Attorney Mankiw: How can Web3 projects stay away from Ponzi schemes?

"Are virtual currencies a Ponzi scheme?"

Authors: lris, Deng Xiaoyu, Lawyer Liu Honglin, Mankun Blockchain Legal Services

This is almost the first question everyone asks when first entering Web3. Even on some social media, you can still see the assertion that "virtual currencies are a Ponzi scheme".

However, these doubts are not entirely groundless.

In the past few years, many projects have indeed built a pass-the-parcel scam through so-called "Token incentive models" under the guise of "mining returns", "daily yields", or "stable arbitrage". Therefore, people unfamiliar with Web3 or virtual currencies often associate token issuance with Ponzi schemes.

However, from a legal perspective, Mankun lawyer believes that the root of the problem is not in the currency itself, but whether the Web3 project has built a long-term self-consistent economic system, that is, the design of financing structure and incentive mechanism.

So, what kind of structure is a typical Ponzi scheme? Next, Mankun lawyer will first help everyone break down three common incentive and financing structures in Web3 projects to see how they gradually fall into the Ponzi trap.

They often do not directly promise fixed returns, nor do they use blatant interest-inducing statements like "10% daily" or "monthly principal return". However, when you truly analyze its financing structure and token distribution logic, you'll find that: although this model may not directly appear to be a Ponzi scheme, its underlying logic is still repeating the old routine of "later participants taking over from earlier ones".

The most common structure for such projects is: extremely high FDV (Fully Diluted Valuation) and extremely low initial circulation.

For example, a project's token opening price is $0.5 during its initial launch, with a total issuance of 2 billion tokens, theoretically making its FDV (Fully Diluted Valuation) $1 billion.

However, it's important to note that only about 0.5% of these tokens, or 10 million tokens worth approximately $5 million in actual circulating market value, may actually enter the market at this time. In other words, the "10 billion dollar valuation" seen by the market is just a "book valuation" calculated based on a price from an extremely small circulating supply, and does not equal the total funds the market is truly willing to pay for this project.

Additionally, the price of these circulating tokens is formed through free trading by initial public offering users or even retail investors, while private placement institutions may have previously acquired tokens at a cost of just $0.01, and only need to wait for the unlock period to gradually cash out at dozens of times the profit.

Previously, SafeMoon faced a class-action lawsuit due to a similar design. The project created price support during its initial launch through a high tax mechanism (charging high fees on both buying and selling), and heavily hyped concepts like "automatic buyback" and "community lockup" to attract continuous user buying. Although no returns were explicitly promised, the project team and early KOLs exited at high points through information and price advantages, leaving many community users waiting painfully for "breakeven" in a bear market.

This constitutes a kind of "structural arbitrage": the early price is determined by a few people's gaming. The project itself has no income, with an inflated valuation and extremely low circulation. Once the high valuation is used as a secondary market narrative, later investors become high-point bagholders.

However, from a compliance perspective, it's difficult to say such a structure is a scam, because it neither promises returns nor makes false advertisements. But its profit logic and incentive design essentially makes later investors bear the cost of earlier investors, completing another form of "Ponzi cycle". Meanwhile, once regulation intervenes or user confidence collapses, the project will quickly go to zero, and ordinary investors will find it difficult to protect their rights or recover losses.