THE ECONOMICS OF PONZI: WHAT IS PONZINOMICS AND WHY YOU SHOULD AVOID IT?

Mar 17, 2023

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Introduction

What we’ve been noticing

Decentralized finance, or DeFi, has been gaining significant attention in recent years as an alternative to traditional finance. However, just like any technology, it has its drawbacks and vulnerabilities. Unfortunately, some DeFi projects have turned out to be nothing more than pyramid schemes disguised as legitimate investments. The lack of transparency and realistic tokenomics has led to the emergence of "ponzinomics," a term used to describe fraudulent financial schemes that rely on continuous investments to keep the project afloat. In this article, we will delve deeper into the concept of ponzinomics and discuss how investors can avoid falling victim to these fraudulent schemes.

Key Topics this Article will Cover:

The Economics of Ponzi: What is Ponzinomics
Fundamentals of Ponzinomics
10 Ponzinomics Mechanisms
How to Protect Yourself
Conclusion

The Economics of Ponzi: What is Ponzinomics

The term ponzinomics is a derivative of the words "ponzi" and "economics". It was coined to describe the economic principles behind ponzi schemes. A ponzi scheme is a fraudulent investment operation that relies on continuous investments from new participants to pay returns to earlier investors. It is a type of pyramid scheme that promises high returns with little to no risk. The term "ponzi" comes from Charles Ponzi, who became infamous for running one of the most notorious ponzi schemes in history.

Tokenomics, on the other hand, is a term used to describe the study of the economic principles behind tokens. It involves analyzing the design, distribution, and circulation of tokens in a given project. Tokenomics is an essential aspect of any cryptocurrency or blockchain project, as it outlines the fundamental principles that govern the token's value and use. However, not all token projects are legitimate. Some are created with the sole intention of profiting from unsuspecting investors. These projects often lack a clear utility or purpose, and their tokenomics are not grounded in reality. They rely on new investors to purchase tokens, which in turn are used to pay out returns to earlier investors. This is the hallmark of a ponzi scheme, and it is what gives rise to the concept of ponzinomics.

Fundamentals of Ponzinomics

In general, ponzinomics has three steps and it all starts with the sell side liquidity crisis. 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.

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. FOMO stands for "fear of missing out" and refers to the anxiety or apprehension caused by the possibility of missing out on a rewarding experience or opportunity.

In a ponzi scheme, profits or returns are paid to existing investors or members using contributions from new participants rather than from actual economic activity. In other words, the scheme can only continue to operate as long as there is a constant stream of new members or investors.

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

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 a community via twitter using an anonymous account to shill the project.
Use similar names of other promising tokens.
Shill on forums and other social media platforms.
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 and slow public token release to allow for private presale to dump tokens.
Self-audit of smart contracts by anonymous creators

How to Protect Yourself

How can we avoid a token that is based on ponzinomics? Do your own research. If you are interested in a project, take your time to read their tokenomics and whitepaper. If you read the whitepaper and see a red flag, no matter how small, that's enough to avoid investing.

Here are some of the red flags to watch out for.

A guaranteed promise of high returns with little risk.
A consistent flow of returns regardless of market conditions.
Investment strategies that are secret or described as too complex to explain.
Clients not allowed to view official paperwork for their investment.
Clients facing difficulties removing their money.

Conclusion

Ponzinomics is an improper use of economics. To scam people and commit fraudulent activities. Although ponzi schemes have been used by scammers for over a hundred years. They were able to thrive in the crypto space due to its decentralised nature and the lack of elaborate regulations governing the sector. Because the crypto market is vulnerable to these types of schemes, it is important to practice due diligence and be cautious before investing in any project. Remember, if something sounds too good to be true, it probably isn’t.

Watch the video below to learn more about ponzinomics. Don’t forget to like and subscribe so you don’t miss out on important updates and up-to-date videos.

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Lisa JY Tan | Founder and Managing Director
E: Lisa.T@EconomicsDesign.com | W: EconomicsDesign.com