Ponzi Economics: Revealing the Game Behind Cryptocurrency with First Principles
As we enter the era of web 3.0, everything around us is becoming financialized and tokenized, and these mechanisms will only become increasingly complex and strange, with complexity being the favorite weapon of scammers.Written by: Jordi Alexander
Compiled by: TechFlow Friends
Chapter 1: The Answer to the Ultimate Question of Life, the Universe, and Everything
I heard you want to learn how to navigate the unknown waters of the Ponzi universe!
Since you've traveled so many light-years to get here, let’s get straight to the point:
The answer to the ultimate question you seek is (-4,+2).
This game theory notation represents an interactive outcome—(X,Y) signifies that Player 1 ends up with X and Player 2 with Y.
The fact is, if one player in a Ponzi scheme ultimately wins, the other player will lose even more.
Simply put, for every 2 Lamborghinis earned in a Ponzi scheme, more entry tickets must be extracted from those who leave empty-handed.
The game of resource accumulation is as old as human history, and after centuries of evolution, it has become increasingly efficient at tapping into our basic human needs.
Humans crave success, desire to belong to a community, and yearn to be part of something greater than themselves.
As we enter the era of web3.0, everything around us is becoming financialized and tokenized, and these mechanisms will only grow more complex and bizarre.
Complexity is precisely the weapon of choice for scammers. The more time and expertise required to engage in a game, the easier it is for people to be deceived into believing they can win.
So buckle up and hold on tight, we are going on a high-speed tour through the Ponzi universe to explore the "Three Fundamental Laws" of the Ponzi universe.
Chapter 2: The Three Fundamental Laws of the Ponzi Universe
In thermodynamics, an "isolated system" describes a system completely separated from its environment.
This introduces the concept of an "isolated investment system":
Funds entering an agreement solely with the expectation of generating monetary returns.
To illustrate, imagine a poker table with 8 people.
If 4 of them are professional players working there, and the other 4 are there for socializing and entertainment, then the table is an open system.
But if all 8 are professional players, then the table becomes an economically isolated system.
The First Law of Ponzi Economics:
The amount of money in an isolated system can be moved, but it cannot grow more than the invested amount.
An economically isolated system cannot create money; it can only redistribute the invested money. Therefore, while it can produce winners, this winning can only come at the expense of other participants.
Zero-sum games can have some cooperation, where people unite against others, ultimately turning into a Hunger Games scenario. But in the end, they remain adversarial, leading to a battle between players, a war of nameless against nameless.
When considering hidden costs, this is no longer just a zero-sum game, but a negative-sum game.
The Second Law of Ponzi Economics:
Entropy loss in an isolated system only increases over time.
Transaction fees; arbitrage bots and sandwich attacks lurk around us, intending to siphon off value; high mining costs; potential code vulnerabilities.
Just the operational costs of the system keep increasing…
…and this doesn't even consider whether the founders have left a backdoor to redistribute money to themselves.
As time goes on and costs accumulate, the amount of money players can win decreases. In the poker game example, if they keep playing for a long time, the casino's cut will grow higher, and eventually, all the money on the table will be taken by the casino.
As losses in the system continue to mount, we arrive at the final law.
The Third Law of Ponzi Economics:
As the amount of money in the system begins to decrease, the activity in the system also declines to zero.
Without sufficient fresh income, once the rocket's momentum runs out, the death spiral begins. People lose hope for future wealth, panic ensues, and the community and share of ideas spiral downward.
This death spiral may take months or years to manifest, but as the Ponzi scheme grows larger, it requires exponentially increasing capital to sustain the game.
Once a Ponzi scheme reaches the scale of billions of dollars, it relies on a large influx of new participants just to maintain the organic losses of the system, creating an insurmountable gravitational pull.
In the world of cryptocurrency, we have seen this evolution countless times in the realm of DeFi protocol forks. They add nothing particularly useful beyond branding and new chains, entering the Ponzi cycle. The positive incentives of liquidity mining gradually attract users to farm, increasing the total value locked (TVL), and momentum builds.
But without an influx from an open system, their ultimate resolution is still the death spiral. Next stop: Goblin Town:
Chapter 3: Framework of Fundamental Principles and FAQs
The basic structure of every game is the same:
Opening: People pool their money together;
Middle: Mechanisms for slicing and moving money;
Closing: The pooled funds are redistributed, determining winners and losers.
As we understand, the middle part is where psychological issues arise. So let’s skip this part and go straight to the final "closing" phase.
Whether you are entering the future of financial farming or earning through dancing in the web3.0 revolution, you should ask yourself:
"Who will be the benefactor providing returns to investors, and what compelling reasons do they have to choose to do so?"
Legitimate projects will have a clear answer to this question. They will explain the execution risks involved in the project, allowing potential investors to have a transparent understanding to make a decision.
Meanwhile, modern Ponzi brothers have learned the art of speaking in vague circular logic. When faced with this question, they will continually revert to psychological mechanisms.
Here are common (and unimaginative) plots of pure scams and "social Ponzi schemes."
Scam: We have a secret system that generates high returns through super AI machine learning trading/mining/Mumbo Jumbo. But don’t ask what it is, because it’s proprietary secret alpha.
Social Ponzi Scheme: We are like Bitcoin, but due to our superior design, we will replace the dollar as the "reserve currency," while Bitcoin will fail.
While these stories can make great marketing slogans, offering this alpha to the public or having the whole world decide to live off "XYZ shitcoin" clearly seems unrealistic. If you had a Ponzi scheme detector, it would definitely sound the loudest alarm in these cases.
FAQ 1: If it’s not black and white, how should we consider the degree of a Ponzi scheme? Isn’t everything a Ponzi scheme to some extent?
In fact, Ponzi schemes exist on a sliding scale, which can be divided into 4 levels from worst to best:
Open Scam: The founder has been plotting to recruit people;
Cryptocurrency Ponzi (CRYPTO PONZI): A plan that is not genuine and misleading, aimed at achieving real utility;
Might Fake It Till Make It: There is income, but they are highly incentivized and still striving to achieve enough of a moat to withdraw some incentives.
Not a Ponzi Scheme: There is a moat and it can generate sustainable income.
FAQ #2: Where do memecoins like $DOGE fall on the spectrum?
Memecoins are also a type of Ponzi scheme, but not maliciously. Since everyone is generally joking, they can be seen as willing to invest and gain entertainment value from the memo community. You could even understand it further as:
Haha, this is a funny meme. Other people might like it too, and it could become popular! Additionally, some of these people might be wealthy whales who decide to spend resources to create real utility for the coin! That’s why our coin is called DOGE.
For example, $DOGE holders can bet that Elon will use his money to create value for holders in exchange for his daily LOLs (laughs).
FAQ 3: If the First Law is true, and the protocol mechanism itself does not generate money, how can it pay out returns? Some say they can even maintain a 50,000% annual interest rate.
The important point is to understand that the returns paid out in the protocol's own tokens are misleading.
The value of the protocol remains constant, at Y tokens * V value per token.
Imagine it as a rectangle with a constant area; you can increase the length, but the width will decrease proportionally. The value of each token is diluted at the same rate.
A daily 10% interest rate (3660% annually) causes the value of each coin to decrease at the same 10%/day rate. The Smart(er) Coin game demonstrates this destructive effect.
Coins that people initially bought for 6 cents end up with less than one millionth of their value, all diluted by high annual interest rates.
However, high APY allows for a "Squid Game" scenario where players battle against each other; whoever sells first and lowers the price to match V can gain new value from other users.
FAQ 4: But what if no one sells, causing the price to rise? Isn’t that increasing market value?
Indeed, this is why market capitalization is not a good measure for manipulated or tightly held tokens. If liquidity is low, its price can easily be artificially maintained at a high level while pumping supply, at least for a while.
Here’s a zero-sum version (generously assuming no entropy):
However, this is always a game where selling is the dominant strategy; any other equilibrium besides (sell, sell) will not stabilize over time.
The only way to achieve a (3,3) outcome between two users not selling anything is to bring in a larger fool as a third player.
(3,3) is fake.
(3,3,-6) might be real, but it shouldn’t be praised.
Chapter 4: The Possibility of Redemption
If we give utility a very broad definition, then protocols can exit the isolated investment system and introduce utility in various ways.
Some are more dubious, but if a Ponzi scheme decides to abandon its thug-like behavior and turn legitimate, here are the exit paths.
Gambling Entertainment: The prevalence of physical and online casinos proves the vast market of people willing to exchange monetary EV for entertaining speculative experiences. Keep the PvP dynamics fresh and fun enough, and they can become sustainable projects.
Community and Meme: Creating a sense of belonging that ultimately makes people willing to pay for it. Fun content further enhances this opportunity. NFTs may be the best design in this regard.
Charity/Donations: If people believe the project benefits the world, they can make a "money -> feel-good charity" trade. So far, this is an unproven token model, but it may work at some point.
Investment Plans: Pooling funds from the Ponzi scheme into a decentralized hedge fund/yield aggregator/venture capital fund. While the business model itself has been validated, transitioning from a Ponzi scheme to an investment plan raises many unanswered questions and keeps people lingering.
Grouping Attention and Selling: Time and attention are the ultimate scarce resources, and now thousands of protocols/products are competing for people's time and attention, making monetization increasingly likely.
After capturing enough users, a protocol can attempt to generate revenue from the open system by packaging them into sellable products.
In web2.0, if you don’t pay for the product, you are the product.
In web3.0, if you don’t pay for your attention, someone else will seize your attention and pay for it.
