Tracking an Iteration in Crypto Investment Schemes: Smart Contract-Powered Marketing Schemes

TRM analysis finds popular "decentralized investment schemes" on blockchains that support smart contracts including Tron, Ethereum and BNB Chain.

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Traditional MLM and pyramid investment schemes — a refresher

Investment schemes can take all sorts of shapes and sizes, but most share a common characteristic: scheme operators want as many people as possible to participate, and they want them to invest as much money as possible. To incentivize this, users are promised significant rewards for referring more people to the scheme in addition to the returns they expect to receive on their own investments. Almost every kind of investment scheme in crypto involves some form of marketing or multi-level marketing, which is often a sign of a risky investment and can be an indicator of possible fraud.

Unlike traditional multi-level marketing schemes, in which a real product is actually sold, some schemes revolve solely or almost entirely around obtaining returns from recruiting new participants — they can only exist as long as new users are brought in at a sufficient rate. This is typically called a pyramid scheme and can generally be identified by the lack of an income stream beyond that which comes from the investments of new participants. Pyramid schemes are fraudulent by definition in many jurisdictions.

Many crypto-related investment schemes have pyramid-like structures and operations, and many may in fact fit the definition of pyramid scheme. But there is one novel form made possible by cryptocurrency and blockchain technology. TRM calls these decentralized investment schemes.

What are decentralized investment schemes and how do they work?

Decentralized investment schemes are pyramid-like schemes that are organized around one or more smart contracts — essentially a program stored on a blockchain that runs automatically based on the conditions in the code and on how users interact with it.

Like most investment schemes, they promise investors things like:

• a “small” passive return on your investment such as 1% daily
• commissions for recruiting new investors
• a percentage of the referred person’s deposits and/or withdrawals
• bonuses based off of the deposits/withdrawals the referrals of your referrals make
• a guaranteed total return on your investment that can be achieved must faster through recruiting than simply taking the offered passive return

However, in these decentralized schemes, smart contracts are leveraged to automatically perform all of the scheme’s advertised functions, such as allocating commissions to a participant based on the amount of funds invested by the person he or she recruited.

This is often marketed as a positive feature — decentralized investment schemes promote that since the contract is openly available and supposedly unchangeable, the scheme is actually more protected from fraud than traditional investment schemes which rely on a central authority or scheme operator being true to their word.

The problem is that very few participants can likely understand the smart contract code enough to verify its legitimacy. This, coupled with the inherent susceptibility of marketing-focused schemes to fraud, raises the risk of participating in these schemes significantly.

For example, according to the claimed functions advertised by Tronchain (trxchain.io), a decentralized investment scheme existing solely on the Tron blockchain, if an investor refers someone and they invest 500 TRX, the recruiter will automatically receive 50 TRX. The code for one of the Tronchain smart contracts is available for public viewing here, but it would be difficult for a lay person to identify loopholes or vulnerabilities in the code.

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Tronchain has received over $230 million in TRX from investors to date.

What are some other examples?

In addition to Tronchain, another well-known example of such a scheme is Forsage (forsage.io), which operates on multiple blockchains and still sees a small amount of activity despite a large, steady decrease in users since its peak in the summer of 2020.

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The scheme started with only one Ethereum contract and has added more smart contracts, investment programs, assets, and blockchains over its lifetime. Most recently, Forsage introduced its Binance Smart Chain contracts focused on BUSD and advertised the token’s approval by the New York Department of Financial Services as evidence of being a safer way to invest.

As of late February 2022, the total amount sent to Forsage’s three main smart contracts — one on Ethereum, one on Tron, and one on BNB Chain — since its inception in early 2020 is approximately $310 million.

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Other popular decentralized investment schemes include FastBNB, Cybertron.live, Etherchain, MMM BSC, and Lion’s Share. Currently, these decentralized investment schemes appear to be most popular on the Tron, Ethereum, and BNB Chain blockchains, but that may be because these are among the most popular chains that allow smart contracts presently.

Managing exposure to decentralized investment schemes

Aside from the financial risk posed by decentralized investment schemes to individual investors, crypto exchanges and services may also elect to limit their exposure to these schemes as part of anti-fraud and financial crime measures.

And there is risk to assess on both sides of the smart contract. If customers are sending funds to the contract, they are at risk of being defrauded. On the other hand, if a customer receives large amounts from such a smart contract, it’s worth investigating whether they are connected to the creation or operation of the scheme.

The example below shows a snapshot of activity from fall 2020 — when the scheme was still popular — of one of the most frequent receiving parties. TRM investigators analyzed transfers with the scheme’s largest Tron smart contract, highlighting here a few of the thousands of withdrawals in TRX that the Forsage counterparty received. These appear to be largely made of up commissions and referral rewards, which were then consolidated with other Forsage withdrawals and distributed to four main addresses over the span of about a month.

Address 1 converts some TRX into USDT on Tron via a decentralized exchange and then sends the USDT to Exchange 1. Addresses 1, 3, and 4 also send funds to the same exchange but in TRX. Addresses 2 and 4 sends TRX to another exchange, and 4 sends more funds to a third exchange. The total amount sent by this particular address to these exchanges was more than $80,000 over this time period.

The multi-chain nature of Forsage and others demonstrate a trend in investment schemes as organizers adapt to changes in the crypto ecosystem, in that they are moving away from the largely single chain (usually Bitcoin) schemes of a few years ago to either single-chain altcoin schemes or multi-chain and multi-asset operations.

TRM allows users to monitor and flag transactions going into the smart contracts of decentralized schemes like Tronchain and Forsage across multiple chains simultaneously. TRM also enables investigators to follow funds flowing out of such schemes seamlessly across the different chains and assets, be it USDT on Ethereum, USDT on Tron, or other assets like MOON and SHIB on Tron, LINK on Ethereum or AVAX on Avalanche.

Managing financial risk: tips for retail investors

Though much has been written about the risks of investment schemes both inside and outside of the crypto space, here are some warnings for investors that are more specific to decentralized and other crypto-related investment schemes:

1. Just because the investment opportunity is governed by a smart contract, that does not mean it’s safe.

• The creator may leave a hidden vulnerability in the contract to later exploit, unintentional vulnerabilities can be exploited by others, and creators can lie about what the contract supposedly does. Smart contracts are difficult to understand without knowledge of Solidity or whatever code the contract is written in.

2. Beware of any opportunity that places limits on withdrawals.

3. Beware of a scheme that has either suddenly announced its own virtual or cryptocurrency or that only allows withdrawals in an unpopular cryptocurrency.

• Often times the scheme will try to prevent users from withdrawing actual money and will only let them convert their supposed earnings into these effectively worthless currencies.

4. Users getting real payouts does not prove that it's a legitimate investment.

• Creators of these schemes will often intentionally let some users make actual profits, and they will make actual payouts (but not profit) to a much larger percentage in order to entice others to join.

5. Similarly, just because you see that you’re making money on a website, it does not mean you actually are.

• Check the blockchain to see if what the website says reflects reality. Many crypto investment schemes make fake platforms that look legitimate and lie very convincingly about how much money you have in your account. Despite what the platform says, the number might be actually be $0.

And as always with any investment, be skeptical and don’t rush into anything. The classic advice holds here very well: if it seems too good to be true, it probably is.

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About the author:

Ian Schade is a Blockchain Intelligence Analyst at TRM Labs, where he identifies and investigates cryptocurrency-related scams and financial fraud schemes. Prior to joining TRM, Ian worked as a financial intelligence analyst at the Major Economic Crimes Bureau of the New York County District Attorney’s Office investigating sanctions evasion, money laundering, tax evasion and other large-scale financial crime schemes such as market manipulation and insider trading. He is a Certified Fraud Examiner, conducts research in several languages, and received his Master of Arts in International Economics and International Relations from the Johns Hopkins School of Advanced International Studies.

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