Are all DeFi Ponzi schemes?
Editor's Note: This article comes fromBlock Record (ID: BlockchainInsights), published with permission.
Editor's Note: This article comes from
Block Record (ID: BlockchainInsights)
Block Record (ID: BlockchainInsights)
, published with permission.
When a company does something bad, its stock price goes down. Shareholders will sue.
Bad things happen to a company, but it's not management's fault. Shareholders are suing them for not disclosing the risk of bad things happening.
Everything is securities fraud.
This dovetails with the latest accusation against DeFi: that everything is a Ponzi scheme.
Ampleforth, and its fork project YAM, were recently branded a Ponzi scheme by cryptocurrency purists. The economics of AMPL are designed to reward early investors heavily, which has drawn the ire of many detractors.
DeFi heavyweights like Synthetix, Maker, and even Ethereum have also been dubbed Ponzi schemes simply because of the incredible returns they generated for early investors.
Such a definition is too broad, so what is not a Ponzi scheme?
Based on the above definition, any investment that rewards early investors with an influx of funds from new investors can be classified as a Ponzi scheme. And as it happens, every successful investment in history has met this criterion.
From 1982 to 1987, Apple stock traded between $0.22 and $1, adjusted for stock splits. Anyone who invests at these prices and sticks with their stock is up at least 500 times today. Because of the way demand and supply work, the only reason we know that Apple's stock has exploded between then and now is because new investors poured hundreds of billions of dollars into the company's stock.
After the stock split, Microsoft's stock price was $0.10, and during the dot-com bubble, it even went as high as $60.
Investors who bought shares after listing and sold at the peak of the bubble used unwitting retail investors as exit liquidity. Thus, early investors profit directly from new investors' funds.
So are Apple and Microsoft a Ponzi scheme? not completely.
The difference between a legitimate investment and a Ponzi scheme is the intent to defraud. Madoff did not defraud $65 billion from clients' accounts. Bitconnect is not a well-intentioned company that miscalculated its advertised benefits.
In fact, both Madoff and Bitconnect have been known to deliberately defraud innocent people.
But YAM is not trying to deceive participants. They overstate the return on investment by failing to pass on the money they collect from later investors to earlier investors. The first iteration of the project is due to a bug - a risk that the team often mentions.
If you invested in Apple in 1987, you didn't buy part of the world's most innovative technology company. You are buying a very risky company that is challenging the status quo and has a considerable probability of failure.
