What kind of animation should be used to portray a virtual world like Second Life? Or should even the virtual world be live-action?

i think making the difference subtle at first and then maybe becoming more and more distinct may work well. small things at first, like no clouds, everybody is polite... then the next visit we notice people smoking in restaurants/bars, no traffic... then things get more vibrant and the people become more interesting (however you chose: clothes, actions, speech)... and so on. just spitballing. i have been thinking about writing a script based on second life for a while, very interesting i believe. congratulations on getting a draft done, and good luck with seeing it come to life...and life :)

The virtual world would have to look very distinct from the real world, but in some fantasy movies such as Pan's Labyrinth the alternate world is very obvious even with live action. On the other hand special effects such as nuclear explosions are easier and cheaper to achieve using animation.