Checklist: how to distinguish a working crypto project from a pyramid scheme

Fraudsters are increasingly using cryptocurrency projects as a disguise to get hold of users' funds. Here are the key factors to identify such schemes

146 pyramid schemes were detected in the first half of 2021 and the number of victims of "Finico" alone exceeded one million people. However, we do not know about all the victims of fraudsters.

There is an opinion that the passion for pyramids is peculiar only to the inhabitants of the post-Soviet space, and the Americans are more resistant to tricks of swindlers who study finances from their school years. However, things are not better in the U.S.: losses totaled $3.25 billion in the quiet pre-crisis year of 2019 alone.

Financial pyramid schemes are now increasingly masquerading as cryptocurrency projects, but there are key differences that identify a fraudulent scheme. We have prepared a checklist, a question on even one item of which will become a red flag.
The pyramid has no free market for trading their "notes". Examine on which exchanges the token you are offered is traded. It is desirable that there are a lot of exchanges, and among them there are well-known major venues. If the entire infrastructure of the project is concentrated in one site, which exchanges the "coins" - that is a very bad sign. What will happen when this site is closed?

Pyramids always have liquidity problems. Even if the token is present on several exchanges, check what is going on in the exchange stack and look at the history of transactions on the pair with the token of interest. There should be a lot of trades and the exchange stack should have offers to sell as well as offers to buy the asset. If the token you bought is traded on dozens of exchanges on high volumes, as well as on many AMM (Automated Market Making) services and swaps, this is a good sign. Even if some resource on the list closes for some reason, you will still have access to liquidity on all other resources.

Checklist: how to distinguish a working crypto project from a pyramid scheme

A real crypto project will not only have its own desktop wallets and browser extensions, but also support from developers of many third-party wallets and mobile apps. That said, pyramids don't have their own software.

A pyramid has no active community. All messages on forums and telegraph channels of project are just of enticing nature. There is no diversity of opinions and no dialogue between participants. Messages with specific questions or doubts are deleted or receive formulaic answers.

The central condition for participation in the pyramid is bringing referrals and acquaintances. Cryptocurrency projects or exchanges may also offer various bonuses for registering with your referral links, but they will be quite modest and their use is optional.

Pyramid offers huge annual profit percentages. Real cryptocurrency projects never offer fixed, fabulous percentages of profit. The success of your investment will depend on market conditions for the asset you bought. An exception to this rule would be liquidity provision tokens (LP tokens) on decentralized financial platforms (DeFi). Indeed, the profits of liquidity pool stake holders in pairs with non-liquidity tokens can amount to hundreds of percent annually, which are directly related to commissions from trading within the pair by other market participants. However, all is not so cloudless in DeFi either. The peculiarities of use and security at such services represent a separate big topic for a full-fledged article.
Pyramid "funnels" have no functionality. Tokens for real projects can have many functions - from allowing the holders to vote on project development to being used as internal currency in a computer game or video hosting service.

Last but not least, you should pay attention to where the information about the potential investment came from. This is a subjective criterion, but unlike the other points, where it will take time to research the asset, this point will help you quickly flag the information as potentially dangerous. What site did you read the information about the project on? If this resource has a long history and a good reputation, there is less chance of falling into a pyramid scheme. Every well-known source tries to take care of its reputation and the fact of mentioning a pyramid can seriously damage its image. It is a different matter if the ad comes in the form of spam from a newly created Telegram channel, which may cease to exist after a week.
The above also applies to people. Is your acquaintance recommending that you invest somewhere? It's a good time to ask yourself the questions: why should he do it, what is his own past investment history, what emotion does he present his message with? A true expert with extensive experience in investing in securities or cryptocurrencies, will definitely mention the risks of any investments and recommend using only a small amount of your total portfolio for a new project. On the contrary, a fraudster, or a person led by fraudsters, will be overly optimistic, he will rush you and recommend you to invest as much as possible, which goes against the generally accepted rules of investing and money management.
Using this checklist will help you reduce the risks of being involved in pyramid schemes or other fraudulent schemes in the cryptocurrency world. However, keep in mind that pyramid scheme creators never stand still, constantly disguising their schemes more thoroughly. The final decision to buy this or that instrument is always up to you, make a decision only when you have studied the instrument yourself, using all methods available to you.
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