Tokenomics of a Ponzi Scheme

Ponzi schemes, pyramid schemes and zero sum games

According to the SEC, a Ponzi scheme is an investment fraud that pays existing investors with funds collected from new investors.

  • Overly consistent returns
  • Unregistered investments
  • Unlicensed sellers
  • Secretive, complex strategies
  • Issues with paperwork
  • Difficulty receiving payments
  • No genuine product or service is sold
  • Promises of high returns in a short time period
  • Easy money or passive income
  • No demonstrated revenue from retail sales
  • Complex commission structure

How could we evaluate the ponziness of a project? The NGMI score.

On a scale from 1 to 100, what’s the ponziness of a project? I guess it’s not exactly ponziness we are evaluating but also pyramidness and zero-sum gameness, so maybe we can establish a new measure. The ‘Not Going to Make It’ score or short NGMI score maybe? The higher a project scores, the higher the likelihood of it requiring more money to flow in to keep it alive i.e. it might not make it.

  • Does it promise returns? How risky are they? Where do they come from (is more money required to achieve the returns)?
  • How Sustainable is the price action?
  • What does the project produce / sell? Is the project transparent about sales / income / revenue streams?
  • How many tokens were distributed to founders/investors/advisors and when will they be unlocked?

Is Ethereum NGMI?

In Doombergs’ diagram, I see Ethereum like this:

  • Value in terms of real world use is still limited, as you cannot buy a coffee with ETH and aside from moving tokens around in DeFi there is not all too much use. With DAOs as the future of work, real-estate on-chain and initiatives like Klima DAO, it’s only a matter of time until we have a breakthrough in real-world usefulness.
  • Ethereum has an active community of developers working on migrating the blockchain to proof of stake — debates about PoW vs. PoS aside, one could argue that lower transaction cost and scalability might increase the value of it.
  • Raoul Pal attempts to value a network, such as Ethereum, by DAILY TRANSACTION VOLUME X NUMBER OF ACTIVE USERS, which is certainly growing on Ethereum.
  • Returns come from the usage of the Ethereum ecosystem. Each transaction incurs a fee, which is paid to stakers / miners.
  • Token terminal gives information about the revenue stream of Ethereum, L2s and applications on top. They argue that the token burn introduced with EIP-1559 is like a share buyback and as such increases the value of tokens in circulation.
  • On the one side the killer use case for Ethereum might be just around the corner, making the network super valuable or we might see the Ethereum merge running into issues making it less valuable.
  • Bloomberg analysts seem to value $ETH at $6128 USD based on discounted cash flows, factoring in the 200% annual growth in transaction fees (amounting to 9.8bn in 2021).
  • Like most blockchains, the stats around transactions, gas fees etc. can be seen on a block explorer (in this case Etherscan). Transparency is not an issue here.
  • Even the newly introduced token burning mechanism is very transparent — watch the burn.
  • The inflow pipe does not need to be larger than the outflow pipe. The relevant metric here is usage. If Ethereum is used, transaction fees are charged and paid to miners / stakers, giving them an ROI and burning tokens akin to share buybacks. If usage continues and even grows there must be some value in it.

What can the Tokenomics DAO learn from this?

As we indicated in our first post, we want to take the community on the journey of thinking through why the Tokenomics DAO needs a token. Understanding what makes up a ponzi might be useful when designing our own token. Not because we want to create a ponzi, but because we want to be clear and transparent about what we do and why what we do has value.

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Florian Strauf

Florian Strauf

tech guy curious about investing, crypto, decentralization and technology in general.