A Ponzi scheme is a fraudulent investment pattern built to pay older investors with the funds of recent investors. Organizers of Ponzi schemes often advertise a legitimate system where investors' funds grow either through the purchasing and sale of assets, where a percentage of the sale goes to investors who have been in the system longer.
In reality, there is no investment as the money of new users is simply used to pay the ROI (return on investment) of earlier investors. Due to this setup, a Ponzi scheme is likely to crash with slow signups or no new members.
Ponzi schemes have entered into all spheres of financial services, including cryptocurrencies and blockchain projects. NFTs are often described as a ponzi due to the wash trading involved and even bluechip crypto assets like Bitcoin and Ethereum have been derided as scams that rely on the “greater fool” theory in order to thrive. The crypto industry is notoriously unregulated in certain sectors, with users and developers prizing privacy and anonymity where possible. As a result, crypto Ponzi schemes have surged over the years, leading to loss of assets. In addition, users are promised a higher ROI per month from depositing assets.