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  2. #EducationalSeries #PonziScheme In today’s lesson, we’ll start with a legendary figure named Charles Ponzi. You read that right — this type of risk/attack is actually named after a person. Charles Ponzi was an Italian-born speculator who lived in the 19th and 20th centuries and immigrated to the United States in 1903. In 1919, he orchestrated a sensational scam. He falsely claimed to own a company that was highly profitable — in today’s terms, essentially an empty shell company. Charles Ponzi promised that as long as you invested in this shell company, you would receive a 40% profit within three months. Such a rate of return was unimaginable in the early 19th century. Charles Ponzi successfully attracted 30,000 investors in just seven months. Then comes the key question: how could a shell company pay out a three-month return as high as 40%? Judging by the duration, Charles Ponzi kept this going for about a year, which clearly means he managed to pay at least three large rounds of interest. The truth shocked everyone at the time. Charles Ponzi used money from new investors as “quick profits” to pay earlier investors, in order to lure more people into the scheme. As long as there were enough new investors, the scam would not be exposed. But as the number of people who needed to be paid interest kept growing and new investors could no longer support the huge upstream interest, the scheme would directly collapse. In the end, it was only when the entire scheme collapsed that people, who had been blinded by profits, finally woke up. Later generations named this model the “Ponzi Scheme.” So, in the crypto industry, the most terrifying thing is not a market crash, nor a hacking attack. It is when you think you are participating in an “innovative business model,” but in reality, you are standing on top of a “capital pyramid” that could collapse at any time. The name of this pyramid — Ponzi Scheme. Ponzi Scheme: A “Rob Peter to Pay Paul” Financial Illusion The essence of a Ponzi scheme is: using money from later investors to pay returns to earlier investors. It is not investment, and it does not create value. It is a structure that relies purely on continuous capital inflows to stay alive. A typical Ponzi scheme has four core characteristics: No external profit source: All returns come from new users, not from an actual business model. Promised returns far above market average: 20% annualized is common, 200% annualized still gets believers, and 2000% annualized is almost routine in the crypto world. The capital pool relies entirely on continuous growth: As soon as net inflows slow down, the system collapses immediately. Early returns are real and withdrawable: So participants firmly believe it is a “sustainable model.” The secret behind the success of Ponzi schemes is this — people at the top really do make money, while people coming later think, “Everyone else is making money, I can’t miss out.” Some even gamble that “the scheme won’t collapse before my exit.” Losers are always those who enter at the bottom of the pyramid, and participants always assume they themselves will not be that person. Why Have Ponzi Schemes Never Left the Crypto Industry? Innovation in the crypto industry moves extremely fast, and every cycle gives birth to new concepts: GameFi Liquidity mining Stablecoins SocialFi Simulated mining Algorithmic models Node staking High-frequency arbitrage bots “Guaranteed profit” financial products Sound familiar? These concepts are not inherently bad. But the reason Ponzi schemes repeatedly explode in the crypto space boils down to one fundamental point: as long as there are high yields, information asymmetry, and rapidly increasing capital inflows, Ponzi structures will naturally emerge. And the crypto world is naturally full of these elements: High yields are easily packaged as “technological innovation” Smart contracts are transparent but too complex for most people to understand Retail investors pour in quickly, and capital liquidity is high Global participants make regulation extremely difficult FOMO is intense, and users are afraid of missing out As a result, Ponzi schemes become the “ghost” haunting every new cycle. They never disappear — they just come back with new packaging. The 5 Most Common Disguises of Ponzi Schemes in Crypto Ponzi schemes are hard to identify because they never tell you “I’m a Ponzi.” Instead, they dress themselves up in various narratives. The following five are the most common disguises: Disguise 1: High-Yield DeFi (Disguised as Liquidity Mining) Many platforms claim to offer 100% fixed returns with principal protection, and the promised yield is allegedly generated by “automatic arbitrage strategies” or “intelligent quant systems.” But in reality: There is no actual trading record All returns come from new funds entering Token inflation itself is a Ponzi structure Once growth stops, the entire pool can go to zero within hours. Disguise 2: Node Staking, Mining Power Sales, and “Ecosystem Node” Programs Many projects sell so-called “nodes”: Buy a node → get daily dividends Buy hash power → receive fixed output Lock tokens for staking → earn high rewards Join as a node → earn tiered referral income But often: Nodes have no real business behind them The project does not generate cash flow The so-called “hash power” is fabricated All returns are generated by “selling nodes” In essence, it is: using newcomers’ money to pay older participants, then using those payouts to attract more newcomers. A classic Ponzi loop. Disguise 3: Algorithmic Stablecoins / Dual-Token Models Some projects design a supposedly “Bitcoin-killer-level” algorithmic model: Token A is stable Token B absorbs volatility The two can be minted and redeemed to support price levels Users earn yield through minting Annualized returns can reach hundreds or even thousands of percent In reality: the system’s stability relies on continuously growing demand. Once buying pressure weakens, the system immediately enters a downward death spiral. The “arbitrage mechanism” fails in sharp crashes, and the price support is based on bubble, not real assets. These projects often operate with impressive sophistication early on, but once capital starts flowing out, they collapse in an extremely short time. Disguise 4: Unlimited Inflation in Social Tokens / Game Tokens / “Ecosystem Tokens” Many GameFi / SocialFi projects don’t look like Ponzi schemes at first glance, but in fact they are: Users constantly mint tokens by completing tasks Token value relies entirely on new users buying in The game or ecosystem has no real income The tokens that users “earn” are just being paid for by other users In other words, it’s a zero-sum capital pool where players are pitted against each other. During growth, it looks like a “revolutionary model.” During decline, it becomes a “mass stampede.” Disguise 5: Cross-Chain, Layer 2, RWA, “Ecosystem Funds” and Other Fancy Stories More advanced Ponzi schemes package themselves with “technical narratives”: RWA backed by premium real-world assets Quantum encryption AI × blockchain Fifth-generation cross-chain technology Ecosystem fund initiatives National “chain reform” partnerships Overseas master fund acquisition plans These projects often have: Very strong marketing Active social media presence Numerous KOLs Large communities But: The business model has no real profitability Token value depends on “narrative,” not “revenue” More importantly, the so-called “asset collateral” cannot be independently verified. At that point, it becomes clear: the main source of funds is new users buying in. The more “grand and sophisticated” the narrative, the easier it is to hide a Ponzi structure underneath. What Truly Fuels a Ponzi Scheme Is Not the Project, But Human Nature (Underlying Psychology) Ponzi schemes work not because they are clever, but because participants want to believe. Crypto users generally share several psychological traits: 1. “If others are making money, I must make money too” — FOMO Seeing others profit quickly leads to anxiety: “If I don’t get in now, I’ll miss the opportunity!” “They all invested, so it must be safe!” Ponzi schemes are best at manufacturing FOMO. 2. “I’ll just play small, as long as I exit fast enough” Many users think: “I know it’s a Ponzi, but I’ll get out earlier than others.” This is extremely common in the market, yet every Ponzi collapses faster than people can react. 3. “I see real returns, so it must be real” The trick of a Ponzi scheme is: Early participants really can withdraw, really do make money, really do receive dividends. This quickly strengthens their belief. 4. “If it were a scam, why would so many people join?” This is a reverse logic trap. The more people join, the more stable the Ponzi becomes. The more stable it appears, the more people join. Eventually it becomes a massive capital black hole. 5. “Strong personal branding, frequent live streams, and large communities” ≠ not a Ponzi Ponzi schemes excel at operating social media and crafting strong personal brands. Their marketing budgets are often much higher than their tech budgets. A powerful public persona never proves that a project is not a Ponzi. The Life Cycle of All Ponzi Schemes Is Almost Identical — Six Stages Stage 1: Early FOMO High yields attract a large number of users Early participants receive real returns KOLs begin promoting The team showcases “technical strength” The narrative keeps expanding At this stage, almost no one suspects anything. Stage 2: Crazy Expansion Phase Community size explodes Capital pool expands rapidly Returns can still be paid consistently Token price keeps rising Massive exposure in media and social platforms This is the most dangerous phase because it looks the safest. Stage 3: Capital Inflow Growth Slows Cracks begin to appear: New user growth slows Trading volume drops Community excitement declines Withdrawals become slower The team starts pushing more aggressive “new products” The most fragile point of a Ponzi system is this: As soon as inflows are lower than outflows, the system immediately destabilizes. Stage 4: Liquidity Crisis Users begin withdrawing heavily The project limits withdrawals and liquidity Various excuses appear, such as “upgrades” or “maintenance” The community begins to split User trust starts collapsing This phase is very short — sometimes just a few hours. Stage 5: Death Spiral More and more people attempt to withdraw The project is unable to honor redemptions Token price crashes Users rush to exit The community falls into panic The capital pool dries up For a Ponzi scheme, once the death spiral begins, it is irreversible. Stage 6: Collapse All users can no longer withdraw Social media accounts are shut down The team disappears The token goes to zero The capital chain completely breaks What remains is chaos and angry users. No Ponzi scheme can escape this final step. How to Identify a Ponzi Scheme? (The 10 Most Practical Red Flags) This is the part most worth bookmarking for regular users. If a project meets any three of the following, it is highly suspicious: Returns are unreasonably high (especially fixed returns). In the real world, there is no stable high yield. Returns are independent of market conditions — making money whether the market rises or falls? Unrealistic. All returns come from “recruiting new people” or “selling nodes” — this is the most typical Ponzi model. The project has no external revenue source (business model cannot be verified). The team is anonymous and refuses audits. Withdrawals require queuing or have strict limits. The larger the capital pool, the higher the returns (classic pyramid structure). Tokens have unlimited inflation — user token production far exceeds real demand. The team relies heavily on marketing rather than product or technology. The project piles up grand “ecosystem narratives” but has no actual implementation. Each of these individually can exist reasonably in the crypto world, but if a project hits five or more, you should exit immediately. Conclusion: Ponzi Schemes Are Cyclical, but Awareness Is One-Time The crypto industry will continue to innovate. Narratives will continue to change. Cycles will repeat. Temptations will keep appearing. But your awareness only needs to be upgraded once. Remember this: Real innovation creates value. Ponzi schemes create illusions. As long as you can read the model, understand the risks, and identify the structure, you will never be the one standing at the bottom of the pyramid.
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