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Ponzi Schemes

Breaking Through the Mist of Ponzi to Find the Dawn of Value, Part 2

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Reducing Outflows: The Carrot-and-Stick Retention Model

The concept of user retention is not unique to Ponzi schemes. Traditional economies have also witnessed a gradual evolution of retention models.

Initially, there were no rules. Then we had some incentives and punishments. For example, regular customers can receive discounts, while premature withdrawal from fixed deposits will lead to the loss of all interests. Additionally, we have some compulsory policies, such as a longer lock-up period for funds redemption. 

For traditional economies, poor user retention is like chronic poison, which can gradually corrode their achievements until the end; for a Ponzi scheme, the retention of users (funds) is basically its lifeblood. Once a run happens resulting in the quick loss of users and large sums of funds, the Ponzi scheme will collapse.

Ponzi Schemes
(Program-Ace)

Accordingly, we can see that Ponzi schemes with a longer life cycle tend to pay considerable attention to the retention of funds and adopt some incredibly refined management models. To put it simply, they often leverage a carrot-and-stick principle to maximize the retention of user funds. We can understand it better with the case of Baer Chain.

Compulsory Lock-up Policy – Restrict the Behavior of Participants

Ponzi Schemes
“Super Rich” of Baer Chain

The game of “Super Rich” only offers a one-way channel for ETH, which means that players who buy ETH can only retrieve their money in the form of newly-generated BRCs. Compared with traditional Ponzi schemes, the game does not promise the return of any ETH. All ETHs are coercively locked in the system.

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Following “Super Rich”, Baer Chain (BRC) launched a new game: Universal City. The intention is to attract players to deposit BRCs for more profits.

Ponzi Schemes
(card.shangjieqq)

So, in essence, it asks the players to lock their BRCs earned from the previous game.

Masternodes rewards are similar to all other blockchain projects offering nodes rewards for locking funds in the system.

Consuming BRC = Permanent Lock: Baer Chain also launched a mini-game named Super Soldier, of which the real purpose is to consume BRCs. However, it fails to achieve the expected goal, so the project launched Universal Cities instead. Super Soldier itself can also be seen as advocating the concept of compulsory lock-up policies.

Ponzi Schemes
Hayek

Hayek’s philosophy is that with control and intervention alone, it’s impossible to manage an economy successfully, and the market order must be formed spontaneously in an “inside-out” manner. Scams that retain money coercively with lock-up policies are bound to face high pressure of collapsing at the moment of maturity.

Therefore, it is also necessary to apply some soft policies. If the compulsory policies are to control a person’s behavior, the soft policies are to reduce a person’s willingness to act, which to some extent can be seen as an issue related to expectation management.

BRC’s Soft Policies — Affect Participants’ Willingness

Powerful marketing team — form a so-called “belief” among participants through pyramid selling strategies.

Price manipulation — to some extent confirms the “belief” of the participants. By affecting the price of BRC, the team forms a positive feedback cycle, which makes more people believe that the price of BRC will rise steadily. This strengthens their willingness to hold BRCs instead of selling.

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Ponzi Schemes
(NullTX)

It is worth mentioning that many participants are fully aware of the risks, whether it is in traditional funding, Ponzi schemes or sales of a cryptocurrency. However, giving in to the temptation of high profits, they blindly take part in these events.

For this group of people, brainwashing-style expectation management won’t work. The only thing that can change their expectation is the price movement in the secondary market.

Professional players will try to capture the signal of collapse in advance, while the promoter should use the signal in reverse to break the expectations of these players.

However, since the promoters have stronger control in the secondary market, the pricing game can easily become a zero-sum battle.

Expectation Management

Expectation Management is a key element in the financial sector, especially in the secondary market. The one and only goal of all secondary-market participants is to predict the expectation of the counter-party, in order to make the proper moves.

Ponzi Schemes
(The Startup Medium)

The traditional behavior of price manipulation can also be outlined as: affect the participants’ expectation through price manipulation, in order to pave the way for the next move of the maker.

In the case of Ponzi schemes, the promoters usually know their participants better and can influence their expectation more easily.

Therefore, in the secondary market, what brings you the final success is not your understanding of the market, but your understanding of your counterparty.

Conclusion

By scientifically studying the specific operations of Ponzi schemes, we can learn more lessons from them, instead of simply staying away from these scams.

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The success of any project is inseparable from proper publicity and promotion. However, when doing promotion, it is important to balance the value enhancement and value loss. Otherwise, unbalanced promotional activities tend to be counterproductive in the long term.

In addition, it is necessary to pay attention to the coercive policies on participants as well as expectation management.

This is the meaning of the design of the token economy.

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Robin Gu
Robin graduated from Fudan University, majoring in Mathematics. Prior to joining X-Order as a Researcher, he has over 10 years of financial modeling experience (both the theoretical and execution aspect) at Big 4 and private equity funds. He joined the blockchain industry in 2017 and is currently focusing on using complexity economics to discover exponential growth opportunities.

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