How can Web3 projects stay away from Ponzi schemes?
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How can Web3 projects stay away from Ponzi schemes?
What truly constitutes a Ponzi scheme is the "misalignment" and "self-circulation" within the financing structure and incentive model.
Navigating Web3 tides with focused insightsAuthors: Iris, Deng Xiaoyu
"Are cryptocurrencies a Ponzi scheme?"
This is almost always the first question people ask when they enter Web3. Even on some social media platforms, you'll still see statements like "cryptocurrency is just a Ponzi."
However, this kind of skepticism isn't entirely baseless.
In recent years, numerous projects have used slogans such as "mining with returns," "daily compound yields," or "stable arbitrage" to create pyramid-like scams under the guise of so-called "token incentive models." As a result, those unfamiliar with Web3—or cryptocurrencies in general—often equate token issuance directly with Ponzi schemes.
Yet, from a legal perspective, Manqin Law argues that the root issue isn't the token itself, but whether the Web3 project has built a sustainable and self-consistent economic system—specifically, how its fundraising structure and incentive mechanisms are designed.
So what kind of structures constitute classic Ponzi schemes? Below, Manqin Law breaks down three common types of incentive and financing models found in Web3 projects, showing how each can gradually slide into a Ponzi trap.
Type 1: Classic Ponzi Scheme
Typically, these projects share clear core characteristics: no real product, no external revenue, and complete reliance on funds from new users to pay promised returns to earlier participants—ultimately leading to inevitable collapse when the funding chain breaks.
All their efforts at branding merely dress up old Ponzi tactics in new Web3 clothing.
A prime example is PlusToken, which collapsed in 2019. Marketed as a "blockchain wallet + quantitative trading" platform, it claimed that once users deposited cryptocurrency into the wallet, the team would deploy it via "quantitative trading" and deliver stable monthly returns as high as 10%. It also implemented a multi-tier referral system where users earned extra commissions for inviting others—an obvious headhunting structure.
However, PlusToken never disclosed its supposed trading strategies, and on-chain fund flows showed no evidence of genuine profitability. When incoming capital eventually dried up, the project imploded in 2019. According to Chinese police reports, the case involved over 20 billion RMB (approximately $2.8 billion), making it a textbook case of illegal fundraising and pyramid selling.
Another example is Bitconnect, one of the earliest projects globally to be officially classified by regulators as a crypto-based Ponzi scheme. It styled itself as an "automated investment platform": users exchanged Bitcoin for the platform's native token BCC, locked it up, and enrolled in a "daily fixed return program" offering annualized returns far exceeding 100%.
Bitconnect also featured a complex referral reward mechanism, expanding its user base through multi-level recruitment, with all payouts funded by money from newly joined users. Yet, it never revealed actual operational logic behind its funds, and the much-touted "trading robot" was purely fictional marketing hype. Ultimately, after user growth stalled in 2018, the platform abruptly shut down, causing the token’s value to plummet by 99%. The U.S. SEC ruled that it constituted unregistered securities offerings and a Ponzi scheme.
These cases highlight a key point: if a Web3 project promises "stable returns" but cannot provide real, verifiable products or sources of profit—relying solely on continuous inflows of new capital to repay earlier investors—it is essentially a replica of a Ponzi structure.
If the statement "cryptocurrency is a Ponzi" holds any truth, it applies strictly to this category of fraudulent schemes.
From a legal standpoint, such projects may not only violate laws against illegal fundraising but could also amount to传销 (pyramid selling), money laundering, and other criminal offenses. Moreover, they represent not Web3 innovation, but rather Ponzi schemes wrapped in Web3 packaging.
Type 2: Near-Ponzi Structures
If Type 1 represents blatant Ponzi schemes, then Type 2 appears significantly more sophisticated.
They typically avoid explicitly promising fixed returns or using overtly enticing phrases like "10% daily interest" or "monthly principal return." But upon analyzing their fundraising architecture and token distribution logic, you’ll find that while not directly identifiable as Ponzis, their underlying mechanics still replay the same old game of "later investors paying for earlier ones."
The most common structure seen here involves extremely high FDV (Fully Diluted Valuation) paired with very low initial circulation.
For instance, imagine a project launching with an opening price of $0.50 per token, a total supply of 2 billion tokens—implying a theoretical FDV of $1 billion.
But note: at launch, only about 0.5%—just 10 million tokens worth roughly $5 million—may actually be circulating. This means the widely cited "$1 billion valuation" is merely a paper figure extrapolated from a tiny floating supply, not reflective of actual market willingness to invest that full amount.
Moreover, the market price of these limited circulating tokens is formed primarily by early public sale buyers or retail investors through open trading, whereas private investors might have acquired their tokens at a cost as low as $0.01. Once vesting periods end, these early holders can exit incrementally with dozens of times profit.
Safemoon previously faced class-action lawsuits due to such design. At launch, it used high transaction taxes (charging large fees on buys and sells) to artificially support prices, heavily promoted concepts like "auto-rebuy" and "community locking," and attracted sustained buying from users. While no explicit returns were promised, the project team and early KOLs leveraged asymmetric information and pricing advantages to cash out at peaks, leaving many community members stuck holding bags during bear markets waiting to break even.
This creates a form of "structural arbitrage": early prices are shaped by a small group of insiders. With no real revenue, inflated valuations, and minimal liquidity, once high valuations become part of the secondary market narrative, later investors inevitably become bagholders buying at elevated levels.
Yet, from a compliance perspective, it's difficult to classify such structures as outright fraud—they make no guaranteed returns nor false claims. However, their incentive design effectively shifts the burden of early costs onto latecomers, completing another version of the "Ponzi cycle." And once regulation intervenes or confidence collapses, the project can rapidly go to zero, leaving ordinary investors with little recourse or ability to recover losses.
Type 3: Ponzi-Tendency Projects
Projects in the third category often have real operations, teams, and products, and attempt to raise funds through compliant methods. Yet they still face a deeper issue—their incentive and financing structures are poorly balanced, making them vulnerable to accusations of exhibiting "Ponzi-like tendencies"—a legal risk Manqin Law aims to help founders avoid.
For example, a GameFi project may initially offer a playable product, thousands of daily active users, and some in-app purchase revenue. However, if its token model features an excessively high valuation (e.g., FDV reaching hundreds of millions of dollars), extremely low initial circulation, allows VCs and KOLs to enter at ultra-low costs, and lacks sufficient lock-up provisions or transparency, retail users may rush in at peak prices driven by product momentum and hype—only to become dumping targets when large volumes unlock.
Similarly, some projects using SAFT agreements for fundraising may not promise returns explicitly and possess technical merit, yet fail to clearly disclose round-specific pricing and release schedules. If protocol revenues cannot justify token valuations, a drop in market sentiment leads to sharp price declines, resulting in user losses, loss of trust, and potential regulatory scrutiny.
The core problem with such projects lies in failing to anchor token value to real business activity. Their incentive mechanisms lack long-term sustainability, increasing the risk of financialization and pushing the entire system toward Ponzi dynamics under stress. While these cases don’t necessarily constitute fraud or illegal fundraising, a breakdown in capital flow can still trigger liquidity crises when token prices decouple from actual project value. From a regulatory viewpoint, such designs may involve inadequate disclosure, misleading promotion, or even soft violations involving "masking financial risks with technological veneers."
While we shouldn’t automatically label these projects as Ponzi schemes, we must acknowledge that structural compliance combined with flawed mechanism design creates fertile ground for "Ponzi-ification."
How to Avoid Falling Into a Ponzi Trap?
As we’ve seen, true Ponzi schemes stem from mismatches and self-referential loops within fundraising and incentive models. In simple terms, if a project cannot generate organic revenue from real operations and instead relies on constant recruitment of new users to maintain superficial prosperity, it will ultimately collapse regardless of whether it wears a Web3 mask.
So how can Web3 projects proactively avoid falling into this trap? And how should investors identify and mitigate structural risks? Manqin Law suggests both project teams and investors consider the following points.
For project teams, building a non-Ponzi structure hinges on four key principles:
1. Reduce "paper valuations" and avoid FDV traps. Initial valuations should align with actual business scale and revenue expectations. Don’t artificially inflate FDV to create false impressions of success—especially avoid driving up token prices with minimal circulation, which misleads investors with "phantom market caps."
2. Design fair token release schedules. Token unlock timelines across all rounds should be equitable and transparent, avoiding structural imbalances such as "VCs buy at 1%, public sale at 50x valuation, retail absorbs the dump." VCs, KOLs, and core team members should have clear lock-up commitments and reasonable linear vesting mechanisms.
3. Publish full token allocation and release schedules. Disclose details including round prices, quantities, lock-up rules, and unlock timetables—ensuring structures are auditable and rules verifiable. Project teams have a duty to provide clear economic model disclosures rather than hiding release risks behind "complex curves."
4. Build real business fundamentals. Whether through protocol fees, service charges, or NFT sales, only a stable, sustainable business model can support intrinsic token value. Ensuring user rewards come from product growth—not price speculation—is the fundamental way to prevent "Ponzi-ification."
For investors, avoiding "Ponzi risks" comes down to three critical questions:
1. Where does my return come from? Is it from product revenue sharing, protocol incentives, or simply dependent on the next wave of buyers? If there’s no clear business logic explaining the source of returns, proceed with extreme caution.
2. Who got in first—and who ends up holding the bag? Understand the project’s funding rounds, token distribution structure, and unlock timelines. If circulating supply is extremely low but paper valuation is sky-high, and early holders are nearing unlock, you may be stepping right into a sell-off zone.
3. Is the investment process compliant and information transparent? Projects without clear whitepapers, vague token structures, undisclosed pricing, or inconsistent unlock schedules often signal unstable frameworks and information asymmetry—carrying risks well above average.
Cryptocurrency itself isn't inherently guilty; token fundraising isn't automatically fraudulent. Take today’s trending RWA sector, for instance—tokenizing real-world assets based on authentic data exemplifies responsible and effective use of the model.
For the industry’s future, only by anchoring incentives to real value creation can Web3 truly move forward.
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