An economic model for disguising a semi‑decentralized pyramid scam


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 the game theory.

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

There have been around ten other projects which have put forward serious innovations in decentralized systems. I’m talking about Ethereum, Ripple, Monero, lightning network, ZCash, Bitshares, or HashGraph.

This isn’t a recommendation to rush out and buy coins of some of them, especially because I consider that internal coins are all unnecessary there. Well, even if they are necessary in certain projects, it still remains unclear how to value the economic future of this projects.

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

Having this in mind, I have been racking my own brain for a very long time trying to come up with the idea of a project, where I could myself justify the presence of an internal, independent currency. In fact, this is the precise reason why Distributed Lab didn’t issue its ICO. By the way, a lot of professionals whom I know personally shared the same feelings, believing that crowdfunding via ICO only makes sense either if the internal token is justified, or when you don’t have any options to raise money through the ‘conventional routes’.

Just think about it, the cost of a stake in a company that’s developing a decentralized stand-alone platform oughts to move towards zero precisely because the platform is autonomous.

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

The crux of it lies in the fact that your token is endlessly growing under the pyramid scheme, that by the way is applicable to literally ANY kind of business (even a kebab stand). With this scheme, neither business should be thinking anything up (according to its personal case) but can just copy it and it’ll work  And the best part is that token won’t be classified as a security but — utility (even though we know it isn’t).

So, here’s the way this model works:
1) Obviously, it starts with business providing its certain service (the price of this service is fixed in US Dollars).
2) The company determines the rules that prescribe that clients can get a discount (say 50%) if pay for the service with tokens (that the company issues on its decentralized project).
3) The number of tokens is limited. More than that, they can even burn out over time, while the rise in the demand to the service (caused by the profitable discount for the clients) prompts a corresponding rise in the token price.
4) Price of tokens keeps on going up, thus providing novice investors with reasons to believe that it’s worth investing, which afterwards contributes to another price boost.
5) The only losers in this process are the company’s shareholders, who suffer losses (that’s why this token is actually a Security).
6) The project’s founders can easily manipulate the price by controlling the number of tokens that are put on the stock exchange. The majority of tokens is obviously in their hands, plus they get those that were exchanged on the service they provide.

And that’s basically how you set up a semi-decentralized pyramid scam that will work with any kind of business.

Pavel Kravchenko

Pavel Kravchenko

Founder & cryptographer