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An economic model for disguising a pyramid scam

An economic model for disguising a pyramid scam

Last updated 12th Apr 2022

I’ve always been amazed by the technical side of Bitcoin – which combines all the achievements of cryptography, network protocols, consensus mechanisms, decentralized economics and game theory.

I’d find it hard to name any other project whose scale of innovation could stand alongside Bitcoin.

There have been around ten other projects which have put forward serious innovations in decentralized systems – such as Ethereum, Ripple, Monero, lightning network, ZCash, Bitshares, or HashGraph.

[This isn’t a recommendation to rush out and buy their coins, especially since an internal coin isn’t needed in all cases at all – and even if one is needed, it remains unclear how to value the project’s economic future].

Crowdfunding via an ICO was one of the possible ways to finance this type of project (although most of the largest and the coolest ICO projects didn’t do so).

My personal view is that I couldn’t come up with any other project with a decentralized economy – just so I could have justified the presence of an internal independent currency. In fact, this is one of the reasons why Distributed Lab hasn’t issued an ICO. Many professionals whom I know personally have shared the same feelings – believing that crowdfunding via ICO could only be justified if there’s an amazing idea behind it, or it’s been impossible to raise money through conventional routes.

[One example could be because the cost of a stake in a company that’s developing a decentralized stand-alone platform ought to veer towards zero – precisely because the platform is autonomous].

However, that’s not the subject of today’s post:) Recently I heard out about an economic model which has been implemented in Binance – and I’d like to feature it as an example of outstanding achievement in ‘legal’ embezzlement.

The crux of it is that a token can grow indefinitely in a pyramid set-up – and this business model could be used for ANY kind of business at all, even for a kebab-stand. From this moment onwards, no business has to think anything up – just copy:). And the best part is the token won’t be classed as a security, but as a utility (even though we all know that it isn’t!).

The way this model works is that the business:

1) Provides services whose prices are fixed in US Dollars

2) When paying by tokens (which are, naturally, issued by the decentralized project) you get a discount. This makes paying by token worthwhile, regardless of its price.

3) The number of tokens is limited and can burn out over time – while a rise in the consumption of the service prompts a matching rise in the price of the tokens.

4) So overall, the tokens keep going up, thus providing novice investors with reasons to believe it’s worth hanging in with the investment. This also further boosts the price.

5) The losers in the process are the project shareholders, who suffer losses (that’s why this token is actually a security).

6) The project’s founders can easily manipulate the price, simply by putting more, or fewer tokens onto the stock exchange. They keep the majority of the tokens, plus a few of those who accept the tokens in payment for services.

And that’s how to set up a semi-decentralized pyramid scam.

Pavel Kravchenko, founder at Distributed Lab

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