I have seen quite a few people asking whether Steemit is a Ponzi or pyramid scheme and similar questions have been asked about other crypto-currencies.

What is a Ponzi scheme?

The term "Ponzi scheme" refers to a form of fraudulent investment scheme where there is no realistic chance of creating any real value that can be monetized. Funds received from new investors are used to payoff previous investors. However, eventually the scheme runs out of new investors.

In the 1920's, Charles Ponzi claimed to be able to arbitrage postal reply coupons (they're kind of like stamps, but available at different prices in different countries) and promised his investors absurdly high returns in absurdly short times. Unfortunately, for a variety of practical reasons, he was unable to get his business off the ground.

Rather than admitting that his business was a failure, Ponzi kept taking money from investors and used the money to pay off earlier investors. With each dollar he got, he became further in debt. About a year later, the scheme collapsed, costing his investors tens of millions of dollars.

What are the hallmarks of a Ponzi scheme?

While not all Ponzi schemes are the same, they generally have almost all of the following hallmarks:

1. Investment:
   • Ponzi schemes are pitched as investments.
   • Money is taken from people with the promise that they will make a profit.
   • Unusually high rates of return are promised.
   • Risks are claimed to be very low.
2. Fraudulent misrepresentation:
   • Investors are mislead as to how their funds are used.
   • Operator typically claims to have some secret strategy.
   • If investors get to see records, they are fake.
3. Insolvence:
   • The scheme incurs more obligations to investors than funds it can raise.
   • New funds only flow to investors by the operator making more promises.
   • Inevitably, the scheme will face promises it cannot fulfill.
4. Fraudulent Transfers:
   • Because the scheme is insolvent, payments to investors are fraudulent.
   • Fraudulent transfers are subject to clawback.
   • Operator commits a crime when he pays investors their "profits".
   • Investors can be forced to repay them.
5. No creation of value:
   • There is no product.
   • There are no customers.
   • Nothing monetizable is produced.

So what is Steemit?

Steemit does not have any of the hallmarks of a Ponzi scheme.

1. I hope nobody promised you that Steemit would make a profit. While Steemit has enormous promise, there are also tremendous risks.
2. Nothing about how Steemit works is secret. There are no fake records.
3. Steemit never owes anybody any dollars. SD is not guaranteed to track the dollar, just designed to be likely to do so.
4. Steemit never transfers anything to anyone except tokens that it owns. Since it has no obligations, other than those enforced by code, it cannot be insolvent.
5. Steemit creates value, has a product (you are looking at part of it right now) and has customers. This product is monetizable.

Some arguments that need to rebutted:

"It's a Ponzi because early investors/creators benefit disproportionately."
Then Apple and Google are Ponzi schemes.

"It's a Ponzi because you can't withdraw your funds when you want to."
Ponzi schemes use lies and excuses to hide their insolvency when people want to withdraw. That is in no way comparable to a withdrawal scheme that is well-understood in advance. Steemit's withdraw policy is much more like a lock up agreement that exists to prevent crashing and to keep incentives aligned.

"It's a Ponzi because it asks you to spread the word and bring in others."
Then everything that tries to be viral is a Ponzi scheme.

However ...

You really should not think of Steem as an investment. You should not believe anyone who tells you that high returns are guaranteed or that risk is low. Profits are possible, but the platform is vulnerable to abandonment, technical obsolescence, or technical failure. You should make smart decisions.

It remains to be seen what will happen to systems like Steemit when they eventually can no longer grow. They may crash. They may innovate new business and revenue models and thrive. We simply do not know.

I am not a lawyer. This is not legal advice. The SEC would probably tell you that none of these things meet the legal requirements for being an investment.

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