A list of characters in the encrypted dark forest

Original title: "Tokens are the new Herbalife. Parallelisms between crypto and Multi Level Marketing schemes"

Author: @ VannaCharmer

Compiled: Ismay, BlockBeats

Editor's note: In the narrative torrent of the continuous expansion of the cryptocurrency market, tokens are no longer just carriers of technological or financial innovation, but have become bargaining chips for a structural game. From exchanges, VCs, KOLs, to communities, airdrop players and retail investors, everyone has been involved in a game of "who is the last takeover". This article does not attempt to deny the potential of encryption technology itself, but reveals the hidden truths in the current token issuance and circulation mechanisms: how it operates like a multi-level pyramid scheme, and how it systematically concentrates interests upward. I hope this article can provide you with a clearer perspective and learn to distinguish narrative from reality in the market where hallucinations and hopes are intertwined.

The following is the original content:

Cryptocurrency repeats the worst aspect of MLM-but this time it is a native version of the Internet, with higher marketing efficiency and less transparency. Most tokens have evolved into a sophisticated pyramid game: the top people squeeze the most profits, while retail investors end up with only a bunch of worthless "air coins".

This is not accidental, but a structural problem.

In traditional pyramid schemes, such as Herbalife or Mary Kay, products are often inflated, but their effects are worse than those on the market. The core difference is not the product, but the sales method: it is not through retail stores, but by individual agents, and then they find customers who are willing to take over.

As a result, it quickly changed from "selling products" to "hitting people". Everyone’s motivation for buying products is not to use them, but to be able to sell them to others at a high price in the future. In the end, when there are only "speculators" left in the market and no real users, the pyramid cannot hold on. The people at the top took away all the asymmetric gains, while the participants at the bottom could only stare at a bunch of unscrupulous inventory.

Token pyramid

The operating logic of crypto tokens is exactly the same as that of multi-level pyramid schemes. Tokens themselves are "products" - a digital asset with inflated prices and little practicality except speculation. Just like distributors in the pyramid scheme system, coin holders do not buy tokens for use, but to sell them to the next person at a higher price later.

This pyramid structure is similar to traditional pyramid schemes, but cryptocurrencies have their own unique participant ecosystem, forming different levels. Compared with traditional pyramid scheme products, tokens are more ideal carriers: they can use the Internet and social networks more efficiently, be easier to trade and obtain, spread faster, and spread more widely. The operating logic is roughly as follows:

In traditional pyramid schemes, if you develop a downline, they sell products or continue to purchase goods, you can make a profit from it. The same is true for playing tokens: if you ask others to pick up your "goal", then you can attract some newcomers who enter the market later than you. This is good for you and those above you, as newcomers provide "exit liquidity" and prices rise. At the same time, newcomers will also start to actively promote because they have also received tokens (they have "goods" now!), while early coin holders can cash out at a high level (the income multiple becomes higher!). This mechanism is exactly the same as pyramid schemes, but it is more powerful.

The higher you are in the pyramid, the more motivation you will have to continue issuing new coins and continue to promote this gameplay.

God-like existence: Exchange

At the top of the crypto pyramid are those real "gods" - exchanges. Behind almost all "successful" tokens is inseparable from the in-depth manipulation of exchanges and their associated market makers. They control the distribution and liquidity of tokens. If the project party wants to access the platform and obtain distribution resources, it often has to "pay tribute" - that is, hand over a portion of the tokens free of charge.

If you don't follow their rules, your tokens will not be able to go to the line, or you can only stay in the "hell" with extremely poor liquidity and eventually die silently. The exchange can kick market makers away at any time, ask the project party to provide token loans to its employees to cash out, and even unilaterally change the terms of service at the last minute. Everyone knows this hegemony well, but they can only endure it silently - because it is the price of "liquidity" and "distribution".

For entrepreneurs, the exchange is an insurmountable wall. Whether a leading exchange can be launched often depends on the "relationship network" rather than the quality of the project itself. This also explains why there are "invisible co-founders" or "former exchange employees" in so many projects nowadays, who are responsible for making connections and opening up channels. Because of lack of experience or connections, it is almost impossible to complete this coin listing process.

Demigod: Market Maker

Market makers, in theory, are the role of providing liquidity to the market, but in fact they often help project parties secretly ship goods through OTC, and at the same time, they use the information they have to seize ordinary users in reverse. They usually hold a considerable portion of the total supply of tokens (sometimes up to several percentage points) and use this to manipulate transactions to obtain asymmetric arbitrage opportunities. For tokens with very small circulation, this impact will be extremely amplified, leaving them in an extremely favorable position in the transaction.

The money you make by simply "providing liquidity" is extremely limited, but you can make a lot of money by reversing transactions with uninformed users. Among all market participants, market makers know the best of the circulation of tokens - because they know both the real market fluctuation and hold a large number of tokens. They are the culmination of information advantages.

For project parties, the "quotation" of market makers is also very difficult to evaluate. Unlike haircut services that have clear price tags, the prices of market-making services vary from person to person. As a startup project, you don’t know what terms are reasonable and which are inflated, which has given rise to another gray phenomenon: the proliferation of invisible co-founders and "market maker consultants". In the name of an advisor, they match you up, but further increase the complexity and game cost of issuing coins.

King: VC and project party

Under the exchange, there are project parties and VCs, who have seized most of the value in the private placement stage. Before Volkswagen heard of a project, they received tokens at extremely low prices, and then weaved the narrative to create a "liquidity export" for shipment.

The business model of encrypted VC has become extremely distorted. It is much easier to get "liquidity events" in the crypto industry than traditional venture capital, so they don't really encourage long-term builders. In fact, the situation is just the opposite - as long as it is beneficial to itself, VCs can turn a blind eye and acquiesce token economic model. Many VCs no longer pretend to be supporting sustainable business, but instead systematically participate in and support various "pull-up" speculation.

Tokens have also given birth to a unique incentive mechanism: VCs have the motivation to artificially increase the valuation of their own portfolio (in fact, they are "harvesting" their own LP). This is especially common in low-circuit tokens – they can use FDV to mark book value, thereby inflated project valuations. This approach is extremely immoral, because once all the tokens are unlocked, it is impossible to exit at that price. This is also one of the key reasons why many VCs will find it difficult to raise new funds in the future.

Although platforms like Echo have slightly improved this reality, behind the screens of the crypto industry, there are still a large number of black box operations that ordinary investors cannot see at all.

Opinion Leader: KOL

Further to the next level is KOLs, where they usually get tokens for free when the project goes online in exchange for promotional content. "KOL financing round" has become the norm in the industry - KOL participates in investment and will receive full refund after TGE. They use their communication channels to exchange for free chips and then brainwash the fans, who eventually become their "exit liquidity".

Soldier: Community members and the hair-fucking party

"Community" and airdrop players form the underlying labor force of the pyramid. They undertake the most basic tasks: testing products, output content, and manufacturing activity in exchange for token distribution. But even these activities have now been "industrialized": the rewards are getting fewer and fewer, but the work is being put into more and more.

Most community members often "work" for a long time for free for projects, and then suddenly realize that they are actually just outsourcing the marketing department of the project party - and after TGE, the project begins to ruthlessly smash the market. Once they realize this, anger spreads, "pick up the war." This "angry community" is extremely bad for projects that really want to do products because it creates additional interference and noise.

Leek: Retail investors

The bottom of the pyramid is the "exit channel" of the ideal retail investors

• everyone above. They are fed with various narratives and stories, giving an asset a "meme premium" to attract more people to buy it, so that the foundation and other upper-level players can ship it smoothly.

However, this cycle is different from before, retail investors have not really entered the market. Today's retail investors are more cautious and suspicious, which makes community members useless airdrop chips to hold a bunch of worthless airdrop chips, and insiders have long cashed out through over-the-counter trading. I suspect that this is one of the reasons why you always see someone complaining on the timeline about the token plunge or the airdrop is worthless: because of this cycle, retail investors did not take over at all, but the founders were still rich.

as a result of

The core of the current crypto industry is not to make products, but to make up stories - telling a narrative of "high illusion rate of return" to induce others to buy a certain token. Focusing on product construction has become a disincentive behavior (although this is slowly changing).

The entire token valuation system has been completely distorted and is no longer based on fundamentals, but is based on "market value benchmarking" for horizontal comparison. The core problem of the project has gone from "What problem does this token solve?" to "How many times can it increase at most?" In this environment, the project is almost impossible to be reasonably priced or evaluated. What you buy is not a company you are building, but a lottery ticket, and you must recognize this when investing in cryptocurrencies.

The script selling narrative is very simple: just make up a story that "sounds reasonable but cannot be priced", such as:

"This is a stablecoin project backed by Peter Thiel, and its tokens can be seen as an indirect exposure to Tether's equity. It is optimistic about this token because Circle has a market capitalization of $27 billion, while Tether's revenue and profits are far higher than Circle and has lower operating costs. There is currently no product on the market that allows you to invest directly in Tether, and this token just fills the gap! They are also building an infrastructure similar to the Circle payment network and planning to introduce privacy features. This is the future of finance, with a market capitalization of 100 billion!"

If you want your friend to buy a token, this kind of narrative is very useful. The key is: the story must be told "clear enough", but "leave enough imagination space" so that they can imagine a high-valuation future.

What should I do next? Fix the market structure of tokens

I still firmly believe that the crypto industry is still one of the few areas that can bring great asymmetric benefits to ordinary people, but this advantage is gradually disappearing. Speculation is the core product fit (PMF) of crypto and the “hook” that initially attracted market participants to pay attention to everything we are building. Because of this, we urgently need to repair the entire market structure.

The second part of this article will explore how platforms like Hyperliquid can have the potential to completely change the rules of this game.