What is the solution to the various Ponzi schemes that are occurring on a daily basis on this blockchain ecosystem?
The first thing we need to get out of the way is the naïve idea that pyramid schemes only happen in cryptocurrencies or unregulated markets or that regulation stops pyramid schemes.
Why do I say this?
A brief history lesson, the word Ponzi comes from the last name of the man who created a fund in what was then a regulated market (not as regulated as today, but regulated none the less). Another more recent example would be Bernard Madoff which created what some like to call a Ponzi scheme for the rich (this time in a much more regulated market and not so long ago by the way).
However this does not mean Ponzi schemes do not happen more often in unregulated markets, in fact they do. But the why is the important part?
So why are they more frequent on unregulated markets?
Not because regulators are stopping them, but because they are restricting access to entrance on both sides of the market enough that is very difficult to generate the type of liquidity needed for Ponzi schemes.
In other words regulation makes creating and managing Ponzi schemes harder (since you have more eyes on you at all times) but it doesn’t stop them.
So what’s the solution?
There’s only one way to stop investors from making stupid mistakes, and that is letting them learn from their mistakes, letting them lose money and become more cautious next time.
You cannot teach someone the reason they are making money on some “lending platform with a super trading bot” is because they are sitting on the upper levels of a pyramid that will surely collapse at some point leaving the vast majority of the investors with nothing.
As you probably have heard before the only way to teach the kid to keep the fingers away from the hot stove …is to let the kid touch the stove.
Not convinced yet?
Why do you think people in some countries are less likely to fall for a pyramid schemes? Because they have more experience with them, they have been burned again and again and again, and this lesson starts being passed down from one generation to the next one.
Just look at some examples and you will find that the reason investors are more sophisticated in the United States or other western nations than the rest of the world is because they have had more practice, there’s nothing inherently better about their regulatory system.
So what can we get from this?
This is a skill you cannot teach unless you use experience, the biggest mistake you can make is teach investors that they do not need to make smart choices themselves, that if they make bad choices they will get bailed out, that if they allow someone else to vet/authorize/rate/value their investment they outsource the decision making and the risk to someone else and everything is going to be ok.
History has taught us that giving that power to someone else immediately introduces corruption so that that then the people who are rating, vetting, authorizing and deciding which investments are safe are the people you need to corrupt in order to introduce your pyramid scheme just like it happened with the rating agencies in the housing crisis in 2008. This also presents another problem since centralized decision making does not scale, however markets do and they do it very quickly, specially one growing as fast and bringing so much innovation like the crypto market.
What we need to do instead is tell investors:
"There are scams out there, we will not catch them until they have done enormous damage, you will lose all the money that you put in them so be careful and for any mistake you make you will have to take full responsibility. Yes we will punish the people you did it afterwards, but the damage has already been done."
You can’t save people from their own bad decisions, trying will only make them more easier targets.
So lets all learn from this mistake and make ourselves smarter so this doesn’t keep happening, help yourself and the future generations to come.