There is a lot of decentralized finance (DeFi) coming up everyday. And much adore these platforms forgetting they do have a hidden flaw.
Many of these platforms lack solid roots, as we witnessed with the LUNA disaster. The reality is that many projects are nothing more than a pyramid scheme. We can see that their tokenomics are not as grounded in reality as it should be. These project runs a model call Ponzinomics.
Lets try to understand tokenomics before looking at ponzinomics
The economics of a token are described by the term “tokenomics.” it can be called token economics . It discusses the elements—such as the creation and distribution of the token, supply and demand, incentive systems, and token burn schedules—that affect its use and value.
Successful cryptocurrency project need well-designed tokenomics. Investors and stakeholders must evaluate a project’s tokenomics before choosing to take part.
For, tokenomics are vital data that make significant project-related revelations. It describes the token distribution process and the timeframe in which investors will receive their tokens.
But not every project is created with an obvious utility. Some Tokens are created by fraudsters with the sole purpose of stealing from others. This situation gives rise to the concept of Ponzinomics.
Can you hear the word ponzi-scheme from this? YES. Ponzinomics is another form of scam that happen in the tokenomics. Ponzi-scheme is a business model where new members funds are used to pay old members.
In this type of fraud, those who join first profit from the investment of the new participants. These investors promote some sort of product or service to newcomers. This process, in turn, creates a chain reaction. The more people enter the scheme, the more money the fraudsters make.
They require ongoing enrollment from new participants in order to remain operational. They can keep giving money to the early participants in this fashion.
The scheme gets a boost from this money transfer, but it is not a long-term solution. The mechanism breaks down when fresh participants cease joining. The last entrants never recover their initial investment.
The economic dynamics of most DeFi platforms appear to be appealing to many Ponzi schemes. However, the problem is trickier than it seems. DeFi services are not all Ponzi schemes. But we are aware that DeFi Ponzi schemes are more widespread than we might imagine. Most Defi projects are operating on the Ponzinomics.
For these schemes to continue to function, fresh participants are required. To ensure they can continue to operate, they frequently enforce buy and sell taxes.
The main issue is that these can be profitable for a few months. A few months feels like a long time in the DeFi industry. People decide to invest after realizing that these systems have been profitable for some time. They are unaware that they are used as bait for larger fish, though.
Why you avoid them
They should be avoided not only for what they stand for but also for their methods of operation. These tokens typically manipulate the token supply to create an artificial demand.
More people become interested in the token once this fictitious demand is present. The price of the tokens rises as more users join the system. All of this results in the system failing to produce any kind of economic value, which is how the Ponzi scheme got its start. This leads to the creation of a loop that continues until it breaks. The new members eventually hold the tickets once they stop working.
How to avoid ponzinomics
We are aware that not all DeFi platforms operate like Ponzi schemes. But what it really means is that we should be cautious about where we put our money. It may sound attractive to participate in a platform using ponzinomics. After all, it’s difficult to refuse an APY of more than 1,000%. The issue with these projects is that only the party responsible for organizing the scheme benefits. Our entire investment could be lost. If you’re fortunate, you might be able to leave before everything unravels. But would you want to participate in a fraud that will burn others?
How can a token built on ponzinomics be completely avoided? Make independent research. Read the tokenomics and whitepaper of a project if you are interested in it. Any red signal you spot when reading the whitepaper should be enough to convince you not to invest.
Always keep in mind that if an offer seems too good to be true, it generally is. DYOR and be responsible with your money.