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

Original Author: @VannaCharmer

Translated by: Ismay, BlockBeats

Editor's Note:

In the ever-expanding narrative flood of the cryptocurrency market, tokens have long ceased to be mere carriers of technological or financial innovation. Instead, they have become chips in a structural game. From exchanges, VCs, KOLs, to communities, airdrop players, and retail investors—everyone is dragged into a game of "who's the last bag holder." This article does not aim to deny the potential of crypto technology itself, but rather to uncover the hidden truths within the current token issuance and circulation mechanisms: how they operate like multi-level marketing (MLM) schemes and systematically concentrate profits upward. Hopefully, this article will offer you a more sobering perspective, helping you navigate a market where illusion and hope intertwine, and distinguish narrative from reality.

The following is the original content:

Cryptocurrency has replayed the worst aspects of MLM schemes—only this time, it’s an internet-native version with higher marketing efficiency yet even lower transparency. Most tokens have evolved into sophisticated pyramid schemes: those at the top reap the biggest rewards, while retail investors are left holding a pile of worthless "air tokens."

This isn’t by chance—it’s a structural issue.

In traditional MLM schemes, like Herbalife or Mary Kay, the products are often overpriced and perform worse than alternatives in the market. The key distinction isn’t in the product itself but in the sales strategy: instead of being sold through retail stores, these products are purchased by individual distributors, who are then tasked with finding willing buyers to offload them on.

This quickly shifts from "selling products" to "recruiting people." The motivation to purchase the product isn’t to use it but to sell it at a higher price later. Eventually, when the only participants left in the market are speculators rather than genuine users, the pyramid collapses. Those at the top walk away with all the asymmetric gains, while participants at the bottom are left staring at unsellable inventory, wondering what went wrong.

Token Pyramid

The operational logic of crypto tokens is almost indistinguishable from that of pyramid schemes. The token itself is the "product" — a hyper-inflated digital asset with little to no utility beyond speculation. Similar to the distributors in pyramid schemes, token holders don’t buy tokens for their use but with the hope of selling them to the next person at a higher price.

This pyramid structure resembles traditional pyramid schemes but with a unique participant ecosystem inherent to cryptocurrencies, forming different tiers. Compared to conventional pyramid scheme products, tokens are even more ideal as a vehicle: they leverage the internet and social networks more efficiently, are easier to trade and acquire, spread faster, and have a wider reach. The operational logic is roughly as follows:

In traditional pyramid schemes, you earn profits when your recruits sell products or purchase additional inventory. Tokens operate in the same way: you convince others to "buy your bags" and bring in new entrants who joined later than you. This benefits both you and those above you, as the newcomers provide "exit liquidity," propelling prices upward. Meanwhile, these newcomers, now holding tokens themselves, start actively promoting them (they now have "bags" too!), allowing early holders to exit at higher multiples. The mechanism is almost identical to pyramid schemes—only more powerful.

The higher you are in the pyramid, the more incentive you have to issue new tokens and keep pushing this game forward.

Godlike Entities: Exchanges

At the top of the crypto pyramid are the true "gods" — the exchanges. Behind nearly all "successful" tokens lies the deep manipulation of exchanges and their associated market makers. They control token distribution and liquidity. If a project team wants to integrate with a platform and gain distribution resources, they often have to "pay tribute" — that is, hand over a portion of tokens for free.

If you don’t play by their rules, your token won’t be listed or will remain stuck in a liquidity-starved "limbo," eventually fading into obscurity. Exchanges can remove market makers at any time, demand token loans from project teams for employees to cash out, or even unilaterally alter service terms at the last minute. Everyone understands this oligopoly but silently endures it — because it’s the price to pay for "liquidity" and "distribution."

For entrepreneurs, exchanges are an almost insurmountable barrier. Whether a token can be listed on a top-tier exchange often depends on "connections" rather than the quality of the project itself. This explains why so many projects today are associated with "shadow co-founders" or "former exchange employees" who specialize in networking and opening doors. Without experience or relationships, navigating the listing process is almost an impossible feat.

Demigod: Market Makers

Market makers, in theory, are supposed to provide liquidity to the market, but in reality, they often help project teams secretly offload tokens via OTC deals. At the same time, they exploit their informational advantage to trade against regular users. These market makers typically hold a substantial percentage of a token's total supply (sometimes several percent), which allows them to manipulate trades and lock in asymmetric arbitrage opportunities. For tokens with low circulating supply, these effects are magnified immensely, positioning them advantageously in trading activities.

Earning money purely by "providing liquidity" is extremely limited, but through trading against uninformed users, they can rake in substantial profits. Additionally, among all market participants, market makers have the clearest picture of a token's liquidity. This is because they not only understand the actual circulating supply in the market but also control a significant portion of the tokens themselves. They sit firmly atop the pyramid of informational advantage.

For project teams, evaluating a market maker's "quote" is notably difficult. Unlike haircuts that have transparent pricing, the cost of market-making services varies significantly depending on the individual provider. As a fledgling project team, it's nearly impossible to determine which terms are fair and which are overpriced. This has given rise to another gray-area phenomenon: the proliferation of invisible co-founders and "market-making consultants." Under the guise of offering advice and connections, they further complicate token issuance and increase negotiation costs.

King: VCs and Project Teams

Below the exchanges are the project teams and VCs, who capture the lion's share of value during the private sale stages. Before the general public has even heard of a project, they acquire tokens at extremely low prices. They then craft narratives to create "liquidity exits" for offloading their holdings.

The business model of crypto VCs has become profoundly distorted. Compared to traditional venture capital, achieving a "liquidity event" in the crypto space is significantly easier, which means they do not genuinely incentivize long-term builders. In fact, the opposite is true—so long as it suits their interests, VCs will turn a blind eye to exploitative tokenomics. Many VCs have long stopped pretending to support sustainable business models and instead systematically participate in and endorse various pump-and-dump speculative schemes.

Tokens have also given rise to a peculiar incentive structure: VCs, in order to boost their management fees, are motivated to artificially inflate the valuations of their investment portfolios (essentially "harvesting" their own LPs). This is especially common with low-liquidity tokens—they utilize FDV (Fully Diluted Valuation) to mark up paper valuations, leading to inflated project evaluations. This practice is deeply unethical, as once all tokens are unlocked, it is virtually impossible to exit at such lofty prices. This is also one of the key reasons why many VCs will find it increasingly challenging to raise new funds in the future.

Although platforms like Echo have slightly improved this reality, behind the curtains of the crypto industry, there is still a vast amount of black-box operations that the average investor has no visibility of.

Key Opinion Leaders: KOLs

On the next tier down, we have KOLs (Key Opinion Leaders), who are typically rewarded with free tokens when a project launches in exchange for promotional content. The so-called “KOL funding round” has now become an industry norm—KOLs participate as investors, only to receive a full refund post-TGE (Token Generation Event). They leverage their influence and distribution channels to secure free tokens, subsequently hyping up their followers with borderline brainwashing tactics, effectively turning these followers into their “exit liquidity.”

Foot Soldiers: Community Members and Airdrop Hunters

The “community” and airdrop hunters represent the workforce at the base of the pyramid. They take on the most basic duties: testing products, creating content, and generating engagement in exchange for token distributions. However, even these activities have now been “industrialized”: the rewards keep shrinking while the work required keeps growing.

Most community members often realize only after working “for free” for a project for a long period that they were essentially serving as an outsourced marketing department for the project team. After TGE, the project team often ruthlessly dumps tokens on the market. Once community members realize this bait-and-switch, anger spreads, and they “take up arms.” This type of “angry community” significantly hinders products that genuinely aim to build something meaningful, as it creates additional disruptions and noise.

Retail Investors: The “Retail Bagholders”

At the very bottom of the pyramid lies the idealized retail investor—everyone else’s “exit route.” They are spoon-fed various narratives and stories that imbue a certain “meme premium” to an asset, enticing more people to buy in, allowing the higher-tier players like foundations and insiders to offload their bags at a profit.

However, this cycle is different from the previous ones. Retail investors have largely stayed out this time. Today’s retail participants are more cautious and skeptical, which has left community members holding a pile of worthless airdropped tokens while insiders have long since cashed out through OTC deals. This, I suspect, is one reason why you see frequent complaints on social media about tokens crashing or airdrops being worthless: in this cycle, retail didn’t really take the bait, but project founders still managed to make fortunes.

Consequences

The current crypto industry isn’t focused on building products but rather on crafting stories—telling a narrative of “high illusionary yields” designed to induce people to buy a token. Devoting efforts to actual product development has paradoxically become a non-priority (though this is slowly starting to shift).

The entire token valuation system has become completely disconnected from fundamentals. Valuations now rely on “market cap comparisons” for horizontal benchmarks. The central question has shifted from “What problem does this token solve?” to “How many Xs can this token do?” In this environment, projects are almost impossible to value or assess reasonably. What you’re buying isn’t a company being built—it’s a lottery ticket. You must be clear about this when investing in cryptocurrencies.

The script for selling a narrative is quite simple: just craft a story that "sounds reasonable but is actually impossible to price." For example:

"This is a stablecoin project backed by Peter Thiel. Its token can be considered as an indirect exposure to Tether's equity. The reason to be bullish on this token is that Circle's market cap is $27 billion, while Tether's revenue and profit far exceed Circle's, with lower operational costs. Currently, there’s no product in the market allowing you to directly invest in Tether, and this token perfectly fills that gap! They are also building an infrastructure similar to the Circle payment network and plan to introduce privacy features. This is the future of finance—a $100 billion market cap in the making!"

If you want to convince your friends to buy a token, this type of narrative works wonders. The key lies in crafting a story that is "clear enough" yet still "leaves room for imagination," enabling people to envision a highly optimistic future valuation.

What’s Next? Fixing the Token Market Structure

I remain convinced that the crypto industry is still one of the few fields that can offer ordinary people asymmetric upside opportunities, but this edge is gradually fading. Speculation is the core product-market fit (PMF) of crypto and serves as the initial "hook" that draws market participants' attention to everything we are building. Because of this, it's imperative that we repair the overall market structure.

The second part of this article will explore how platforms like Hyperliquid may fundamentally change the rules of this game.

"Original Article"

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