Is DeFi A Ponzi Scheme?

By Chad
November 18, 2021
Image: IDK, Washington D.C. or the Illuminati or something

Now that Joe Exotic’s knee deep in his own tokenized tiger shit (because the last meme coin based on a Netflix series ended so well) it seems like as good a time as any to answer the eternal question: is all of decentralized finance just one big scam?

Discussing NFTs such as BAYC in the aforementioned Input article, the president of Pyramid Scheme Alert, Robert FitzPatrick, compared the ‘narrative lore and mystery that helps people believe’ in PFP projects and multi-level marketing schemes. Both are valuable ‘only if someone else will buy behind you. You look around at all the smart people that have also joined — how could you be wrong?’

William Keep, a marketing professor at the College of New Jersey, sees similarities, not parallels. The recruitment structure, according to Keep, is not the same. NFT projects rely on public opinion and social proof to drive enthusiasm and profit — not tiered, direct-to-consumer sales. The retention structure, however, more or less is. ‘Love bombing’, in which recruits are welcomed with praise and open arms, discourages them from thinking critically about how much they paid for membership, or whether the perks are worth it. See also: cults; the United States government.

DeFi, on the other hand, by and large resembles Ponzi schemes, not pyramids. ‘If you do not have any value behind you in a creative, real asset backing, then your liquidity only comes about if you have somebody new coming in — this is the very technical definition of a Ponzi scheme,’ says Marc Fleury, CEO of Two Prime, a digital asset investment firm. However, the as-made-famous-by-Madoff variety exists ‘only if [what’s] underlying disappears.’ The basic model of a token accruing buying and selling power based on user adoption ‘is how every financial instrument on the planet works, so this is not necessarily a bad thing.’ 

To be sure, there’s no shortage of crypto scams contaminating the ether. We’ve covered them at length here. But through my eyes, DeFi is about as scammy as the fiat dollar. Which is to say, very… unless people decide to buy into it anyway, which they have. I, too, dream of one day hawking freshly hunted elk meat for a bone flute in the honorable spirit of our homo erectus ancestors. But the anarcho primitivist in me will have to wait for the apocalypse. I’m buying the dip in the meantime. 



Cas Stone is a story told in essays, posts, ads, audio, visuals, podcasts, novels, someday, naturally, stories.

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