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> That being said, calling these platforms "ponzis" isn't correct, the most you can say is that they were front ends for a ponzi. It would be like setting up a front-end to receive investments, and then depositing the money with Madoff. I'm not saying that it is a legitimate business, just not a ponzi.

Something like this happened with Madoff in a very similar manner to what you describe.

Madoff was a board member on one the schools at Yeshiva University. J. Ezra Merkin was on Yeshiva University's investment committee. Merkin funneled some of the University's money directly into his own fund which turned out to be 100% invested in Madoff.

Now, in some ways this is an even bigger ethical breach. lets say Merkin didn't know that Madoff was sketchy, why does he have to use his fund as a middle man for the University's funds when Madoff is on the board so he presumably can invest the funds directly with Madoff. The only reason is to skim off the top. For others, who didn't have an entry into Madoff's funds themselves, perhaps the middleman has value (assuming the middleman really believes in the underlying investment, if they are just there to skim off the top, the I would say they are not fundamentally different than ponzi themselves, as they are just pulling a Sgt Shultz, "I see nothing, I hear nothing, I know nothing")

> the most you can say is that they were front ends for a ponzi. It would be like setting up a front-end to receive investments, and then depositing the money with Madoff.

This was absolutely a thing; most large Ponzi schemes have feeder funds.

https://www.reuters.com/article/us-pwc-madoff-settlement-idU...

Interesting. I had no idea, but it definitely makes sense. Thanks for sharing.

Indirection seems to be very valuable with scams. The 2008 housing crash had a lot of layers:

1. Loan Application (Borrower Lying about income) 2. Mortgage Originator ( Not validating loan application ) 3. Mortgage Back Security Creators ( Obfuscate what is in the security ) 4. Ratings Agencies ( Not being honest that step 3 happened ) 5. Sellers of MBS ( Not being honest that steps 1-4 exist )

I don't know enough about crypto to list out all the layers but I'm pretty sure I understand the first step:

1. Claim that underlying technology will be revolutionary just like the internet in a vague way that cannot be validated.

im pretty sure at this point everybody knows there is nothing behind it, at least 80% people that invest in something like this, so like Ponzi they hope that enough people will come in that they can cash out before everything falls out.

6. Buyer not caring about any of this

7. Absolutely nobody at all caring about this until shit hit the fan.

It's a psychological concept that maybe up to 15% of a deviation from cold hard truth is normal embelishment or puffing. When you line up 5 actors each puffing in the same direction it's easy to get a material total effect, e.g., 75% in the example above, while each actor can maybe feel comfortable themselves with their role in it. This unfortunately is not terribly unusual.

I'd swap 1) and 2). The people writing the mortgages were telling the borrowers to lie, and that the lies wouldn't be checked. It wasn't some oversight.

I understand, there were some cases where #1 didn't even exist, The person at #2 edited the application without #1 knowing. But the #1 situation happened as well, sometimes because a realtor told them that was the only way they would get the house.

I think it was mainly independent mortgage brokers who were telling borrowers to lie, not the actual banks who were providing them

The front-end is the ponzi. The whole point of the ponzi is that there is no investment activity happening beyond tricking customers into depositing funds. So being the front-end for a ponzi (even unwittingly) means you’re an integral part of the scheme.

It wasn’t so obvious for some people…

https://www.hbs.edu/faculty/Pages/profile.aspx?facId=697248

https://medium.com/terra-money/have-you-met-marco-216ca2a8b9...

https://assets.website-files.com/611153e7af981472d8da199c/61...

https://cdck-file-uploads-global.s3.dualstack.us-west-2.amaz...

Why did you decide to join Terra?

I thought Terra provided the perfect environment to apply what I learned in my research. Ensuring the stability of a digital currency closely resembled the issues faced by central banks in deciding monetary policy measures, while the lessons learned in studying trading in the equity and bond markets are crucial in guarding against potential manipulation by malicious market participants.

What do you think are Terra’s strengths compared to other blockchain projects or potential competitors?

There are several, but I will mention just three. First, there is no improvisation. In fact, our strong research team stays grounded and informed by the latest research in economics and finance, devoting a lot of attention in making sure that Terra’s ecosystem remains stable. Second, top eCommerce companies in Asia are pushing for Terra’s adoption, ensuring that Terra will be widely used from the start. Finally, the team is composed by a diverse and uniquely qualified set of people that are excited to collaborate in solving one of the most exciting challenges of our time.

Those 3 reasons can be summarised as : "We are a bunch of excited 20yo who think they know better than everyone else and we have received pinky swear promises from shady asian websites, so we are definitely going to be rich, trust us ! xoxo"

That guy is at least 35 but he surely compensates the old age with lots of enthusiasm. After all, you don’t get a chair of royal garments innovation by pointing out that the king is naked.

Just so you know, referring to 35 as "old age" isn't cool. At all.

Sincerely, an old fart who hasn't seen 35 in the rearview mirror for a while now.

I was replying to a comment about “a bunch of excited 20y”.

For what it’s worth, I was also 35 once.

Duly noted.

Hopefully you're not referring to a past life.

Definitely 35 are no longer in my future!

Nothing in there indicates that he thought Terra would stay stable. Indeed, you can even read it has him wanting him to be involved becuase he found the lack of stability an interesting problem to try and solve.

“We propose a cryptocurrency, Terra, which is both price-stable and growth-driven. It achieves price-stability via an elastic money supply, enabled by stable mining incentives.”

“Terra achieves price stability by creating stable incentives for mining (PoS consensus) via highly predictable rewards. We propose a framework to evaluate the stability of Terra’s peg under stress. […] Our findings, based on 1 million years’ worth of simulation data, indicate that Terra’s peg is highly robust under both forms of stress.”

Growth driven is a nice euphemism for ponzi scheme.

> That being said, calling these platforms "ponzis" isn't correct

I feel like "ponzi" has become the "magazine/clip" derailer of crypto discussions.

Some very smart people mistake being pedantic for being smart.

It's very easy to join a "conversation" by picking up a pedantic point. Compare that to arguing over the fundamentals which actually requires some knowledge and experience.

By being pedantic it's very easy to "win" an argument, you're entering with a position you consider factually correct.

It's not at all productive as you indicate, and actually harms more productive conversation by de-railing the conversation.

A ponzi is when an investment that supposedly produces a return actually pays the funds needed to deliver that return from new entrants to the scheme rather than productive enterprise.

Given that there’s literally no productive return-producing enterprise underpinning any of this it’s totally fine to consider the word ponzi at least loosely applicable to the entire concept of cryptocurrency as practiced.

By this definition most crypto wouldn‘t be a ponzi. E.g. bitcoin doesn‘t claim that funds are invested in productive entreprise. It is clear that it is only a value store (like gold). Whether it is any good at storing value long term, we will see.

Bitcoin proponents definitely (for a time) claimed that it was Bitcoin's utility as a currency that gave it value in the first place. That everyone would need some because everyone would use it to transact. That's a claim of an inherent investment value that didn't actually exist, making Bitcoin exactly like a distributed Ponzi scheme.

It was originally created to be a form of non-fiat democratized currency. It is exactly that even though it's not its most popular use which is as a store of value. I don't see how that makes it a Ponzi scheme. I buy things with it a few times per year and do my degenerate sports gambling with it all the time. It works within seconds for almost no cost.

> That being said, calling these platforms "ponzis" isn't correct, the most you can say is that they were front ends for a ponzi.

“Its not a Ponzi, it's just paper thin layer of indirection on top of a Ponzi, which is often how most victims of a Ponzi scheme are brought in” is maybe not as important of a distinction as you are making it out to be.

> I'm not saying it's a legitimate business

Umm, once it's not a legitimate business, it's fraudulent. Exactly what type of fraudulent is a somewhat secondary issue.

[of Boiler Room scams of old] "... often rely on high-pressure sales tactics, such as aggressive cold-calling, misinformation, and extravagant promises to assure buyers that they are buying "a sure thing." [..] The SEC requires brokers to adhere to strict standards when selling securities. Brokers may not misinform or omit material facts when selling securities; nor can they exaggerate their own track records. They are also required to have a “reasonable basis to believe that a recommended transaction or investment strategy is suitable for a customer.”"[0]

Ring any bells?

Do we think customers are really giving informed consent before putting their savings into these platforms?

[0] https://www.investopedia.com/terms/b/boilerroom.asp

josu didn’t say it wasn’t fraudulent, just that it wasn’t a Ponzi scheme, which is a particular type of fraud. (I agree)

Bad grammar on my end, just edited the comment to clarify that I was indeed saying that I don't see it as a legitimate business.

So how is the 20% interest created?

Excuse my ignorance on crypto. I don’t understand how UST can drop 90% when I assume it required some sort payment of some other currency/coins to get mint them. I heard it was tens billions of UST was minted. So what happened to these coins? Were they used to pay out the interest?

Read Matt Levine's columns on Luna, or listen to the most recent podcast from Odd Lots with Galois Capital.

They answer all your question and are much more cohesive than anything I could type here.

> Matt Levine's columns on Luna

Thanks, some great stuff. This[0] jumped out at me:

"But there is no magic here. There is no algorithm to guarantee that Luna is always worth some amount of money. The algorithm just lets people exchange Terra for Luna. Luna is valuable if people think it’s valuable and believe in the long-term value of the system that you are building, and not if they don’t.

The danger here is that Point 7 never goes away. Any morning, people could wake up and say “wait a minute, you just made up this all up, it’s worthless,” and decide to dump their Lunas and Terras."

[0] https://archive.ph/HQAwY

To be clear, I was interpreting josu's “these platforms” as the layers on top of UST, not inclusive of UST itself. He also mentions that they might be ”front ends for a ponzi” which is basically where I fall on this. (So, to your question, the answer would be that the yields in fact do come from a ponzi mechanic)

This is a pretty meaningless distinction if you invested in them, because you were exposed to the same mechanics, but it does have some implications for culpability because it's the difference between “should have known it was a ponzi” and “actually operated a ponzi”.

A feeder fund for a Ponzi is a still a ponzi, even if it is a step removed from the core fund. Thus a "front-end for a ponzi" is a ponzi.

> but it does have some implications for culpability

In many jurisdictions around the world, there isn’t much of any difference between “directly handed the loaded gun to the killer” and “pulled the trigger and killed someone”.

> So how is the 20% interest created?

I'd treat the offer of earning 20% interest on a risk-free investment with the same scepticism I'd treat the offer of buying a perpetual motion machine.

You can have abnormally high interest, or your capital can be risk-free. I simply don't believe it's possible to have both, at least not over the long term.

Interest has to come from somewhere. It is a zero sum game. There has to be some mechanism that is generating interest unless you're paying from the money invested which would qualify as a ponzi scheme

Feeder funds are a normal part of the structure of modern ponzis, Madoff had them too. Pirate40 had them. They're ubiquitous and an important part of scaling up these fraudulent operations. Essentially all HYIPs have them.

Not only do feeders increase the sales force the reduction in yield by the feeder's profit margin actually helps hit more of the potential market: People hear 20% apy and assume it's a scam... but 15% apy? 10% apy? -- starts just sounding like a good deal.

> It would be like setting up a front-end to receive investments, and then depositing the money with Madoff. I'm not saying it's a legitimate business, just not a ponzi.

So, it’s neither legitimate nor a Ponzi. Cool, what is it then?

it's fraud

The whole thing reminds me of something more like baseball cards or other collectibles, where the monetary value rests in a collective belief in the inherent value.

How much of the real value of cryptocurrency is not monetary? How much of the value is in the existential value of participation, e.g. Dogecoin?

You're pretty much exactly right with this intuition. The infamous MTGox exchange, the grandaddy of all rug pull Bitcoin / crypto disasters, started out life as a platform for magic the gathering trading cards. Recognizing an overlap in both the mechanism and the type of motivation driving both types of trading activity.

networks derive their value from participation. ex. if the us government held 100% of dollars or berkeley had 100% of internet connected devices or jack had 100% of twitter accounts, these dollars or devices or accounts wouldn't be very useful

IANAL, but anything between fraud and gross negligence I guess.

Fraud is very obvious. Which part of it is simply “gross negligence”?

They drank the kool-aid and actually thought that the risk of a depeg was very low, or that they would be able to pull out the money in time?

Hanlon's razor.

I don't think Hanlon's razor is safe to apply in the finacial/cryptocurrency space.

Then you haven't spent enough time in the cryptocurrency space.

That’s possible, though I would expect more due diligence from a (unregulated quasi) bank…

When you pretend to be ignorant about parts of a crime that you haven't been proved to be involved with (although you built your entire business around the crime.) Between being charged with malice or stupidity, the wise man chooses stupidity.

Investing client cash in a scheme that promises to pay 20% yields with an explicitly ponzi like setup seems like gross negligence.

Terra and the Anchor protocol should have appeared fraudulent to any expert from the very start.

Great insight. Unrelated but what is the sortino achieved with your delta neutral strategies? If it possible for a regular joe to get in?