Translation: Ponzi Cosmo Shuttle Guide Chapter 1: Uncovering the Game Behind Crypto Ponzi with First Principles

This article is written by Jordi Alexander, Chief Information Officer of Selini Capital, published on December 30th, titled "Of Smoke and Mirrors, Part 1". The Chinese version is for reference only. For any discrepancies, please refer to the original article.

Chapter 1: The Ultimate Answer to the Ultimate Question of Life, the Universe, and Everything

I heard you want to know how to navigate the unknown waters of the Ponzi universe! Since you've traveled so many light-years to get here, let's get straight to the point:

The answer to the ultimate question you seek is -4,+2. This game theory symbol represents an interactive outcome ── X,Y, where player 1 ends up with X, player 2 ends up with Y. This means that in a Ponzi scheme, if one player ends up profiting, the other player will lose even more.

In simple terms, for every 2 Lamborghinis the Ponzi scheme earns, it takes even more entrance tickets from those who leave empty-handed.

The game of gathering resources has a long history, evolving over centuries to efficiently satisfy people's desires: the desire for success, to be part of a community, to be part of something more accomplished than oneself.

As we enter the era of web3.0, everything around us becomes more financialized and tokenized, mechanisms that will only become more complex and bizarre.

Complexity is the fraudster's favorite weapon. The more time and expertise required in a game, the easier it is for people to be deceived by the illusion of their ability to win. So buckle up, we are about to take a super-fast tour in the Ponzi universe, exploring the "Three Fundamental Laws" of the Ponzi universe.

Chapter 2: The Three Fundamental Laws of the Ponzi Universe

In thermodynamics, a "closed system" describes a system completely isolated from the environment. This introduces the concept of a "closed investment system": funds entered into a protocol solely for the purpose of monetary return.

More specifically, imagine it as a poker game with 8 players.

If 4 of them are professional players there to work, and the other 4 are there for social and entertainment purposes, then the game is an open system. But if all 8 are professional players, then the game becomes an economically closed system.

Ponzi Economics Law #1: The amount of funds in a closed system can be moved, but it cannot exceed the original input of funds.

An economically closed system cannot create more value, it can only redistribute the input funds. Thus, while it can create winners, it does so at the expense of other participants.

Zero-sum games may have some room for cooperation, where people band together against others, but eventually turn into a hunger game. Ultimately, they turn into opposition, players against players, an unknown against an unknown.

But when hidden costs are considered, it's not just a zero-sum game, it becomes a negative-sum game.

Ponzi Economics Law #2: Entropy loss in a closed system only increases over time.

Transaction fees, arbitrage bots, sandwich attacks lurk around us, aiming to siphon value. Additionally, high Gas costs, potential code vulnerabilities, the cost of just operating the system keep increasing...

And this is without even considering if the founders have left backdoors to reallocate funds to themselves.

As time passes and costs accumulate, the amount of money players can win decreases. In the poker example, if they play for a long time, the casino's rake will increase, ultimately taking all the money on the table.

As losses in the system continue to grow, we arrive at the final law.

Ponzi Economics Law #3: As money in the system starts to decrease, activities in the system also decline to zero.

When incoming funds start to dwindle, the rocket's fuel runs out, and the death spiral begins. People lose hope for future wealth, rumors abound, communities and shared ideals spiral downward.

This death spiral may take months or years to manifest, but as the Ponzi scheme grows larger, it requires multiples of capital to sustain the game.

Once a Ponzi scheme grows to a scale of billions of dollars, maintaining the system's organic losses requires a significant influx of new participants, creating an insurmountable gravity.

In the world of cryptocurrencies, we have witnessed numerous iterations of this evolution in DeFi protocols. These forked protocols, aside from different branding and names, deployed on new blockchains, do not add any additional utility, and have entered the Ponzi loop. The staggering returns from liquidity mining gradually attract new users to mine, increasing the Total Value Locked (TVL), and the protocols evolve.

However, without inflows from open systems, they will ultimately spiral into a death spiral. Step by step towards extinction:

Chapter 3: Framework of Primary Principles and Common FAQs

The basic structure of every game is the same:

1. Opening: People pool money together
2. Mid-game: Funds are dispersed and transferred among players through mechanisms
3. Endgame: Pooled funds are reallocated, determining winners and losers.

As we know, the middle part is primarily a psychological game, so skipping that part, let's dive straight into the final "endgame" segment.

Whether you are actively participating in the future of financial farming or joining the web3.0 revolution of "Dance-to-Earn," ask yourself:

"Who will provide returns for the investors, and do they have sufficient reasons to do so?"

Compliant protocols will have a clear answer to this question. They will explain the execution risks involved in the protocol, ensuring potential investors have a thorough understanding to make informed decisions.

Meanwhile, modern Ponzi schemes have mastered the art of speaking, often using vague and tangential logical arguments. When faced with the above question, they will continuously revert back to psychological mechanisms.

Here are common plots of "fraud" and "social Ponzi schemes" (lacking imagination).

Fraud: We have a secret system that combines super AI and machine learning to trade, mine, and generate high returns. But don't ask what it is, it's a proprietary secret alpha.

Social Ponzi Scheme: We are like Bitcoin, but with superior design, we will replace the dollar as the "reserve currency" and achieve things Bitcoin cannot!

While these stories may sound like catchy slogans, making alpha accessible to everyone, or making the world choose to live with "XYZ Shitcoin," these stories are clearly unrealistic. If you had a Ponzi scheme detector, it would sound the loudest alarm in these scenarios.

Common Freeloading Question #1: If it's not all black and white, how do you judge the extent of a Ponzi scheme? Aren't all things to some degree a Ponzi scheme?

In fact, Ponzi schemes have a scale ranging from worst to best, divided into 4 levels:

• Outright Scam: Founders continue to plan a Rug Pull.
• Crypto Ponzi: Attempts to achieve real-world use cases with unrealistic and vague plans.
• Might Fake It Till Make It: Has revenue but offers significant incentives, still working to build enough moats to withdraw some incentives.
• Not a Ponzi Scheme: Has moats and can generate sustainable income.

Common Freeloading Question #2: Where do meme coins like $DOGE stand on the spectrum?

Meme coins are a form of Ponzi scheme, but not malicious. Since people invest in a joking manner, it can be seen as voluntary investment for entertainment value within the community. You can even go further to understand it as:

"This meme is hilarious. Other people might like it and it could become popular! If lucky, some wealthy and influential whales may decide to spend resources to create real utility for this meme coin!"

For instance, $DOGE holders could bet that Elon will use his money to create value for holders, adding some fun to his life.

Common Freeloading Question #3: If the first law is true, and the protocol itself cannot generate cash flow, how can it afford to pay out high rates of return? Some protocols even claim to sustain a 50000% annual interest rate.

It's important to note that the interest rates paid by the protocol in its tokens are misleading. Protocol valuation calculation: Y token quantity * V value per token.

Think of it as a rectangle with constant area, where you can increase the length, but the width decreases proportionally. The value of each token is diluted at the same rate.

A daily interest rate of 10% with an annual rate of 3660% causes the value of each coin to decrease by 10% daily. The Smarter Coin game demonstrates this destructive effect. Coins initially purchased for 6 cents end up being less than 1 millionth of their value, diluted by the staggering annual interest rate.

However, high APY allows for the "Squid Game" player-to-player slaughter, where whoever surrenders and sells at a reduced price to match the V token value can gain new value from other users.

Common Freeloading Question #4: But if no one sells and causes the price to rise? Doesn't the market cap increase as a result?

Indeed, this is why market cap is not a good measure for tokens manipulated or tightly HODLed. If liquidity is low and supply continues to be met, the price can easily be artificially maintained at a high level, at least for a period of time.

Below is a (rough no entropy assumed) zero-sum version:

However, it's always a game dominated by the selling strategy, and any other equilibrium besides selling out will not tend towards stability over time.

If two players unwilling to sell want to exit the game with a 3,3 result, the only way is to have a dumber third party player join.

3,3 is fake. 3,3,-6 can be real, but should not be applauded.

Chapter 4: The Possibility of Redemption

If we give utility a very broad definition, protocols can exit closed investment systems and introduce utility in various ways. While some protocols seem questionable, if a Ponzi scheme decides to abandon its thug-like ways and go legit, here are some exit paths.

Gambling Entertainment: The prevalence of physical and online casinos proves that there are plenty of people willing to exchange money for a fun speculative experience. As long as the PvP motivation remains fresh and engaging, the project can continue.

Community and Memes: Creating a sense of belonging that ultimately makes people willing to pay for it. Interesting content further increases this opportunity. NFTs may be the best design for this aspect.

Charity/Donation: If people believe the project benefits the world, they will be willing to perform a feel-good charitable act with money. So far, this is an unproven token model, but it may work at times.

Investment Scheme: Transforming the funds in a Ponzi scheme into a decentralized hedge fund/income aggregator/venture capital fund. While the business model itself has been validated, transitioning from a different outcome to an investment plan leaves many questions unanswered, keeping people engaged.

Attention Aggregation and Sale: Time and attention are the scarcest commodities in the market, and with thousands of protocols and products competing for people's time and attention, it becomes increasingly likely to monetize them. With a large user base, protocols can package them into sellable products to generate revenue in an open system. New protocols will offer their initial users liquidity mining rewards to stimulate activity, in which case, the rewards can be directly attributed to the protocol.

"In web2.0, if you're not paying for the product, you are the product; in web3.0, if your attention is not rewarded, someone else will grab it and get rewarded."