Pyramid Scheme

A pyramid scheme generates profit primarily through recruiting new participants who each pay to join, rather than through selling a genuine product or service, with revenue flowing upward toward earlier participants.

Like a Ponzi scheme (see Kaavon's "Ponzi Scheme" glossary definition), a pyramid scheme is mathematically unsustainable, since it requires an ever-growing base of new recruits to keep paying out earlier participants. The two differ mainly in how they present themselves: a Ponzi scheme usually claims to generate investment returns and hides that it is paying earlier investors with newer investors' money, while a pyramid scheme openly pays participants for recruiting others — the recruitment is the business.

The line between a pyramid scheme and a legitimate multi-level marketing business is where the money actually comes from. A legitimate business earns most of its revenue from real sales to customers who are not part of the recruitment structure; a pyramid scheme earns it from participants' joining fees and required purchases, so it collapses once recruitment slows.

Crypto versions often borrow the vocabulary of investing or mining. Common warning signs include:

• Multi-level referral rewards, where earnings depend mainly on how many people you recruit and how many they recruit in turn.
• Mandatory buy-in "packages" or tiers that must be purchased to qualify for rewards.
• Guaranteed or unusually steady returns with no clear, verifiable source of revenue.
• Rewards paid mainly in the scheme's own token, which can't easily be sold for its stated value.
• Pressure to recruit quickly, and withdrawal limits or delays that appear once new deposits slow.

A well-known crypto case is OneCoin, which US prosecutors described as a multibillion-dollar fraud sold through a multi-level marketing network, built around a coin that had no genuine blockchain behind it.