Is Entropia Universe Solvent? Can Virtual Economies Go Bankrupt?
Entropia Universe is an interesting game and is one of the only MMORPGs in the world (along with Second Life) with a real cash economy. The game uses a special currency called PED which is issued by the game's parent company at a fixed exchange rate of 10-1 ($1 buys 10 PED). The company both sells PED and buys back PED at this fixed ratio. So how does the game make money? You would think Transaction Fees, but these are practically non existent in the game (0%-5% for depositing and 1% for withdrawing). I was interested in finding out how the game was making money so I did some research. While the company isn't a scam per-se, some things are definitely a bit fishy.
Here's what I found:
- There are 109.7 million PED ($10.97M) worth of user deposits which have not been used or withdrawn that are currently sitting on player accounts. Mindark classifies this as "Contingent Debt".
- MindArk (Parent company of Entropia) had ~$3.36M in current assets (Cash + assets easily convertible to cash).
- Mindark has ~$4.36M in equity (Assets minus liabilities, ignoring PED liabilities)
- The company reported net deposits into the game of 70.1 million PED in 2016, up from 63.3 million in 2015.
Source: Mindark 2016 Annual Report. Mindark is the parent company of Entropia Universe.
The first thing that really popped out to me was that Entropia Universe's net assets (equity) aren't sufficient to cash out the PED currently sitting on player accounts. If these deposits were considered debt, Mindark would be insolvent today. However, even though Mindark refers to PED deposits as debt in their annual report, they are classified on the company's balance sheet as "Contingent Notes" and aren't counted as debt in calculating the company's equity. I suspect the reason Mindark doesn't consider PED deposits as actual debt is because they are not obligated to cash out PED deposits at the 10-1 fixed rate they advertise on their website. That can change at any time. The exchange rate has been fixed at 10-1 for over 10 years and likely won't change unless there's a dramatic increase in withdrawals.
So long as players don't all withdraw their PED this isn't really an issue, but it is something Entropia Universe players should keep in mind when depositing funds. The main reason its not necessarily an issue is that most PED that Mindark sells to players gets consumed in-game (Items are purchased from the company) and the liability disappears. This is why despite net deposits of 70.1M PED in 2016, the total number of unconsumed deposits did not increase much (in fact, it decreased from 122.5 million PED to 109.7 million. This decrease was largely due to the company not counting PED held in inactive accounts). In a normal year though, most deposits are consumed in-game and never have to be paid out.
Another odd issue with Entropia Universe seems to be the extremely long waiting period for the company to process PED to USD withdrawals. According to the company's own FAQ withdrawal requests take approximately 50 business days. That's over 2 months just to get your cash out of the game. Players ARE waiting upwards of 2+ months to get their cash too. There's absolutely no logistical reason the withdrawal process should take this long. A bank transfer takes no more than a few days. I suspect the company utilizes a long processing time to discourage withdrawals and also to give themselves ample leeway to adjust their PED to USD exchange ratio if they start seeing too many withdrawal requests.
Conclusion? Entropia Universe isn't in dire straights because players likely won't cash out all their PED en-masse, and even if they tried to the company could just adjust their exchange ratio as needed to remain solvent. Still, anyone considering depositing money into Entropia Universe as an "investment" should understand that the exchange ratio displayed on their website isn't guaranteed forever. If I was a player with substantial PED assets in Entropia Universe, I'd quickly get them converted back into USD in case the exchange rate changes in the future. And given that Mindark cannot redeem all PED in-game at their 10-1 exchange rate, this is certainly a possibility.