What is Ponzi Scheme
The Ponzi scheme is an age-old fraud in which new money inflows pay off earlier investors while the inflows come from new investors.
One of the most famous Ponzi schemes refers to the Madoff investment scandal. In short, Bernard L. Madoff kept attracting new investors by offering a steady, above-market average rate of return, and Madoff claimed that the solid returns came from his own "inside information" when in fact, he was using the money of new investors to pay dividends to previous investors. Since the dividends were small shares of money compared to the principal, this model continued on Wall Street for a long time. It was not until one day, an investor asked to redeem a large amount of principal, resulting in insolvency, that the scam finally burst.
In the crypto market, Ponzi schemes are commonplace. One of the most notorious is LUNA (now LUNC), which caused a market-wide shock in May 2022.
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