AnalysisScams

PonziCoin: A joke ICO that went too far

  • During the 2017 bull-run, the cryptocurrency market attracted many investors with a lack of experience, leading to an increase of high risk investments in lesser-known projects.
  • PonziCoin was released in January 2018, and allowed people to purchase tokens and resell them to a smart contract for profit, on the condition that others buy in to raise the price.
  • The project was abandoned after the smart contract reached a peak balance of $175,000, with many investors losing money and the founder fearing a charge for fraud.

In the 2017 bull-run, the cryptocurrency market attracted a hoard of investors. While some of these were well-informed individuals, often having gained experience in other markets, many of those attracted to the potential of cryptocurrency were drawn in by Bitcoin’s massive price increase in late 2017, and had little to no prior investing experience. For some, the cryptocurrency market was their very first experience with trading.

Presumably as a result of a lack of trading experience, the cryptocurrency market has seen investors dump large amounts of money on projects over rumours, hype, or simply to get invested before other people do. This trend of careless investment was likely reinforced during the 2017 bull-run, in which many cryptocurrencies gained value regardless of their individual merit, as new money flooded into the market.

By the end of 2017, many people had become fast and loose with their investment practices. It was not unheard of to invest in projects that were known to be illegitimate or scams in order to make money. For example, when it was revealed that BitConnect was a Ponzi scheme and a scam, some people chose to buy in after the currency crashed, causing its value to almost triple for a few hours.

Enter PonziCoin, a self described Ponzi scheme and scam. Released as an ICO in January 2018, the project aimed to create “the world’s first legitimate Ponzi scheme”, through an Ethereum smart contract.

PonziCoin tokens could be bought and sold through the smart contract. The organiser of the ICO claimed that what differentiated PonziCoin from a malicious Ponzi scheme was the fact that there was no way for themselves to take the money from the ICO and run.

Money was prevented from exiting the system through the design of the smart contract. Essentially, once PonziCoins were purchased, the Ethereum used to buy them would be held by the smart contract. The contract would buy back any tokens purchased for a quarter of the price, and would double the price at which it bought and sold tokens with every 100 tokens sold.

The use of a smart contract meant not only that the owner could not run with the money, but it also automated the entire Ponzi scheme. An investor looking to make money could purchase a number of PonziCoins from the contract, wait for other investors to buy tokens until the price had doubled three times, and sell their PonziCoins at a quarter of the new price, which would be double the price that they entered at.

Making money with PonziCoin requires that other people invest more money after the individual makes their initial investment. This is what makes it a Ponzi scheme, as money entering the smart contract through new investors is used to pay off previous investors as they sell their tokens. This process is elegantly summarised in their whitepaper.

The fact that PonziCoin could legitimately be used to make money attracted attention in the community. Despite the fact that it was basically advertised as a scam, people actually decided to invest, with the balance of the smart contract reaching $175,000 at its peak. While the project was presented as a joke, people used it and actually made money.

Looking at the smart contract on the Ethereum blockchain, winners and losers of the stunt can be identified. One investor sent approximately 25 ETH to the contract, withdrawing 34.5 ETH after the price increased, netting over $9000 worth of Ethereum at the time. Naturally, as the funds of new investors were used to pay back old investors selling their tokens, other people will have collectively lost $9000 in this process.

The contract drained naturally through people selling their PonziCoins. However, people who were unaware of how the contract worked believed that the organiser of the ICO had taken the money and left.

In the aftermath of the project, a statement was released on the website, explaining the ICO from the owner’s perspective:

“This was a parody art performance/joke. I did not “run off” with the money, I never sold any of my PonziCoins, and the contract was drained from other users withdrawing. Please be careful when investing in shady cryptocurrencies, especially ones that look like pyramid schemes – it’s a zero sum game and money doesn’t appear out of thin air.”

While the project may have been a joke for the creator, many people lost money through investing in the ICO. While the smart contract could not be taken down, the founder of the project chose to shut down the functionality of the website, amidst fears of being charged with fraud.

PonziCoin was not the first attempt at a transparent Ponzi scheme. In fact, it was not even the first to use smart contracts. Ponzi.io and PonzICO were both Ponzi schemes introduced with a similar smart contract system to that of PonziCoin, released in 2014 and early 2017 respectively.

However, PonziCoin was released during a time when hype and reckless investing ran wild in the crypto community. The market created a breeding ground for shady projects, and while PonziCoin was arguably one of the most transparent crypto projects, it attracted the same type of investment as scam coins such as BitConnect.

Ultimately, PonziCoin did become what the owner had hoped for; an interesting performance art piece. They did knowingly set up a scheme in which some people would inevitably lose money, but conversely, those who lost money knowingly participated in the scheme, and were warned adequately.

While it may have been an obvious joke and should have been treated as such, the fact that PonziCoin actually attracted investment at the time conveys how irrational some crypto investors had become in the wake of the 2017 bull-run.

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