What truly constitutes a Ponzi scheme is the "mismatch" and "self-circulation" in the financing structure and incentive model.
Written by: Iris, Deng Xiaoyu
"Is virtual currency a Ponzi scheme?"
This is almost everyone's first question when entering Web3. Even on some social media platforms, you can still see the assertion that "virtual currency is a Ponzi scheme."
However, such doubts are not without basis.
In the past few years, many projects have indeed built schemes under the guise of "mining rebates," "daily returns," or "stable arbitrage" through so-called "Token incentive models," creating a game of passing the parcel. Therefore, those who do not understand Web3 or even virtual currency often associate token issuance with Ponzi schemes.
However, from a legal perspective, lawyer Mankun believes that the root of the problem does not lie in the tokens themselves, but rather in whether the Web3 project has constructed a long-term self-consistent economic system, that is, the design of the financing structure and incentive mechanisms.
So, what kind of structure is a typical Ponzi scheme? Next, lawyer Mankun will first break down three common incentive and financing structures in Web3 projects to see how they gradually fall into the Ponzi trap.
First Type: Typical Ponzi Scheme
Typically, the core characteristics of these projects are very clear: no real product, no external income, relying entirely on the funds of new users to pay the promised returns to old users, ultimately leading to an inevitable collapse due to a broken capital chain.
Everything they do is merely a repackaging of old Ponzi tricks in a new Web3 guise.
A typical example is PlusToken, which exploded in 2019. This project, which was packaged as a "blockchain wallet + quantitative trading," claimed that after users deposited virtual currency into the wallet, the project team would operate the funds through "quantitative trading" and provide stable returns of up to 10% monthly. At the same time, it set up a multi-level distribution system, where users could earn extra commissions by inviting others to join, forming a clear pyramid structure.
However, PlusToken never disclosed its so-called trading strategy, and the on-chain fund flows showed no signs of real profit. As subsequent funds became unsustainable, the project ultimately collapsed in 2019. According to reports from Chinese police, the case involved over 20 billion yuan, constituting typical illegal fundraising and pyramid selling activities.
Another example is Bitconnect, one of the first projects globally to be classified as a crypto Ponzi scheme by regulatory authorities. It claimed to be an "automated investment platform," where users could exchange Bitcoin for the platform's token BCC and participate in a "daily fixed income plan," with annual returns far exceeding 100%.
At the same time, Bitconnect set up a complex referral reward mechanism to expand its user base through multi-level recruitment, with all profits coming from the continuous influx of new user funds. However, the project never disclosed the real logic behind its fund operations, and the "trading bot" remained merely a promotional gimmick. Ultimately, after user growth stagnated in 2018, the platform suddenly shut down, and the token plummeted by 99%. The U.S. SEC determined it constituted an unregistered securities offering and a Ponzi scheme.
These cases collectively illustrate one issue: when a Web3 project promises "stable returns" but cannot provide real, verifiable products or sources of profit, relying solely on continuously attracting new funds to pay off old investors, it is almost a replica of a Ponzi structure.
If the statement "virtual currency is a Ponzi scheme" holds true, it must be directed at this type of scam.
From a legal perspective, these projects not only involve illegal fundraising but may also constitute pyramid selling, money laundering, and other crimes. Moreover, they are not "innovations" in Web3 but rather "Web3 versions" of Ponzi schemes.
Second Type: Near-Ponzi Structure
If the first type is an overt Ponzi scheme, the second type is much "smarter."
They often do not directly promise fixed returns and do not use blatant enticing phrases like "daily 10%" or "monthly principal return." However, when you analyze their financing structure and token distribution logic, you will find that although this model does not directly appear to be a Ponzi scheme, it still fundamentally repeats the old trick of "new investors taking over from old ones."
The most common structure for these projects is: extremely high FDV (Fully Diluted Valuation) and extremely low initial circulation.
For example, a project may have an initial token opening price of $0.5, with a total issuance of 2 billion tokens, theoretically giving it an FDV of $1 billion.
However, it is important to note that at this point, only about 0.5% of the tokens, or 10 million tokens, may actually be in circulation, equating to an actual market cap of about $5 million. In other words, the "valuation of $1 billion" seen in the market is merely a "paper valuation" based on a very small circulating supply, not equal to the total funds the market is truly willing to pay for this project.
Additionally, the price of these circulating tokens is determined by the initial public users or even retail investors through free trading, while private placement institutions may have acquired the tokens at a cost of only $0.01, and once the token is issued, they can gradually cash out at dozens of times the profit once the unlocking period arrives.
Previously, SafeMoon faced a collective lawsuit due to similar designs. The project created price support through a high tax mechanism (charging high fees for buying and selling) and heavily promoted concepts like "automatic buybacks" and "community lock-ups" to attract users to continue buying. Although it did not explicitly state returns, the project team and early KOLs exited at high points through asymmetric information and price advantages, leaving many community users struggling to "break even" during the bear market.
This constitutes a form of "structural arbitrage": the initial price is determined by a few individuals' games. The project itself has no income, is overvalued, and has very little circulation. Once the high valuation is used as a narrative in the secondary market, later investors become the ones left holding the bag at high prices.
However, from a compliance perspective, it is difficult to classify this type of structure as a scam, as it neither promises returns nor engages in false advertising. Yet, its profit logic and incentive design essentially make later investors bear the costs incurred by earlier ones, completing another form of "Ponzi cycle." Moreover, once regulatory intervention occurs or user confidence collapses, the project will quickly go to zero, making it difficult for ordinary investors to seek redress or recover losses.
Third Type: Ponzi Tendencies
The third type of project often has real business, teams, and products, and the project team attempts to complete financing in a compliant manner. However, they still cannot escape another deep-seated issue, namely the imbalance in the design of the incentive mechanism and financing structure, which can easily lead to the project being inferred as having a "Ponzi tendency." This is also the legal risk that lawyer Mankun hopes to help project teams avoid.
For example, a GameFi project may indeed have a playable product, thousands of daily active users, and some in-app purchase revenue at its launch, but it adopts an excessively high estimated value (FDV reaching hundreds of millions) and extremely low initial circulation, while allowing VCs and KOLs to enter at very low costs, without sufficient lock-up and transparency mechanisms. Community users, driven by "having a product + popularity," buy in at high prices, ultimately becoming the ones left holding the bag during the token unlocking wave.
Another example is some projects that use the SAFT structure for financing. Although they do not explicitly promise returns and possess certain technical capabilities, they fail to clearly disclose the prices and release arrangements for each round during the token issuance process, and the protocol's income cannot support its token valuation. Once market enthusiasm declines, the token price plummets, leading to user losses, a crisis of trust, and even regulatory intervention.
The key issue with these projects is that they do not effectively anchor the token value to real business, and the incentive mechanism cannot remain self-consistent in the long term. This may lead to the token issuance becoming overly financialized, causing the entire system to slide towards Ponzi logic under pressure testing. Although this type does not necessarily constitute fraud or illegal fundraising, once market funds break down and the token price decouples from the project value, it will still trigger a liquidity crisis. Additionally, from a regulatory perspective, this type of structure may also involve insufficient information disclosure, misleading advertising, and even suspected "packaging financial risks with technology" as a form of soft violation.
While we should not categorically label these projects as Ponzi schemes, we must also acknowledge that structural non-compliance and unreasonable mechanism design are themselves breeding grounds for Ponzi tendencies.
How to Avoid Falling into a Ponzi Scheme?
It can be observed that what truly constitutes a Ponzi scheme is the "mismatch" and "self-circulation" in the financing structure and incentive model. In simple terms, if a project cannot generate revenue through real business but relies on continuously attracting new users to maintain a facade of prosperity, then regardless of whether it is cloaked in Web3, it will ultimately face a breakdown of funds and losses for investors.
So, how should Web3 projects design their financing structures to "avoid suspicion before issuance"? How can investors identify and avoid structural risks? Lawyer Mankun believes that project teams and investors can start from the following points.
For project teams, the key to constructing a "non-Ponzi" structure lies in four points:
Reduce "paper valuation" to avoid FDV traps. Initial valuations should match the actual business scale and revenue expectations, and should not blindly inflate FDV to create false prosperity. Especially avoid inflating token prices when circulation is extremely low to prevent "air market cap" from misleading investors.
Reasonably arrange token release mechanisms. The release rhythm of tokens in all rounds should be equally transparent, avoiding structural mismatches like "1% cost for private placement—50 times valuation for public offering—community high position holders." VCs, KOLs, and core teams should have clear lock-up plans and set reasonable linear unlocking mechanisms.
Publish a complete token distribution and release table. This should include prices, quantities, lock-up rules, unlocking schedules, etc., ensuring that the structure is verifiable and the rules are transparent. The project team has an obligation to provide investors with clear economic model disclosures, rather than using "complex curves" to obscure release risks.
Establish real business support. Whether it is protocol income, service fees, or NFT sales, only by forming a stable and sustainable business model can the token have intrinsic value support. Ensuring that user profits come from product growth rather than price games is the fundamental logic to prevent "Ponzi tendencies."
For investors, avoiding "Ponzi risks" should focus on three core questions:
Where does my profit come from? Is it from product revenue sharing, protocol incentives, or purely relying on the next wave of people buying in? If the source of profit cannot be explained with clear business logic, extra caution is warranted.
Who gets the tokens first, and who is left holding the bag last? It is essential to understand the project's financing rounds, token distribution structure, and unlocking periods. If the token circulation is extremely low but the paper valuation is very high, and early holders are about to unlock, you may be standing at the edge of a sell-off.
Is the investment rhythm compliant, and is the information transparent? Projects that do not publish clear white papers, have vague token structures, lack price disclosure mechanisms, and have inconsistent unlocking times often indicate unstable structures and information asymmetry, posing risks far above average levels.
Virtual currency is not an original sin, and token financing is not inherently a scam. Just like the currently popular track of RWA, tokenizing real business data for financing is quite appropriate.
For the future of the industry, only by returning to designs that genuinely link incentives and value can Web3 move further.
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