Ponzi Schemes: The Dominant Marketing Method of the Next Decade?
And how we, the people, become celebrities
For the second time in the magazine’s 93-year-history, Bloomberg Businessweek published a cover-to-cover story on a single topic (the first being “What Is Code?,” by Paul Ford).
Bloomberg tapped Matt Levine, prominent finance writer and notable crypto-skeptic, to write “The Crypto Story: Where it came from, what it all means, and why it still matters.”
In the section detailing tokens, one of the major pillars of crypto, he pulls a passage from Dror Poleg’s blog post “In Praise of Ponzis” to create this thought-provoking graphic:
To fully digest this skeumorph, we need to step back to understand tokens and their purpose.
Tokens: A penny for your thoughts
What most people who don’t work in web3 fail to understand is the ease of creating a token. The Ethereum White Paper (the crypto term for business plan) can help you mint tokens out of thin air in minutes; as many as you want, practically for free.
Yes, I could mint 10 billion $BRYCE coins on the blockchain while I have my morning coffee. The problem is that they have no value because no one will accept them in exchange for anything of value.
While no one wants $BRYCE coin because no merchant would accept it as payment, companies began to believe they could harness this “mint coin out of thin air” phenomenon.
Both startups and incumbents found use cases for tokens. Startups believed tokens could solve their “cold start” problem by offering incentives to use their platform / product rather than that of an incumbent. Similarly, existing companies felt they could deepen loyalty and acquire more customers by paying people to keep coming back in the form of tokens.
After giving out or selling low priced tokens to early supporters and super loyal customers, the only thing left to do is find a merchant that will accept these tokens in exchange for something of value.
Good news: companies are already designed to deliver something of value to their customers. Companies can now deliver these tokens in exchange for the goods and services they already offer.
Companies can deliver value for their tokens in the form of a:
Discount for their goods and services
Gating mechanism to offer exclusives to deep pocketed token holders
Means of payment, instead of requesting good ole’ fashioned greenback USD
Subsequently, these tokens may accrue value as people use them, allowing token holders to exchange them for cash in some scenarios.
Yahtzee! They’ve turned customers into stakeholders, one of the pillars of crypto (as I discussed last month in Free to Own).
In doing so, they’ve paid to acquire customers with money minted out of thin air. In theory, this works. In practice, it’s a Ponzi scheme.
While Ponzi schemes have a negative connotation for good reason, it’s important to understand why NOW might be the time for companies to Bernie Madoff their way to victory.
Sameness, and algorithms at the gate
Advertising and marketing techniques have shifted rapidly over time as the ROI of different tactics have changed. The ROI is determined by what we consume and how we consume it.
What we consume:
Regardless of what you consume, there’s probably a perfect substitute. In a world with 1,000 different toothbrush brands that all vibrate at the same frequency and 40 streaming services that all show True Crime docs, we consume sameness (yes, there are diamonds in the rough, but there are generally substitutes for everything).
In light of this sameness, neither content nor products alone can lure us in.
How we consume it:
As Porleg points out:
The way goods were promoted was also constrained. A handful of powerful gatekeepers (newspapers, TV channels, music labels, book publishers) could crown whomever they wish and prop up new stars.
Today, the main gatekeepers are the crowd and the algorithms that gauge and guide the crowd's attention.
The culmination of the shift in what we consume and how we consume it brings us to a world of sameness where our decisions are dictated by the algorithms that be.
As we all know intuitively, algorithms have a multiplier effect. They are an amplifier for interesting stuff and a muffler for uninteresting stuff.
Who anoints things as “interesting” or “uninteresting”? After the engineers program the specifics, it’s everyday people like you and me who click, interact, and tell the algorithm “I got one!”
Celebs used to say “I don’t advertise for free” or, in their lingua franca “Fuck you, pay me.”
Now, algorithms are the new celebs; algorithms are the tastemakers.
Because, we, the people, drive this algorithm collectively, we, the people, don’t want to use a product or platform without getting something in return (in addition to the product itself).
Because we, the people, drive the algorithm ship collectively, we are screaming the same tune “Fuck you, pay us!”
It’s the big reason why digitally-native celebrities have traditional celebrity status: they have the keys to the algorithm.
So, as the graphic suggests, will Ponzis become the “dominant marketing method of the next decade”?
Ponzis are here to stay, with exceptions
There are a lot of companies that have the “Ponzis are the future” thesis. To name a few: Hang, Try Your Best, and Uptop are all out-of-the-box solutions that enable brands to create blockchain-based loyalty systems that “pay” users for engaging with brands.
In some ways, it’s what we at En Passant Digital believe, too, with some important distinctions.
There are two primary areas in which Ponzinomics can break down (NGMI):
When tokens can be exchanged for cash
When users have to leave their habitat to earn
Tokens for cash is problematic
Thus far, in every model where people can earn cash-convertible tokens in exchange for participating (RIP Axie Infinity) or exercising (RIP Step’n), the token ends up tanking, pissing off everyone involved.
This happens primarily because “users” enter the system who aren’t truly users. These “users” enter the system to make money rather than utilize the product or service that is at the core of the offering. When this happens, the “user” enters, earns the token, and sells it on the open market.
This process creates enormous sell pressure. The year-round-crypto-Kool-Aid-drinkers will counter with: the right system just hasn’t been designed yet.
Maybe true, but in the meantime,
brands should create an ecosystem where the tokens can ONLY be used towards their product or service.
This design finds the true users, as you’re paying the users in a currency only accepted by the product or service itself.
Customers don’t like leaving their habitat
Most people don’t want to deal with the trouble of learning a new platform, even if it lets them earn discounts / rewards towards their favorite products and services. Users are willing to engage, but more-so in the habitats they already reside in.
Starbuck’s embryonic web3 loyalty program understood this well, integrating their POS system with Polygon. This means customers don’t have to switch their behavior. Coffee drinkers keep using the mobile wallet they have been scanning at Starbucks for the past decade, and it works.
The truth is that no one wants to spend hours and hours setting up new profiles and engaging with new systems, all to get enough tokens to earn a 5% off Groupon.
If users can use their preferred social networks and the websites they already shop on, the result will be that Charles Ponzi was way ahead of his time.
En Passant Digital designs Ponzi schemes that work
Some of the biggest brands in the world trust En Passant Digital to build their incentive systems. Whether you “believe in crypto” or not is irrelevant.
Pay customers and make them stakeholders, without taking a hit to your bottom line
Better call En Passant Digital (yeah, it rhymes)
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About the author: Bryce Baker is the co-founder of En Passant Digital, which designs and leads web3 strategy for businesses. Bryce previously worked at Parthenon-EY as a consultant for private equity firms, focusing on buying and selling technology companies.
En Passant’s other partner, John Tabatabai, has led investments for Crypto VCs and consulted for projects across the NFT space. He orchestrated one of the largest grossing NFT projects, kickstarting the first NFT bull run in early ’21, creating over $200M of value. John is designing one of the most influential Metaverse Community projects ($300M valuation at time of writing) which launches shortly.