How to distinguish between MLM coins and Ponzi schemes in the cryptocurrency circle?

In recent years, the world's attitude towards Bitcoin has fluctuated, but blockchain technology, one of the underlying technologies of Bitcoin, has received increasing attention.

The crypto world is an intensive concept production machine. It either melts, gathers, or grafts, giving birth to many new concepts. Consensus mechanism, encryption algorithm, ecological incentive, mining calculation, cross-chain accounting, lightning network...

Image source: PANews

For a newbie entering this industry, the first step is to distinguish various concepts and try hard to understand the true meaning and function of each technical concept.

Faced with the encrypted world with only a string of code and hash value, many people are confused. Between technology and huge profits, the scammers' schemes are so confusing that it is difficult to distinguish between true and false.

Looking at the pyramid schemes in the past two years, the easiest thing for the public to distinguish is to use pyramid schemes and concepts to confuse the ecological incentive mechanism of blockchain projects, so as to achieve the real purpose of large-scale money-making. So, what are the real blockchain ecological innovations? What are the pyramid schemes for the purpose of making money?

This article attempts to use more intuitive writing to suggest some methods of distinction.

1. Incentive methods of traditional blockchain token economy

Bitcoin uses blocks and transactions as decision-making, and mining rewards as participation motivation. Ethereum uses the consensus mechanism of POW+POS as an ecological incentive mechanism. These are already well known to many people.

EOS uses the consensus mechanism of DPOS as the driving force of ecological incentives. When BM designed the DPOS mechanism, he implemented 21 voting super nodes. Each node has an annual income of nearly 100 million yuan, and these 21 nodes are called EOS super nodes.

DashDAO is about how to allocate funds in the fund pool to a number of proposals, with token appreciation as the driving force. (See "The Historical Rhythm and New Paradigm of Dao" by Daling Think Tank). Dash is an early project that implemented DAO, which was forked from Bitcoin.

Compared with Bitcoin, Dash adopts a two-layer network architecture: the first layer of the network is mainly controlled by miners, performing some specific network functions, such as creating new blocks; the second layer of the network is composed of "masternodes", which mainly perform functions such as secure storage of user data, processing light wallet transactions, and facilitating instant and private transfers.

It should be noted that to become a masternode, you need to stake at least 1,000 Dash coins. These staked coins can be spent at any time, but correspondingly, the masternode qualification may also be revoked.

Incentive method:

1. 10% of the block rewards will go into a fund pool, which is used to fund proposals that promote the prosperity of the Dash network or ecosystem.

2. For ordinary participants in the Dash ecosystem, 10% is the driving force that motivates them to participate.

3. For the master node, the master node of a group can obtain 45% of the block reward.

Effect:

1. External evaluations are mixed.

2. The entry threshold for both ordinary participants and master nodes is not very high

3. Relevant participants can enter or exit at any time.

With the launch of Polkadot, MolochDAO, DigixDAO, GenesisDAO, DxDAO, WBTC DAO and PolkaDAO, 2019 can be said to be a year of great development for DAO. DAO has gradually transitioned from a centralized bounty platform to a distributed storage, interactive interface and a wider decentralized financial service platform. Not only has the security of smart contracts been greatly improved, but the development focus has also shifted from a single guiding decentralized infrastructure construction to the management and application of existing systems, protocols, and platforms.

Data source: Datalight

2. New Node Fission and Fission Marketing

In 2019, the blockchain industry demonstrated tremendous market transformation capabilities, mainly in the form of economic ecological incentives, such as node fission, fission new users, super nodes, Dutch auctions, etc., to accelerate the development of project ecology towards large-scale decentralization.

1. Algorand: Consensus mechanism innovation + Dutch auction, a historic initiative

Algorand is a blockchain protocol developed by macali of MIT Media Lab and its collaborators, claiming to be a new consensus protocol BA that breaks the "impossible triangle". In addition, Algorand has also adopted a new approach to solve the problem of token distribution, which is the Dutch auction.

First, let's introduce what a Dutch auction is. A Dutch auction is also called a "decrease-price auction" and is a special form of auction. The bids for the auction items also decrease from high to low in a predetermined step. People can bid at any time and report their total bid amount. As the price drops and the bid amount increases, the number of items calculated based on the lowest bid price will decrease, until the auction ends when all items calculated based on the lowest bid price are sold out.

Algo is the first crypto asset ever to achieve token distribution through a Dutch auction.

The main logic of the Dutch auction:

1. Set up a short option;

2. The earlier you participate in the auction, the higher the price you will get;

3. The starting price is determined by the users participating in the auction in the market;

4. Early private equity can be cashed out in the secondary market at any time.

Advantages of Dutch auction for project owners:

1. The profit of short options belongs to the project owner;

2. The difference in the auction price belongs to the project owner;

3. The useful life of Token funds is controlled by the project party;

4. The auction method is conducive to early financing of projects;

The first auction started at $10 per Algo. As the price dropped, new buyers would buy at lower prices. Figure 1

Data source: DalingRe Data

The auction ends when the price is $0.1; or when demand exceeds supply, the price is also $0.1. Figure 2

This token distribution method has obvious algorithm requirements and the characteristics of market-determined prices.

Data source: DalingRe Data

As an auction method opposite to the English auction, the Dutch auction does not dominate the market. However, Algorand uses this method for token distribution and ecological incentives, which has attracted much attention in the blockchain industry. It is still unclear whether the Algo Dutch auction is a success or a failure, after all, it will be held again next year. The token price has also returned to the normal market fluctuation price. But there is no doubt that judging from the results of this auction, Algo has once again had a good start.

2. Super Node Fission

The effective super node fission seen so far is still aimed at stimulating cooperation among ecological users and resources.

The general rules of super node fission are:

1. Each super node locks the position;

2. Distribute rewards across the entire network in the form of POS incentives;

3. As a full-node wallet, the super node has voting rights and bookkeeping rights;

4. Super nodes are in a competitive relationship with each other. Only secondary or tertiary fission is related to the downward rewards of super nodes;

Operational effects of super nodes:

1. The community operates spontaneously and in a decentralized manner;

2. Super nodes are the second batch of ecosystem builders, with more funds and resources;

3. Super nodes are mostly institutions or powerful individuals, forming a semi-decentralized network;

4. A multi-party check and balance has been initially formed, which is conducive to the development of the ecosystem, and the secondary market has a significant boosting effect;

(III) Mining machine node fission mode

It is mainly Pow's Token, a marketing method generated in the process of marketization and rapid decentralization.

Mining machine node fission mode:

1. Use mining machines as nodes to form a storage network of tens of millions;

2. Each mining machine storage node is a first-level node, which develops into two levels of parallel personal storage nodes;

3. Use the invitation code as a reward certificate;

4. The benefits are more intuitive;

Mining machine node fission effect:

1. For C-end and B-end users;

2. The mining revenue mechanism of mining machines is easy to understand;

3. The yield curve is relatively smooth, and the incentive requirements for mechanism design of individual users are relatively high;

4. It is similar to the points system of Internet companies and has stronger compliance.

(IV) Trading is Mining

In theory, "transaction is mining" is essentially a manifestation of the token economy, which provides economic incentives for trading behavior. It is based on the ecology created by behavioral economy, data, and cash flow, increasing market strength and user stickiness. However, due to the complexity of the total token design, ecological economy, and behavioral rights confirmation, "transaction is mining", "data is mining", and "behavior is mining" are mostly used by blockchain project parties as marketing gimmicks and means of fundraising, and no particularly successful cases have emerged.

(V) Airdrop

Airdrop is an effective marketing method borrowed from Internet points and P2P companies.

III. Analysis of pyramid schemes and Ponzi schemes

Since mid-2019, pyramid schemes and Ponzi schemes have taken advantage of the coming of the flood season, and several well-known pyramid schemes have become widely known, such as Plustoken, Bell Chain, VDS, etc., with the following promotional methods: "model coin", "locked coin", "arbitrage by moving bricks", "index trading", "quantitative arbitrage", etc.

Image source: Internet

MLM or Ponzi schemes have the following characteristics:

1. There are n downlines for promotion, and there are bonuses for downlines - multi-level rebates;

2. Most of them only start trading or make transactions on their own websites/apps/WeChat platforms;

3. Claims to have a strong official background;

4. Often seek support from big names

5. High returns, high rebates; high rewards include two forms: static returns and dynamic returns. Static returns: obtained through one's own investment, implying that the more you invest, the more rewards you get. The investment interest rate is much higher than that of banks, but the rewards will be locked for a certain period of time; Dynamic returns: the more people you invite to the fund pool, and the higher the amount of money they invest, the higher the dynamic returns of the inviter.

6. Air coins: Most of the blockchain data cannot be found, or there is only a coin name and wallet address;

The main pyramid selling methods adopted are:

1. Offline conference closed-door marketing

Offline meetings have a mature brainwashing and marketing process. There are special lecturers to talk about how to make stable and reliable income, as well as high returns. Famous MLM coins: BCC, PCE, etc.

2. Evangelistic Community Model

Rules for sermon mode:

1. Generate an exclusive user invitation code;

2. Virus spread and develop subordinates;

3. There are 3 levels of invitation mode in total;

4. If the invitation is successful, the reward will be directly returned to the relevant level and the inviter;

The Effect of Online Evangelistic Community Model

1. Fundraising is extremely effective;

2. After a certain period of time, the inflow and outflow of funds reach an equal value, and new funds are needed to replenish the flow, otherwise there will be a collapse;

3. Most projects will end up collapsing;

(III) Airdrop candy, spend money to unlock

They attract people to join in the name of short selling and free registration, but set many conditions, especially the method of making a deposit first and then unlocking the tokens to lock in investors until the market collapses, or they drag the market until a large amount of funds continue to pour in and then run away.

(IV) Mining and financial management, stable income

After investing money, they only show a page showing the mining income and promise to pay back the money in a certain number of days, but usually end up running away. Or they use mining machines and computing power as targets, and push offline and sell products by enjoying transaction dividends.

(V) Fake or stand-alone exchanges

MLM creates a trading platform, increases the currency value, and then closes the door to fight the dog. Or after accumulating a batch of funds, it runs away publicly or quietly. ETF exchange.

(VI) Wallet disk

Using wallets as platforms to attract users to deposit more funds; issuing their own tokens in exchange for users’ Bitcoin, Ethereum and other mainstream tokens, and then shutting down and running away. Such as VDS, Plustoken, Wotoken, mgctoken, etc.

Image source: Coin Circle Conscience

7. Pass the Parcel, a Ponzi scheme

The more people buy, the higher the price; each time a token is sold, the lower the price. The cost for the buyer becomes higher and higher until it collapses. Such as POWH 3D and Fomo3D mode.

IV. Conclusion

As a senior practitioner in the industry, when I see the emergence of various "tokens", "models" and "capital exchanges", I can't help but worry about the development of this industry. Investors are deceived by their own greed, lack of knowledge and other reasons, but it is also related to the chaotic environment of the new industry, which gives some people the opportunity to defraud under the guise of blockchain technology, trust, decentralization, and immutability. When you find that the person who introduced you to the "valuable investment opportunity" has a superior, and the superior has a superior, and the superior has a superior, it is also a great opportunity to withdraw.

Whether it is a Ponzi scheme or a pyramid scheme, there is an important distinguishing point among the various models: the key point of the inflow and outflow of project funds. When the inflow value is equal to the outflow value, that is when the pyramid scheme and the Ponzi scheme collapse and run away.

Author: DaLing Think Tank & Wang ZeLong.

References

1. DaLing Think Tank, "DaLing Observation | DAO's New Paradigm and Historical Rhythm", Stan Wu & Wang Zelong

2. The conscience of the cryptocurrency circle: "The coffin of plustoken is closed. Give up. I won't open a website anymore."

3. Literature "Exclusive Interview | Meng Yan: The biggest application of the token economy in the early days was finance, and the biggest detour was pyramid selling"

4. PANews: "The Ministry of Public Security named the fake project "BRICS Digital Currency", beware of pyramid schemes disguised as blockchain"

5. Fortune Chain Circle "The Tricks Behind Second-Hand Mining Machines: Beware of the MLM Scam of the "Mining Machine Model""

6. [ChainDD 2019 March 15th Heavy Exposure] List of the Top 100 MLM Coins in the Second Half of 2018

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