Understanding Ponzinomics

Bottom Line Up Front

Rebasing projects promising 6-7 digit APYs require a constant flow of new money buying in to cover for when old money sells. High buy and sell taxes help ensure new investors hold for at least several weeks to avoid selling at a loss, which increases their risk exposure to price fluctuations. While it is certainly possible to turn a profit investing in such projects, it is not likely to happen from APY returns alone. Always do the math, and understand your breakpoints and risk exposure before investing.


Ponzi Scheme (noun) - an investment fraud that pays existing investors with funds collected from new investors, rather than revenue earned from legitimate business ventures. That is, when early investors want to sell, it’s money from new investors that’s paying them. When this concept is baked into the tokenomics of a crypto project, the results can look too good to be true. I’m going to use SAFUU as an example here, but the same principles apply to any such project:

Is your "too good to be true" alarm going off yet?
Is your "too good to be true" alarm going off yet?

That’s right, invest just $1k now, let compound interest work its magic, and in one year you’ll be a multi-millionaire! In a strictly mathematical sense, this is actually true. But, it relies heavily on a number of assumptions.

The Assumptions

The first assumption, as SAFUU kindly states in their fine print, is that the APY remains static for the year. There are many reasons why an APY may be lowered, usually related to scaling issues as new investors join the project. More holders means more emissions being paid out at each rebase, which can quickly become unsustainable for the treasury.

The next assumption, which goes unmentioned, is that the price would have to remain static as well. The vast majority of crypto projects don’t last a year before being abandoned and seeing a 99%+ drop in price. Maybe SAFUU (or another like it) will be the rare exception, but the odds are against it. That said, the price could always go up, right? Absolutely! But the rise would need to be more than the sell tax, which I’ve seen as high as 25%, and you’d have to be quick to catch it - the majority of projects have one good pump to all time high, then rapidly fall from there.

The third major assumption relates to the heart of why I call these ponzinomic projects: the treasury (and insurance fund, in some projects like SAFUU) help ensure price stability and project sustainability:

These two pools of money are funded by the buy and sell taxes:

The assumption then is that there will be a sufficient flow of buys and sells to maintain the treasury and insurance fund. As the number of holders increases, the amount being paid out at each rebase will increase as well, meaning the volume of trades will have to increase along with it to maintain equilibrium. If a majority of people opt for the “invest $1k to become a multi-millionaire in a year” approach, this means constantly attracting new buyers. If the hype dies down, volume drops, and growth slows, then other measures like lowering the APY will have to be taken, else the project will simply implode as soon as people start selling off.

This is not to say that every project of this type is a pure scam. It is certainly possible to turn a profit in them, especially if you are one of their earliest investors. Knowing and understanding a few key breakpoints can help better inform your investment strategy, and increase your chances of staying in the black.

Break Even and 2x Breakpoints

Two common milestones in any investment are when you break even, and when you have doubled your initial investment. So, let’s use the APY calculator on SAFUU’s website to see when these would happen. We’ll start with a $1k investment, and assume that price and APY will remain fixed:

So, 6.43 tokens at $155.73 each gives you your $1k initial investment. But wait, what about that 14% tax on buys? That’s not being reflected in their calculator, and I doubt the omission was accidental. Here’s what a $1k initial investment would actually look like:

You’d have 5.53 tokens, or around $860 worth. Now, taking into account the 16% sell tax, you would have to accrue about $1190 worth of tokens to break even, should you decide to sell everything and walk away. According to their calculator, that would take about two weeks:

Again, this is assuming that the price and APY remained fixed. So, how long would it take to double your investment? Let’s say you wanted to pull your principal investment ($1k), and keep an equal amount in SAFUU to let it ride. You would have to accrue $2190 worth of tokens to do so, and it would take right around 42 days:

So, if you just buy and hold as the conventional (3,3) wisdom suggests for these kinds of projects, you’re looking at 14 days to break even, and 42 days before you double your initial investment (assuming you’re only pulling half, and letting the other half ride). AND AGAIN, THIS IS ASSUMING THE PRICE STAYS THE SAME THE ENTIRE TIME.

The Takeaway

Any project offering a 6-7 digit APY relies on a constant flow of transactions to maintain their treasury and insurance pools. High buy and sell taxes help ensure buyers will hold their bags for at least a few weeks, short of any major price spike, to avoid selling them at a loss. While it is certainly possible to make money investing in these projects, especially for the earliest investors, buyers should carefully consider the tokenomics and revenue streams of the project before jumping in. If transaction taxes are the only source of revenue for a project like these, do not expect them to maintain a high token value and APY for very long.

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