small examples, there's no adults communicating with each other in metaverse-like spaces. So I think we're likely to see companies continuing to ship things that are experiments in this regard, and that process is likely to go on for the next, say, five years.
GF: Will all businesses need to be there?
Rosedale: When I started Second Life, I would have told you ‘yes’ every business would need to be in the metaverse. Now I don't think that's necessarily so. We will almost certainly do some types of shopping in 3D environments where we have a live presence with others. I wouldn't say, though, that it's necessary for everything.
Why would people want to live in a virtual world, even simulated with a lot of detail? What we're going to find is that that's not everybody. It is a lot of people, and it’s going to be a big business, no question about that. But it's not everybody.
GF: What have you learned these past 20 years about virtual social interaction?
Rosedale: People can be good to each other and can help each other and can learn together and can grow to know each other well. Online. That insight, by the way, is an important one because right now we're all sort of well, some of us are feeling like technology is just a bad thing, and that isn't true at all.
Second Life demonstrates specifically that technology can be a good thing as it relates to improving human relationships. You can read lots about this from other people than us—in academic papers. We know there's a lot of good that can happen when people are in virtual worlds together.
GF: How does the platform support or encourage that?
Rosedale: It's not based on advertising. It doesn't have any mission to manipulate your behavior or watch you. Social media, as a business, has grown through surveillance and behavioral targeting. To extend that business model to the virtual world, well, the potential harm is inestimable. Because if I know from your body movement that you're nervous, or that you're suffering from a certain disease—which, by the way, very, very much works—then I'm going to be able to manipulate you in ways that are insanely beyond anything we've seen.
And you don't know where the advertisements are. In the real world, we put ads in little squares so there's a fair fight between consumer and advertiser. But with social media, we broke that rule. We said, Now I can be a pretend person that tries to sell you things, and you don't even know. That's true already on social media, and look what harm it's done.
I don't think most of us mean to cause harm. I have talked to a lot of people who are very reasonable yet don't understand the risks with advertising.
GF: How does that impact the business model?
Rosedale: The good news is Second Life makes more money per user than Facebook does on Instagram with advertisements. It makes more money per user per year, for example, than YouTube does with advertisements. So Second Life shows that the business of providing a virtual world can be done with the highest possible profitability through fees.
Second Life is run on two different types of fees. First, some transactions have fees. If you buy glasses from somebody in the virtual world, they're going to cost about $2, and there’s a small transaction fee. Second, you don’t have to own land in Second Life, but if you do, there is a fixed monthly fee, a hosting fee, that is essentially a property tax. So the point here is Second Life is a tremendous business. I mean, it's relatively small, but it's a very good business that's making a lot of money. And you can do that without causing harm.
GF: Tell us about the development of the Linden Dollar.
Rosedale: The Linden Dollar, Second Life's currency, was in many ways the first digital currency—certainly the first that traded against the dollar. Second Life also built a whole business (Tilia) that provides currency exchange functions to virtual worlds. We’re one of the few companies that has all the regulatory licenses, particularly in the US, to do legal transfer of money.
The distribution of Second Life users actually matches pretty well the global distribution of Internet users, with significant exceptions like China where there's no access. From the very beginning it was very global. Even something like Venmo wouldn't be good enough. Virtual worlds need to have perfect cross-border transactions because you don't want to say where you're from as an avatar. You need to have a money system that works no matter where you're from. The second thing is you need to support small transactions with low fees—our average transaction is $2. So you can’t use the Internet or blockchain for settlement.
GF: How does the Linden dollar compare to crypto?
Rosedale: Cryptocurrency is an experiment to say, could we create a kind of digital currency where no one trusted any one and no one was in control of it? The answer is yes, and that's Bitcoin and Ethereum. The problem is, is that the price of doing that is very high. One is the ecological impact. We have this very dangerous situation where cryptocurrencies are creating an enormous amount of carbon.
In addition, cryptocurrencies are problematic in that they do not distribute the currency fairly. That concept of fairness is very much the subject of experiment and debate— as in the United States debate around basic income. It is probably a reasonable argument to say that as a human society becomes more sophisticated, people should have some sort of basic income rather than, say, an allocation of food or something like that. Cryptocurrencies are going to be very important because they make it possible to distribute resources better than we have done with central banks.
GF: As you did with Second Life?
Rosedale: Yes. Linden Lab has a very different way of managing the money in the system than either traditional banking or cryptocurrencies: essentially a combination of a basic income and a transparent sale of new currency on an open market. With Second Life, we were able to increase the money supply in the world in proportion to the productivity and the new people that were coming in. which is of course what economists try to do. That's what a country tries to do, is it tries to print new money at a pace so that the exchange rate stays constant, and we did that successfully.
It's one of the things that I have to kind of figure out how to explain to people now to try to help, because a cryptocurrency, for it to be useful as a currency, has to have an increasing supply. I'll just say that. I mean, it's not very debatable to economists. It's obvious.
But cryptocurrencies do not have an increasing supply; they are a poker game. And at the end of that game, there will be one winner. If you have a fixed number of tokens and a free market, very quickly, you have only one winner—Elon.
GF: Do you think that virtual asset valuations are effectively too high?
Rosedale: Second Life tells us that many non-fungible token (NFT) prices are too high. The price of an NFT would be related to its utility. Virtual shoes should be worth what, say, a teenager would be willing to pay to look cool, which might be $100, but it's certainly not $100,000.
There's certainly an argument to be made that every new technology is exploited by greed at the beginning, and traditionally that drives some kind of a bubble. The Internet, of course, was like that. Similarly, right now with cryptocurrency, virtual land, or NFTS for art and virtual stuff, probably almost all of the value of those things is just a bubble.