The cryptocurrency ecosystem is heterogeneous to the bone. It is a complex fusion of benign, questionably safe and clearly malicious use cases. Cryptojacking campaigns, initial coin offering (ICO) exit scams, and Ponzi schemes have seen a rapid spike over the past few years, causing enormous losses to investors and coin holders. The lessons learned, apparently, don’t stop people from continuing to engage in various risky ventures.
The growing demand for new investment opportunities has spawned a number of legitimate financial pyramids based around Ethereum, and alternative cryptocurrency to Bitcoin, in 2018. Technically, these are Ponzi schemes whose authors do not conceal their true nature. This outright clarification is what makes them different from classic financial pyramids. They revolve around Ethereum smart contracts, a technology tasked with eliminating third-party involvement in various business interactions between companies and individuals. Let’s explore the ins and outs of these latest controversial startups.
PoWHCoin broke new ground – but also broke the bank
The modus operandi of PoWHCoin is backed by an algorithm its authors dub the Proof-of-Weak-Hands. To avoid direct conceptual associations with a pyramid, the developers are marketing it as “the world’s first three-dimensional cryptocurrency investment.” The idea is prosaic: The funds from new token purchases are automatically distributed as dividends to existing participants. Although this tactic smells like a bubble that’s about to pop, a lot of people have joined up and keep on buying tokens while realizing the risk.
For each token purchased, the smart contract underlying PoWHCoin slightly raises the price of future tokens. On the other hand, when a token is sold, the algorithm will automatically decrease the cost of future tokens. This approach is expected to thwart pump-and-dump scenarios and similar manipulations. At the end of the day, the investors who hold their coins within this system get an increment of revenue as new people join the pyramid.
As of early March 2018, the smart contract of PoWHCoin received a total of 17,810 transactions. This indicates people’s growing interest in this offbeat incarnation of a Ponzi scheme. In the end of the day, PoWHCoin was not successful. Its creator was hacked and all tokens were stolen.
ShadowFork: another smart pyramid Ponzi failure
The spinoff of PoWHCoin called ShadowFork wasn’t nearly as successful as its prototype. It turned out to be a complete fiasco, although the gist looked promising. The creators were planning to implement a business model where investors could get higher dividends than PoWHCoin had to offer. This scheme would have probably worked as intended, at least for a while, if it weren’t for a coding bug in the smart contract.
The wakeup call sounded shortly after people began joining ShadowFork. The investors realized they couldn’t withdraw funds due to a critical imperfection in the smart contract. When trying to cash out, they would bump into an error where the transaction entered an infinite loop.
The fact that this Ponzi had the blockchain at its core posed a nearly insurmountable obstacle to implementing the fix. In other words, the proprietors of Ethereum would have had to delete all transactions linked to this smart contract, which translates to rolling back the blockchain. That’s unlikely to ever happen, obviously.
In the aftermath of this incident, people lost a lot of money. The ShadowFork smart contract holds 1,669 transactions made by adventurous investors. The total amount frozen is nearly $1 million worth of Ether. Well, the participants realized the risk when joining this scheme, but they probably expected it to last longer and blow up for a reason other than a banal coding flaw.
EthPyramid is holding its ground as a ‘fair Ponzi’
The epic fail of ShadowFork didn’t stop the transparent pyramid trend in its tracks. There appear to be lots of people still willing to invest in such questionable schemes. The new EthPyramid project, promoted as the most powerful and decentralized pyramid yet, illustrates this unquenchable interest to the fullest. Its name alone speaks volumes about the essence of what it does: It’s a “fair” Ponzi offering some nice revenue to early investors as new people enter the game.
To evade negative associations with the unsuccessful startup mentioned above, the authors of EthPyramid stated upfront that they created the code of their smart contract from scratch. Although it doesn’t mean the code is flawless, this statement made the project appear rather trustworthy from the get-go. One way or another, most people intending to give it a shot aren’t tech-savvy enough to read or audit the smart contract information, so this claim of the proprietors was simply a clever marketing move.
The EPY tokens sold to investors circulate inside the pyramid only and otherwise have no value. The participants earn 10% of each buy and sell. As opposed to other legit Ethereum-based Ponzis, the smart contract allows converting these dividends back into tokens. Furthermore, there is an option of selling tokens back to the smart contract for 80% of the current value.
The smart contract of EthPyramid has pulled in funds amounting to $222,970 worth of Ether at the time of this writing, with the number of transactions exceeding 9,000. The scheme continues to grow, proving the self-preservation instinct theory wrong.
Dealing with self-sustaining pyramid schemes is somewhat of a gamble. The investors are aware that they may – and probably will – lose their funds at some point along the way. One of the most disconcerting things about the whole “white hat” Ponzi boom is that its lack of common sense may discredit the remarkable smart contract technology.