Ponzi Scheme

The peril

So you want to find a way to make a lot of money quickly and safely. Don’t we all? That’s one of the very reasons why some people become interested in crypto in the first place. There’s nothing wrong with that. It’s not even rare.

But if you read any book at all dealing with any kind of investments (the traditional stock market, commodities, forex, and yes, cryptocurrencies) the first piece of information that the author will try very hard to convey to you in the most precise way is this: becoming a trader or an investor is risky.

So the first thing you need to do whenever you get involved in any of those activities is to asses the risk they imply, and figure out how if it’s a good fit for your appetite for risk.

Risk appetite sounds like a very intuitive notion, but it’s actually defined in an HM Treasury paper as the amount of risk that an organization or individual are ready to accept, tolerate or be exposed at any moment. That definition expands in that paper by defining five types of risk appetite.

• Averse: stays away from risk in all circumstances.
• Minimalist: plays it safe but accepts a little inherent risk when there’s potential for a limited reward.
• Cautious: also prefers to play it safe but it’s ready to accept residual risks that may have the potential for a limited reward only.
• Open: it takes into account every option available and opts for the one with the highest probability to succeed with acceptable reward levels.
• Hungry: wants to find options of high risk and great reward.

The thing to understand here is that none of those five preferences for risk is right. None is wrong either. Each of those approaches to risk management can be efficient depending on many factors that include the amount invested, the asset you’ve chosen to invest, potential market size, volatility, liquidity, politics, etc.

What we all would like would be a high level of return without any risk at all. And it will never happen. A risk is at the heart of any investment. As a matter of fact, risk and reward levels are very often directly proportional. The safer you are, the fewer you earn. And some risks are not inherent to the asset itself or to the market. There’s the risk of technical failure (your internet goes off just at the moment you were going to place that order and the perfect moment to make a profit, and the moment is lost), the risk of fraud, and things of the sort.

Meet Mr. Chrles Ponzi

Several smart contracts, created by anonymous users, have been popping up around the Tron network over the last few months. They offer high profits with no risk at all. The most popular one promises you 3.33% of daily growth for the amount you invested. And that will keep going on indefinitely (in principle, it could last forever). So, it just goes up all the time. Forever. Whatever the TRX or BTC price is. At that rate, you recover your initial investment in a month flat, and from then on, it’s all profit until Kingdom Come.

Does it sound kosher to you? Maybe you’d instead think that it just seems too good to be true. And you’d be right because that’s the case. This kind of “project” has been known as a “Ponzi Scheme” for more than a century because it was made famous by the notorious criminal Charles Ponzi.

He cheated investors out of his money using the trick that now bears his name. He would promise his victims a 50% return in a month and a half. 100% in three months. As he made people excited and the money came in, he used fresh money from new “investors” to pay the earlier victims off. He kept going on until August 1920. By then he caught The Boston Post’s eye, so the news organization thought it would be interesting to dig a little and do a little research about Mr. Ponzi’s returns. The inquiry stirred the investors and scared them off the scheme. They pulled their money out, and Mr. Ponzi spent 14 years in prison.

As explained previously, a Ponzi scheme promoter pays his first investors back by raising money from new investors. But the potential investor pool is not infinite, to say the least, so sooner or later he will run out of fresh money coming in. At this point, the scheme collapses.

Ponzi schemes are not all that rare, and they keep happening everywhere in the world. And gullible people keep falling for them. And now, this kind of scheme has found its way into the crypto verse in general and, more specifically, into the Tron Main Net. Several smart contracts are programmed to behave in this exact way. How can you tell? Look for the following signs:

• The promise of high investment returns at a very small or nonexistent risk. This is the third time we mention this and, chances are it won’t be the last because it’s just so important. Risk begets profit, and there’s just no way around that. It’s almost a physical law (actually, it’s not very different from the Second Law of Thermodynamics). Even if you choose the safest possible asset in the world, you will still have to deal with bad days in which things go South. If you really want to have no risk at all (which is understandable), then you will need the resignation of keeping your level of wealth precisely as it is.
• Excessively uniform returns. Markets are never flat. This is true of every financial market known to man, and the cryptocurrency ecosystem is no different. Things are never dull, things are never consistent permanently. On the contrary, everything is changing all the time which is why it takes skill and knowledge to make a buck. Anything that promises you a permanent 3.33% return every day without exception is just deceptive because it’s unnatural as markets go.
• Anonymous team. Most clean projects in the world have a team behind it which is not shy about letting you know who they are. That’s because successful legitimate projects help build a team’s reputation so that they can keep developing new projects and getting support from investors and the community. But being vocal about who they are also means that they can be held accountable for any misbehavior. Since the internet and the cryptosphere allow for various degrees of anonymity, it’s no surprise at all that fraudulent operations are run by invisible individuals or teams. Distrust anonymity thoroughly when it comes to giving your money for somebody. Especially in the Tron network.
• Convoluted or secret investment strategies: never invest in something you don’t understand or somewhere in which the investing process is just a black box in which you can’t look under the hood at all. It’s your money. You have every right (and need) to get every bit of relevant information about how your money will be used. This is particularly important because the Ponzi scheme promoters in the Tron network are merely getting started. More elaborate schemes will appear in the future, and it behooves you to be able to tell them apart from the rest. Those who run these schemes say, of course, it’s no scam at all. But the facts are quite simple when it comes to this. If that’s the only argument they can offer, and if they can only pay back old customers with the money they get from the new ones, then it’s a Ponzi scheme however you want to look at it.
• Getting payment not straightforward and encouragement to roll over: if getting paid is not quick and painless, be suspicious. Casinos and gambling sites love to get your money, but when you ask for a withdrawal (assuming you’re so good at betting that you actually can win consistently, which is no mean feat), they are quick to pay. Keep also in mind that Ponzi scheme administrators will encourage you very strongly to “roll over” your funds. That way, they don’t need to pay you.
• But we are in a blockchain network. And blockchains are a technology designed specifically to bridge trust gaps. In any other environment, getting some kinds of information is just impossible unless you’re willing to break the law (which we do not recommend). But in a blockchain such as Tron’s (and this applies even to Bitcoin’s blockchain as well) the transaction information that the network carries out is transparent. So all it takes is a bit of basic research for you to get all the information you need to know if a given smart contract is real or a scam.

Ponzi-like smart contracts: The next generation in financial fraud

P3T Daily Roi seemingly qualifies as the oldest Ponzi scheme running on Tron. It’s a smart contract that allows users to deposit and withdraw TRX each minute. If you leave your tokens there for a full day, you get a 3.33% return on your tokens daily.

We have more to say on this but, before we move on, let’s just do the Math on this. How much is 3.33% really? How much will it yield in a year for you? Well, fortunately, it’s a straightforward calculation to perform. It’s merely 1.0333 to the power of 365. That’s 155828.44.

That means that, if this were true, you’d get 155828.44 for every TRX token you invest, if you just leave it there for a full year. This kind of earnings is unheard of in the real world. Even when stocks such as Yahoo, just to mention one, soared to the stratosphere, they didn’t pay that much back. Maybe even drug dealing can’t get you that kind of returns.

It started slowly as only a few people tried it out. But then, after a little marketing and time, it took off, and people came to the site in high volumes. Put a lot of tokens into it. At its peak, it had around 37 million Tronix coins (which is not very far from a million bucks). This happened a couple of weeks ago only. And then, the P3T encouraged the participants to leave their tokens in the system so they could take advantage of compound interest. What a surprise, huh? Well, most of them did roll over.

By then, those who got in early had “earned” a reward level (compound interest is real, and it grows fast) number of tokens that was more than enough to bring the whole scheme down, should those early adopters chose to withdraw their funds. And they did. To a degree, they started to cash their coins out, and the whole P3T community got panicked. A chain reaction started. People were not so willing to roll over anymore and wanted to get their rewards there and then.

As all that happened, the contract’s value went way down which caused new investors to stay away. In only a week, the “project” had lost more than half of its value (to about 15 million TRX). It’s wholly consumed now. The P3T team tried to get new investors like if their lives depended on it so they could pay back to all the users that were leaving. But the writing was on the wall, and the P3T ship was sinking. It was beyond salvation, and even a vast TRX injection could not prevent the contract to become nill in a few weeks at the most.

But P3T wasn’t unique at all. Other similar smart contracts have popped up around Tron. They wear the camouflage of an honorable project. The improve on durations, sustainability and reward circles. So the makeup is effective in making an ugly thing look pretty, and it makes it harder to tell a fraud when you see it. They do look more respectable, but they’re still Ponzi schemes, make no mistake about it.

Investments vs. Financial Fraud

So what’s the difference between sheer Fraud and a real project? For a start, Ponzi schemes can’t last very long. The pool’s alleged value grows too quickly to be sustained by new investors alone, and because the scheme creates no legitimate revenue at all, it just can’t keep going.

There’s no service or product associated with Ponzi schemes, so these are projects that have no way at all to make money. There’s no innovation, no production, no value is added into anything at all. Only the creating team and the early participants get something out of it.

And that’s different from authentic projects precisely because real projects are designed to behave oppositely. They will use a resource to create something. To come up with a solution to a problem that people actually need to solve.

If it solves said problem conveniently, it will grow naturally and create a sustainable income. Those projects could remain around for years and even thrive, even if they have to deal with losses every now and then. They stay around because they have the fundamentals needed to continue to create revenue.

Financial fraud is a thing!

So you need to know which other smart contracts look like Ponzi schemes? Well, let’s see… 4Days Profit, 12 ROI, FOMO 7, Rising ROI, Rocket Roi Dynamic, Turbo Dynamic ROI, Rocket ROI, 100roi, Turbo ROI, Tron Vault, or TronBank.

Those are the more obvious ones, but there could be more, and the future will bring us lots more of them for sure. Don’t take our word for it, we’re not accusing anybody. Just visit those websites and see what they offer compared with the red flags we gave you earlier in this article so you can make a decision on your own.

But they do meet with all the criteria as far as we can tell. They seem to be acting as Ponzi schemes, and each does it in its very own way. Some will keep 15% of your initial deposit as a fee. Others will promise you a return in a few days, even a few hours. But each and every one of those contracts will end up out of cash, and they will crash down just as P3T did. It’s just a matter of time.

P3T ignited greed in Tron. It began a trend of get-rich-quick mania. It’s seeming success inspired all the other equally fraudulent sites by promising users to make them rich without any risk or effort.

As P3T’s ending begun, there were users depositing hundreds of thousands of TRX tokens in the hopes of profiting. Now that the contract is empty, chances are that many among them lost most of the assets they invested in it.

So what will happen in the future?

We’ve been through the shrimp farm mania, gambling mania, and daily ROI mania. Actually, we’re still stuck on ROI mania. We can and should expect other scam bubbles to appear in the network in the future. This isn’t cynicism or pessimism, but if we’re not aware of them, then we can’t protect ourselves from them.

Maybe the next scheme to become a thing in Tron (and other blockchains) will be the pyramid scheme. It’s been quite successful in the real world for years, and it’s even gained a degree of respectability for something that’s inherently fraudulent.

The pyramid scheme is not a Ponzi scheme, but there are similarities. The pyramid is based on networking and network marketing. The “official” idea is that the profits in sales are shared among all the person in a given thread within the pyramid, all the way to the top.

Much as Ponzi scheme, these models also fail because there’s just not enough people to support the absurd amount of rewards promised by the model. There is such a contract in Tron already. And others will appear as that one becomes successful, at least for a short while.

The Crux

So hereś the beef. You should never get involved in any smart contract that:

• Guarantees profits while promising high returns.
• Claims it can’t fail (that there’s no risk).
• Insists in you rolling over and no cashing out or makes it difficult for you to collect your earnings.
• Says it has a sophisticated and complicated system to create revenue that we mortals couldn’t possibly understand because we’re not financial gods as the anonymous team behind this project is.
• Offers no service, sells no product, solves no problem but greed.
• As things stand right now, Tron community members seem to prefer gambling and get-rich-easy schemes. So it’s fertile ground for con artists. This is terrible news for the individuals that have lost money in the past because of this, and for those who will lose it in the future. But it’s terrible news for Tron and the world’s blockchain community as a whole as well because it discredits a powerful and innovative technology that can be used for good.

This will only change if we the users educate each other, denounce frauds as frauds, and focus on real projects that have real fundamental value. Yeah, that’s much harder. It takes expertise, time, energy and hard work. But that’s great for everybody.

Image courtesy of Pixabay.

Disclaimer: The presented information is subjected to market condition and may include the very own opinion of the author. Please do your ‘very own’ market research before making any investment in cryptocurrencies. Neither the writer nor the publication (TronWeekly.com) holds any responsibility for your financial loss.