I've been hearing from some that there's a panic run on the LindeX (Linden Exchange). After going in and taking a good look, my reaction is more or less: ummm, no. Actually, a "run" on the LindeX (in the current way it is happening) is a good thing, because the exchange rate between the Linden Dollar and U.S. Dollar is becoming ridiculously stable.

Is the LindeX being affected by the sledge-hammer news dropped by Tateru Nino (Massively) and confirmed by Linden Lab with regard to a 30% cut in their workforce? Short answer is yes. The good thing is: not by very much. Unless you are exchanging money by the higher-end hundreds of thousands of Linden Dollars for the tens of thousands of legal tender dollars, you wouldn't feel much at all - pennies, actually.

So why all the worrywarting? Because most people do not have a comprehensive grasp of just what the LindeX really is and how it works. So I'll explain in as pithy a way as I can.

First, LindeX is not a bank in any sense of the term. You are not placing money (virtual or real) into any kind of account. Rather the LindeX is simply a trading post. You are trading money: whether it be Linden Dollars (L$) or U.S. Legal Tender Dollars ($US). Additionally, your are not trading anything with Linden Lab at all. Rather, you are trading with other people who want what you are offering.

Whenever you buy Linden Dollars, you are not buying them from Linden Lab. You are actually buying from other Second Life users who are selling their Linden Dollars (also called "cashing out").

Linden Lab's only hand in it all is to act as the escrow agent. So, if you have L$1000 you want to trade into $US, you offer it for trade (or as LindeX puts it: for "sale"). Someone looking to "buy" L$ will then trade with you. The question is how many Linden Dollars will you give them for each $1 U.S. - and how many Linden Dollars the buyer gets for each $1?

So here is how it works:

Linden Lab creates a "money strong box" or "pool" for each trading denomination equal to $1 U.S. like so (I apologize I tend to interchange "strong box" and "pool" throughout this post, but they are meant to be the same thing):

  • L$250
  • L$251
  • L$252
  • L$253

...and so on. Call these trading "rates". The bigger (higher) the number of L$, the lower that value of each L$ - which means the value of the U.S. Dollar is higher. So, when you sell Linden Dollars, you want to sell at the lowest number possible (higher value for the Linden Dollar).

Most who buy or sell Linden Dollars will just do so at the current trading "rate", whatever it is at the time they actually place the order. However, if you click "Manage" in the LindeX portion of your Second Life Web Site Dashboard, you can actually specify your own rate if you are selling Linden Dollars.

These "manual rate" people are the ones who are determining the current exchange rate. If you look at "Market Data" in that LindeX part of your dashboard, you'll see several graphs.

The table at the bottom shows the "closing" (midnight SLT) exchange rates over the last so many days. A brief look at this table will show you just how stable the Linden Dollar has been over the last 30-days or so. Now, remember my example of the "strong box" above? It is easy to see it.

Click the "Sell L$" link in the "Manage" section of the LindeX area of your dashboard (not the "Sell L$" link under the LindeX title - click MANAGE first).

You are presented with two methods of selling your Linden Dollars: Immediately at the current exchange rate or you can specify exactly what rate you wish to sell for. Below this section is the exchange rate "pools" - the amount of money offered for sale at the differing exchange rates. If you choose to sell at a specific rate, your Linden Dollars will be placed into that pool.

The number next to each exchange rate is the amount of money in that "strongbox" waiting to be sold. One thing that is confusing to a lot of people is the low and high of the "sell" when you are selling Linden Dollars. So I reiterate: the lower the number, the higher the value of each Linden Dollar as you are getting more U.S. Dollar. So the idea is that you want to sell your Linden Dollars where the exchange rate shows the lowest possible number of Linden Dollars for each $1 U.S. L$1000 will go a little further in this case (hence, the Linden Dollar has more value).

[Edit: special note... notice these are the "best 20 rates" - to see the current exchange rate, look to the right for the best 20 rates in the BUY table, which is not shown here.]

Notice in this chart (the left side of the window called "Open Sell Orders" (screenshot taken at 0630, June 11, 2010) how many waiting orders there are at L$257? L$258? L$259? They are creeping up, aren't they? Look at that whopping number in the L$260 "box"!

That is the "run" on the LindeX people are speaking of. All those people looking to "cash-out". Hardly anyone willing to trade at L$261 (though it is early in the morning when this screenshot was taken). Here is why the "run" will actually stabilize the exchange rate:

In the case of L$261/$1 - the "current best selling" rate, all who buy Linden Dollars (at this rate) will get that many for each $1 U.S. they spend. This is a good deal for the buyer. However, when that pool of (as shown) L$973,770 dries-up, the next batch of Linden Dollars purchased will start coming from the L$260 "pool" - until more end-up in the L$261 "pool".

So, think of Linden Dollars as water and each exchange rate as a bucket - with the higher number of L$ being a "smaller" bucket. As the water is used-up from the smaller bucket, water is then taken from the next larger bucket, until more water is added to the smaller one.

It's a constant fill, empty, refill, re-empty and so on.

Here is where the stabilization comes from: see that L$260 "bucket"? It has a LOT of "water" in it. All that "water" (L$) must empty-out before the next "bucket" (L$259 rate) can be used at all. And not to mention the L$261 "bucket" will constantly be filled and emptied - and whenever there is "water" in that L$261 "bucket" - water is not removed from L$260 - it's "frozen".

Because of this, it will take a long time before any of the L$259 sell orders are ever filled. A very long time. However, if more people become impatient and decide to manually sell at L$261 or L$270 or more... then their could be a serious devaluing of the Linden Dollar. That would be a real "run" on the market.

Of course this is a constantly, fluid process. Rates are fluctuating wildly, much like the real world stock markets. Except that the LindeX is not a stock market (you are not trading ownership in anything, but rather directly trading tit-for-tat virtual currency for real currency: tokens.)

This is why the current "panic run" on the LindeX is a good thing.

At first blush, it would appear in the above graph that people are buying a lot less Linden Dollars on the 10th (causing some panic to set-in for some people).

However, this chart can be rather misleading. Looking at the table of transactions summary (below) will show that people have been purchasing Linden Dollars at the normal average rate. However, because of the mad rush to cash-out and place sell orders at a specific rate (L$260) as noted above, there is suddenly a massively large pool of sell orders at that rate. More than usual sell orders with "normal" number of buy orders causes the chart to appear skewed as though a minor "crash" is happening, when it really isn't.

Notice the Volume as compared to the Average. There is the answer. With such a flush of sell orders at L$260, there were some Second Life users who manually chose to sell at L$261 - causing all Buy orders to take from that pool first. And so it climbed as high as L$272 - an awesome deal for the buyer, not so much for the seller - a panic seller apparently.

Learn how to read the LindeX information, and then understand the information it is giving you. Disclosure: I am not any kind of financial analyst or anything likewise. I am explaining the LindeX as I understand how it works through simple logic and experience. Thus, responsibility for any transactions you make through the LindeX is yours and yours alone.