So this has some interesting implications: the SEC has started going after the most fraudulent ICOs, and will no doubt start working their way backwards. Cryptocurrencies provide a permanent record of all transactions, and exchanges are obliged by KYC to map that to real people. This means that people who've already profited from crypto bubbles (and maybe even spent the money) might find themselves the target of recovery actions.
If I were to describe a scheme that disproportionately rewards early adopters[0] and requires a constant addition of new adopters just to sustain the price[1] - would an ordinary reasonable person[2] think "the future of money" or "traditional pyramid scheme"? And then if I were to describe a second scheme extending the first scheme where the main attraction is the supposedly constant pressure for buying into that scheme in order to participate in other new schemes launched with that scheme[3] - would an ordinary reasonable person think "new financial paradigm" or "traditional ponzi scheme"? And then if I was to describe those new schemes based on the second scheme based on the first scheme...
[0] Both via difficulty adjustments every 2 weeks (mostly increasing) and rewards halving every 4 years
[1] To counteract the deflationary nature of new coin generation
[3] i.e. buying into the "platform" in order to "invest" in tokens for subschemes issued with the "platform" (no one advertised that the subschemes would eventually have to dump their "shares" of the platform afterwards)
If something like bitcoin was getting exactly enough users to counteract generation, the goal would be something like "eventually we'll triple the userbase!" or "eventually we'll add 25% to the userbase!" which is stupendously far from a pyramid scheme's infinite exponential growth.
Once a coin is mature, the amount of user growth to match or even beat inflation on the dollar is... zero.
So what you're left with is "rewards early adopters" and "makes new subunits" and that... is a pretty ordinary startup.
Bitcoin has a lot of problems but a need for a constant flow of new users isn't one of them.
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From the other comment thread: "I used the term "at the top" to allude to the original point about what geometric shape a reasonable person would be likely to use to pictorially represent such a scheme."
Nah. You have early adopters, and you have everyone else. The early price is super cheap, and the later price is based on demand. The best analogy is baseball cards.
> 'what you're left with is "rewards early adopters" and "makes new subunits" and that... is a pretty ordinary startup.'
While you could argue that a startup and a ponzi scheme can be considered similar because they both benefit earlier investors/members more than later ones, I'd argue that they are fundamentally different due to both the intention and the method - (i) the intention of a startup is extrinsic, i.e. it is to provide a real product or service based on a genuine or perceived customer need, while the intention of a ponzi scheme is intrinsic, i.e. it is solely a money making scheme with no product or service outside of the scheme, and (ii) the method of the startup is such that it will typically try to benefit most or all investors and customers to a greater or lesser degree, while the method of a ponzi scheme is such that it will benefit the earlier members at the expense of the later members (necessarily because nothing exists outside of the scheme).
The critical part of a ponzi scheme is using new investment to pay interest on old investors.
Something that you can model as a collectible doesn't do this. No matter how many promises of revolution you attach, it's still a commodity where you can buy and sell units based on supply and demand, and everyone profits or loses based on where the price goes. And they're generally aimed at a perceived customer need, at least.
For an honest believer, the value of their coins remaining stable is fine, they just want to be able to purchase things easily with them and/or do smart contract stuff.
The word 'scam' is appropriate for some coins. The words 'ponzi' or 'pyramid' are very rarely appropriate.
On a side note, the smart contracts set up to do a ponzi were interesting. It turns it into straightforward gambling, without the risk of someone taking the money and running.
>"requires a constant addition of new adopters just to sustain the price[1]
[...]
[1] To counteract the deflationary nature of new coin generation"
I think you've got some confusion going on here.
1) There is no requirement to "sustain the price" for any (normal) cryptocurrency.
2) New coin generation is "inflationary" in the sense that the number of coins is increased. This "inflationary" attribute would put the downward pressure on price you are referring to.
1. There's nothing at the code and protocol level about sustaining the price, but at the human level the early adopters (i.e. the 4% owning 97% of assets) are incentivised to try to sustain or increase the price through whatever means they can (e.g. funding pro-crypto press, social media, lobbyists etc.).
2. There's a big debate about whether it is inflationary, or deflationary, or hyper-deflationary, or different things at different times (e.g. inflationary wile new coins are being mined and deflationary from when the maximum number of coins has been reached). But whatever you call it, the point is that if there are the same people holding assets and there are more of those assets enabled, then all else being equal each of those assets would naturally be worth less, and as per point 1 the people at the top are incentivised to take action to counteract this, e.g. by introducing more people into the system below them.
>"There's nothing at the code and protocol level about sustaining the price, but at the human level the early adopters (i.e. the 4% owning 97% of assets) are incentivised to try to sustain or increase the price through whatever means they can (e.g. funding pro-crypto press, social media, lobbyists etc.)."
Ok, but this is trivial. It is true for everything for which there is a market. And both early and late adopters have the same incentive to increase the price. Why does the timing matter to you?
>"There's a big debate about whether it is inflationary, or deflationary, or hyper-deflationary, or different things at different times"
Who is debating this? It seems pretty straightforward that creating new coins is inflationary.
>"if there are the same people holding assets and there are more of those assets enabled, then all else being equal each of those assets would naturally be worth less"
Yes, this is literally the definition of inflation, I don't understand how someone can debate that this is actually an instance of deflation. "Worth less" == Prices (of other things denominated in the cryptocurrency) go up. I see no room for any disagreement about this: https://en.wikipedia.org/wiki/Inflation
>"the people at the top are incentivized to take action to counteract this"
Isn't anyone holding the currency incentivized to do the same? What does "at the top" matter?
>Who is debating this? It seems pretty straightforward that creating new coins is inflationary.
It is enabling coins within a fixed supply of 21M - this is not the same as creating new coins with no upper bounds. It isn't my intention to debate terminology - as I said "whatever you call it, the point is..."
>Isn't anyone holding the currency incentivized to do the same? What does "at the top" matter?
Those with more wealth to lose are disproportionately incentivised to protect it, and those with more wealth are also disproportionately empowered to take action to protect it. I used the term "at the top" to allude to the original point about what geometric shape a reasonable person would be likely to use to pictorially represent such a scheme.
The fixed coin supply is totally different from the inflationary pressure you are concerned about. There seems to be some kind of confusion here but I can't figure out what your are trying to say now.
>"Those with more wealth to lose are disproportionately incentivised to protect it"
I'd think a billionaire with $1 million worth of cryptocurrency would be less incentivized than someone with no other "wealth" but $10k worth of cryptocurrency. Also, the people with the most non-cryptocurrency wealth are going to be most empowered to take "protective" action. The "cryptocurrency wealth" is tied up in cryptocurrency... So I can't really follow this argument of yours either.
>"what geometric shape a reasonable person would be likely to use to pictorially represent such a scheme"
Yes, you seem to have started with the conclusion that you have problem with cryptocurrencies, and then are coming up with false arguments to call them a pyramid scheme.
> 'I'd think a billionaire with $1 million worth of cryptocurrency would be less incentivized than someone with no other "wealth" but $10k worth of cryptocurrency.'
Precisely. And in the context of this discussion, almost all crypto is held by people who have most of their wealth in crypto (e.g. 97% held by 4% of addresses) - using the percentages in your example, there aren't any crypto billionaires who have a trillion in cash. Linking this back to the original point, the are forced to keep most of their wealth in crypto because if they sold large amounts they would crash the market, hence one of the reasons for the need for new buyers so they can sell in a trickle.
> 'Also, the people with the most non-cryptocurrency wealth are going to be most empowered to take "protective" action. The "cryptocurrency wealth' is tied up in cryptocurrency...'
If you've a billion US$ worth of crypto, selling the odd million US$ worth to fund whatever you need to do in order to sustain the scheme (or "build the ecosystem" to use the euphemism) isn't a big issue. Not to mention that in many cases the people you are paying have been converted into "true believers" (perhaps even as a result of your own earlier efforts) and can therefore be paid in crypto.
A bubble is, in some ways, a self-organizing Ponzi scheme, in that the apparent growth has essentially nothing behind it but the inflow of new funds. Promoting something you know to be a bubble may be morally equivalent to running a Ponzi scheme, but you have to make some specific and clear-cut misrepresentations for it to be a crime. I would not be completely surprised if it turns out that some ICOs crossed the line, though ordinary take-the-money-and-run fraud seems more likely.
The comparison is that a fund run in contravention of the law has been at least partially unwound, with investors who are out of pocket being reimbursed.
If some of the larger ICOS are found to have been in contravention of the law, it's possible some sort of unwinding via lawsuit could occur.
What some ICOs have done, and what many more may be found to have done in future, is sell illegal unregistered securities.
