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A brief history of cryptocurrency Ponzi games up to Fomo3D

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Cryptocurrency Ponzi games have a long (at least by cryptocurrency standards) and fascinating history.

Bernie Madoff would be proud. The popular FOMO3D Ponzi game is sitting on over 35 million dollars' worth of ETH, while its copycats and imitators are pulling in millions more.

It's been a long and fascinating road to get this far though, and open and transparent Ponzi scheme games have been a staple of cryptocurrency for a while now. These are projects that openly describe themselves as Ponzi schemes and explicitly tell users how it all works.

At its heart, the idea behind the Ponzi games, as well as scams themselves which don't openly admit to being Ponzi schemes, is simply for people to deposit money into an account, and then get back more than they deposited. The game ends when there are no longer enough new deposits to pay out the most recent participants.

A brief history of crypto Ponzi games

It's worth walking through a brief history of transparent cryptocurrency Ponzi games, if you're into that kind of thing.

2011: Bitcoin Ponzi games emerge

Open bitcoin Ponzi games have been going on since at least around 2011, and people seem to have had a lot of fun playing with different rule sets (higher or lower payouts, letting players choose the fees for the next person in line, different minimum and maximum deposits, etc) to try to create the catchiest Ponzi scheme around and enrich everyone at the expense of the unlucky punters who get caught holding the bag at the end.

At its heart, Ponzi games of any kind are similar to more widely-played games such as pass the parcel, musical chairs or buying a house in 2007.

But overall, the early ones might be best thought of as online trust fall games. People deliberately fall by sending money to a stranger, and then trust others to catch them by sending even more money to the same stranger. And everyone trusts the game's creator not to exit scam on them and run off with all the money.

2014: The next generation

The games have evolved over the years and across bitcoin's ups and downs, but got kicked up a distinct notch in 2014, shortly after bitcoin's first foray above $1,000 injected a lot more money and interest into the space as well as when someone created PonziCoin, an automated Ponzi game that brought trustlessness to the system. With increasingly large amounts of money at stake, it got more important to programmatically remove the possibility of exit scams and create transparently fair Ponzi games.

The first PonziCoin met an untimely end when its funds abruptly disappeared after a month in operation. Initial speculation was that the game's owner had run off with the money, and that PonziCoin might have been a scam.

The founder later said the game's website was hacked, and that it was time to put the thing to bed. The game turned over roughly $126,000 in its lifetime, assuming average bitcoin prices of $600 for the duration of its operation, and lost $7,000 in the disappearance. The bitcoin churned through the game is naturally worth millions these days.

It was one of the larger Ponzi games at the time, but it's still a far cry from the US$50 million-odd frenzy currently going on around Fomo3D and related Ponzi games.

2015: Ethereum arrives

Then Ethereum arrived in 2015, coming into existence against a long backdrop of niche-yet-popular Ponzi games. Its smart contract functionality allowed for more Ponzi game possibilities, while the ability to easily create new tokens that can simply run on Ethereum's blockchain, rather than needing to develop their own consensus network, allowed for the creation of separate Ponzi game cryptocurrencies for the first time.

Now it was possible to actually create an entire Ponzi economy of sorts, and for Ponzi game money to be traded on an open market for other currencies.

These new possibilities, in combination with the growth in the cryptocurrency user base, saw even more money get involved.

Several new PonziCoins emerged on Ethereum over time, taking varying forms.

UET: Free market Ponzi

The Useless Ethereum Token (UET) was one of them, plying the exact same model without explicitly referring to itself as a Ponzi game. It went through an ICO and promised "investors" that they would be getting exactly nothing except worthless tokens in return. The value, if you can call it that, held by the UET tokens would be determined entirely by market forces rather than the game.

The distribution itself was gamified along gambling lines, with growing returns for larger "investments" and a 1 in 256 chance of ICO contributors winning a jackpot of even more useless tokens during their purchase.

UET was a hit, with its ICO pulling in about $150,000 worth of Ether. Its market performance since then – UET/ETH pairs are still traded on HitBTC – has been about on par with most other ICOs. Incidentally, vulnerabilities allow hackers to pull UET out of people's wallets, which probably shouldn't come as a surprise given that the creator explicitly said gaping vulnerabilities were a definite possibility.

The former Ponzi game champion

The next Ethereum PonziCoin, which cropped up shortly after UET, did even better. It was also called PonziCoin, like its 2014 predecessor, but ran its own separate Ethereum token.

It ran its own unique twist of the classic Ponzi scheme, taking advantage of Ethereum's functionality and separate ETH market to programmatically adjust coin prices in line with demand.

Basically, people could put money into the PonziCoin contract to buy PONZI coins. The contract allowed people to trade Ether for PONZI as well as trade PONZI for Ether at a quarter of the price they initially purchased it for. The trick is that the value of PonziCoin would automatically increase based on how much money was put into it, so anyone who gets in early enough can profit if the price rises more than fourfold.

Like a classic Ponzi scheme or multi-level marketing system, the goal was to encourage buyers to get in early and then pressure others into purchasing.

PONZI buyers were also treated to a message saying "also we need to be competitive with CryptoKitties' cuteness so here's a really nice dog" if they were brave enough to have a punt.

The game was a definite hit, pulling in around 250 Ether valued at more than $250,000 at the time, within just the first 8 hours. This spooked the heck out of the creator who just wanted to have a laugh, then realised it was making so much money that they might have accidentally crossed the line into running a literal Ponzi scheme and actually committing fraud. They swiftly announced that it had gotten out of hand and shut the game down before it got too crazy.

Over the years, those fun bitcoin trust fall games with pretend money had gotten very real and started dealing with serious money, even as the games remained largely the same.

The PonziCoin whitepaper. Really.

FOMO3D: The new Ponzi game champion

FOMO3D has now blown away all old records, and its contract currently holds about 75,000 ETH worth around US$35.5 million. It's very much in a league of its own, and the money put into it has also spawned a series of copycats worth about another $15 million, some of which are actual scams as opposed to just scam-themed games.

The essence of FOMO3D is that people can buy keys with Ether. The keys add time to the countdown timer. Each key increases the timer by 30 seconds up to a maximum of 24 hours. If no one buys a key before the timer runs out, the game ends, and that multi-million dollar pot is distributed among the various winners.

A player joins one of four different teams, but still competes individually. The teams instead affect how a player's resources are distributed between the keys, the P3D tokens and the exit scam itself.

The following are the three types of keys, tokens and events:

1. FOMO3D keys

These are the bread and butter of the game. The purchase of these keys prevents the exit scam event by adding 30 seconds to the timer per key purchased. If the timer runs out, the last person to buy keys can choose to "exit scam" and take the entire pot, minus the portion given to other players based on their key purchases, and the round ends.

The Ponzi element comes from the price scaling which raises the price of keys the longer a round continues. So someone who buys up a lot of cheap keys early on might net a very tidy profit, especially when a round gets as rich as this one is. Plus, every key purchase of 0.1ETH or more has a chance of winning some of the airdrop pot as a kind of door prize to encourage purchases.

2. P3D tokens

These dividend-paying tokens are like a stake in the game itself, and they don't reset each round. Instead, they pay out dividends taken from the 10% fee charged for transactions in the game. So far it's paid out over 35,000 ETH to P3D buyers.

P3D tokens can be bought and sold at any time, but it costs 10% more to buy them due to the fees.

3. The Exit Scam

This happens when the timer runs out. This is when the total pot for the round is distributed, with the last key buyer getting the lion's share, but all key buyers receiving some amount based on how many keys they have.

The current round's pot is up to about 21,500 Ether, worth about $10.3 million. At the time of writing, it rarely goes a couple of seconds without topping up back to 24 hours, so it's probably going to be a while. With so much money on the line, and so much more coming in, it might be possible that this round never actually ends for as long as Ethereum exists.

In response to this problem, and to keep new buyers coming in, the team behind this game is planning to release a short version with set round timers in the near future.

The future of Ponzi games

You don't have to look very far to find vocal criticisms of crypto Ponzi games, and various voices dismissing them as "a new level of stupidity," but a very brief moment of consideration makes it clear that they have a lot more in common with traditional gambling than they do with actual Ponzi schemes, the same way movie-themed slot machines (of which there are a lot) are still just pokie machines rather than cinematic experiences.

But like many traditional areas redone with a crypto twist, Ponzi games are able to bring in new elements of trustless profit-sharing among users, interesting angles around community management and economic theory, and the notion of trust, especially in the early days of bitcoin Ponzi games. By mistakenly thinking of Ponzi games as actual scams, one misses out on a lot of interesting developments and potential for future development.

Games like FOMO3D are the natural intersection of gambling and cryptocurrency, and the reason FOMO3D is so popular is probably just because it's a catchy game that people want to play, rather than because the world has gone mad, kids are crazy these days or similar.

And like all the other areas it stands to disrupt, cryptocurrency still has a very long way to go before it even comes close to touching the expenditure of traditional variants.

USA state lotteries, for example, pulled in $80.5 billion in ticket sales in 2016. And Australian slot machines used to do about $11 billion per year before the country collectively said "woah" and pulled back a bit. And actual fiat Ponzi schemes are still historically much more lucrative than crypto scams. Madoff's record will hopefully stand for a while.

Games like FOMO3D are one example among many of cryptocurrencies putting a new twist on old ideas. Ponzi games are an especially great example of this because they transparently highlight some of the bizarre ways money can be contorted. Plus, you can still enjoy the ride from a safe distance without knowingly dropping any of your own money into a Ponzi.

Disclosure: At the time of writing, the author holds ETH, IOTA, ICX, VET, XLM, BTC and ADA.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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