EP 24: Economics of Ponzi

What is Ponzinomics

Lisa JY Tan

Sep 11, 2020

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TLDR below. This is not financial advice.

Season 1 is for the foundations of economics design, token economics and token engineering. The fun stuff comes now in Season 2!

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General Conclusion

Ponzinomics = economics + ponzi.

What's ponzinomics? It's the economics of ponzi scams.

Economics has 3 basic fundamentals. I talk about them all the time:

1) supply

2) demand

3) opportunity cost, which translates to behaviour of people.

Ponzinomics also has 3 basic fundamentals.

1) supply

2) demand

3) funky economics that is an amalgamation of a few things, but mainly to drive FOMO for short-term gains without long-term results!

In this episode, we chat about what is ponzi in defi, what ponzinomics is, 10 ponzinomics mechanisms, 2 case studies and how you can protect yourself .

⚠️ Remember, economics is a TOOL. It can be used for good or bad. It's good when economics is used to incentivise certain behaviour for an economic value. It's bad when it's used to cheat, scam or steal. Don't blame economics. Economics is neutral. ⚠️

1. Fundamentals of Ponzinomics

What is ponzinomics? In general, it has three steps. It all starts with the sell side liquidity crisis.

Ponzinomics in 3 steps

You have very low supply
Your prices increase somehow. E.g. It could be just you making a lot of transactions to the very little supply and it increases prices. Or it could be you doing some stuff to have this short term price increase.
You create this demand. Start tapping into the FOMO.

In general, ponzinomics is trying to induce this sell-side liquidity crisis.

What does that mean? Sell-side is the supplier side. Liquidity crisis means it's not enough quantity.

So the sell side liquidity crisis means that there aren't enough tokens for sale for everyone to buy. How do we do that? By reducing supply and then increasing demand.

Going back to the token economics framework that I created, it's all about creating robust sustainable incentives within your ecosystem. The system can continue to grow so that the system can be accruing a lot of value. These internal tokens are a way to represent the economic value. The real economic value that's being created in this network. When it's traded in secondary markets, that's how we get price discovery and a monetary value to this economic value.

In general this system works. It becomes ponzi when the monetary value of this internal token only exists because of the secondary market pumps and dumps. Like limit supply, drive demand. In general, they're good. But when you use all these mechanisms in a secondary market to create this kind of artificial demand inflation, these kind of short-term price liquidity crisis, that's how you get ponzi scams.

The price discovery reflects the price increase. The price discovery it's not because of the primary market that's driving the demand and growth. It is just the funky economics that you're doing in the secondary market that is pushing up prices so much. That's where it becomes a scale so all these are still quite fluffy and technical.

2. 10 Ponzinomics Mechanisms

Fork something well-known.
List token on Uniswap pool with similar symbols but it’s fake.Making some transactions to the liquidity pool.
Build Community via twitter. Using an anon account. Shilling the project.
Use similar name of promising token
Shill on forums
Rug-pull liquidity move
Listing tokens that will never be traded
Switch-a-roo the real token’s link with fake token’s link
Presale + slow public token release to allow for private presale to dump tokens
Self-audit of smart contracts by anon creators

3. How to Protect Yourself

There are scams all over the place.

Scam 1: YFFI Price went from $619.23 to $4.49. Project’s seven founders began farming YFFI 5 WHOLE hours before everyone else.

Scam 2: YFII: $1,124.41 and dipped to a low of $140.46

Scam 3: SUSHI token falling over 50% after vampire migration and the main developer cashed out $15m in ETH and left the system.

So how do you protect yourself?

Please do your own research!

Figure out the founder’s intent
Do due diligence
Understand the risks
Learn about the protocol and financial aspects
Understand the economics of the system

TLDR:

Ponzinomics is using economics for bad reasons. To cheat and scam people. It's mainly done in the secondary market to capture the FOMO and exit the network before everyone does.

Get smart: Observe the various ponzinomics mechanisms in place and avoid the scams.

Get smarter: Or if you know that it's a scam, get in when it's low, and exit before everyone exits.