Content uploaded by Andrea Cesaretti
Author content
All content in this area was uploaded by Andrea Cesaretti on Apr 08, 2025
Content may be subject to copyright.
1
The Dark Side of Crypto Innovation
A critical introduction to frauds and deception in decentralized finance
Andrea Cesaretti
Independent researcher in crypto-finance and decentralized governance
April, 2025
Keywords: Cryptocurrency fraud; DeFi scams; Rug pull; Fake DAO; Liquidity pool manipulation;
Crypto regulation; Crypto influencers; Ponzi schemes; Tokenomics; Financial literacy; MiCA; SEC;
Blockchain ethics.
Abstract
This paper explores the deceptive practices proliferating within the cryptocurrency ecosystem,
where innovation is often used to obscure manipulation. While blockchain technology promises
transparency, decentralization, and disintermediation, it has also given rise to a new generation of
frauds that exploit the complexity of decentralized finance (DeFi) and the naivety of users.
Through a taxonomy of common schemes, including rug pulls, auto-paired liquidity pools, fake
DAOs, fraudulent exchanges, MLM-style tokenomics, and influencer-driven hype, this work
analyzes the psychological, technical, and regulatory blind spots that allow them to thrive. Drawing
from real-world cases and current regulatory frameworks (MiCA, SEC, FTC), the paper offers red
flags, due diligence tools, and ethical guidelines for investors, developers, and policymakers.
Ultimately, it argues that crypto fraud is not a failure of technology but of culture, and that
safeguarding innovation requires awareness, accountability, and collective action.
Introduction – Of Magic Pipers and Willing Ears
It has happened to me more than once: while presenting a legitimate tokenization project, someone
in the audience would interrupt with a comment like, "A friend of mine lost X thousand euros in crypto."
And when I ask, “How? Why?”, the story always shares the same DNA. It turns out this "friend"
(it’s always a friend, never the speaker) handed over a sum of fiat currency to someone claiming
to have access to a secret algorithm, usually for crypto arbitrage.
Take note: "algorithm" and "arbitrage" are always the flute and drum of the modern-day magic
piper.
The truth is, if this friend had simply bought Bitcoin directly, they would only have lost money in
one of two improbable ways: either by panic-selling during a downturn, or by losing their private
key. Instead, they chose to trust the piper.
History is full of magic pipers and of scams. In 1920, Charles Ponzi promised 50% returns in a
few months (a bit excessive, even for an Italian). In the 1970s, Bernie Madoff promised 18–20%
annual returns from "convertible arbitrage in large-cap stocks." Arbitrage is not a crypto invention,
nor is deception.
The fiat world has known scams involving gold, marble quarries, diamonds, and yes, even tulips
(1637). What about Lehman Brothers? Until 2008, they issued financial products that were little
more than glorified toilet paper.
If we’re being intellectually honest, we must certainly blame the scammers, but we should also
reflect on the scammed. Why do people trust those who promise incredible returns?
The answers are many.
2
Humans are naturally drawn to the dream of financial success, especially if it appears fast and easy.
Promises of high returns are usually wrapped in emotionally compelling stories. There’s urgency,
excitement, and very little rational analysis.
The magic piper always plays the same tune: a story of personal success, accompanied by glowing
testimonials from lives he (or she) has transformed. The piper often tells this tale surrounded by
symbols of luxury, Dubai, Miami, Lamborghinis, Bentleys.
Too often, these are stock photos, rented cars, or digital backdrops.
This narrative builds a false sense of safety and urgency. People act on emotion, not reason.
Then comes the sense of belonging. People derive identity from groups. To accept the group’s
beliefs is to reinforce shared identity and community. The problem is, this sometimes leads
individuals to suspend critical thinking and to defend the indefensible.
I once attended two multi-level marketing events at the request of a friend. The reward systems
for promoters were so mathematically absurd that when I raised questions, I wasn’t heckled by the
organizers, but by the audience. The scammed were defending the scammers.
We should teach this dynamic from elementary school, with Le Bon’s The Crowd (1895), Freud’s
Group Psychology and the Analysis of the Ego (1921), and Bernays’s Propaganda (1928). Fun fact:
Bernays was Freud’s nephew.
As said, scams and scammers have always existed, and always will. The choice is ours: follow the
magic piper, or stay home.
This paper is written for those who want to stay home, or at least learn how to recognize the flute.
1. The Dark Side of Crypto Innovation
1.1. The Crypto Paradox
The rise of blockchain technology and cryptocurrencies has marked a paradigm shift in finance,
governance, and digital ownership. Decentralized finance (DeFi), smart contracts, and tokenized
assets have promised a future of trustless systems, financial inclusion, and innovation unbound by
traditional intermediaries.
However, the same features that make crypto revolutionary also make it vulnerable. The absence
of centralized oversight, the technical complexity of protocols, the global and anonymous nature
of transactions, and the hype-driven culture surrounding new projects create fertile ground for
fraudulent schemes. Between 2021 and 2024, billions of dollars were lost to scams, rug pulls, and
market manipulation. According to Chainalysis, crypto-related crime accounted for $20.6 billion
in illicit transactions in 2022 alone.
This paradox, innovation coupled with systemic risk, is the focal point of this paper. While crypto
technology has the potential to reshape entire industries, it has also empowered bad actors to
exploit unsuspecting users under the guise of decentralization.
1.2. Why Fraud Proliferates in the Crypto Space
Several factors contribute to the proliferation of fraud in the crypto ecosystem:
• Information asymmetry: Most investors lack the technical knowledge to evaluate a crypto
project, leading to blind trust or speculative behavior.
• Regulatory uncertainty: The lack of clear, enforceable regulations creates a gray zone exploited
by fraudulent actors.
• FOMO culture: The fear of missing out drives impulsive investments, often without due
diligence.
3
• Pseudo-anonymity: Blockchain addresses are public but not directly linked to real identities,
complicating enforcement.
These elements combine to create what can be described as a "perfect storm" for fraud, especially
when paired with the narrative of easy wealth, technological utopia, and the ideological allure of
decentralization.
Comparatively, traditional financial markets, while not immune to fraud, benefit from structured
oversight, licensing, and mandatory disclosures. In DeFi, users are often left to navigate complex
systems with minimal protection.
1.3. From Rug Pulls to Ponzi Tokens: A Typology of Scams
This paper develops a taxonomy of frauds, each of which will be analyzed in dedicated chapters.
Common categories include:
• Rug pulls: Projects that raise funds and disappear.
• Pump and dump: Artificial inflation of a token's price followed by rapid sell-offs.
• Ponzi tokens: Tokens that promise returns funded by new entrants.
• Fake DAOs: Projects that simulate decentralized governance but remain fully controlled by the
founders.
• Liquidity pool manipulation: The illusion of liquidity through self-paired tokens or wash
trading.
• Fraudulent exchanges: Platforms that manipulate prices, freeze withdrawals, or vanish with
users' funds.
Not all failed crypto projects are scams. Some collapse due to poor execution, market conditions,
or technological flaws. However, intentional deception and structural opacity are hallmarks of
fraud, and they are alarmingly frequent in this space.
1.4. Research Objectives and Methodology
The objective of this work is threefold:
1. To expose the mechanisms behind crypto frauds, using real-world examples and data.
2. To educate researchers, investors, and regulators on red flags, prevention strategies, and
systemic risks.
3. To propose tools and frameworks to foster a safer and more transparent crypto ecosystem.
The methodology adopted is interdisciplinary, combining:
• Economic and financial analysis
• Legal and regulatory frameworks
• Technical deconstruction of fraudulent mechanisms
• Case study reviews from 2017 to 2024
Sources include academic literature, regulatory reports (e.g., SEC, ESMA), blockchain forensics
(e.g., Chainalysis), and white papers from both legitimate and fraudulent projects.
1.5. Structure of the paper
Each subsequent chapter explores a specific type of fraud, offering:
• A conceptual and legal definition
• A technical breakdown of how the fraud works
• Case studies with on-chain or off-chain data
• Policy recommendations or user guidelines
4
The aim is to create a practical yet rigorous reference for those who wish to engage with crypto
technology while avoiding its many pitfalls.
2. Crypto Fraud Taxonomy: From Exit Scams to Fake DAOs
Before analyzing specific fraudulent practices in the crypto world, it is essential to develop a
taxonomy that can help classify, compare, and better understand the diverse manifestations of
deception in this ecosystem. Fraud in decentralized finance is not a monolith: it ranges from blatant
theft to sophisticated manipulation of governance mechanisms, often disguised within the
legitimate technological features of blockchain systems.
We introduce a typology of frauds, organized according to their structure, intent, and means of
execution. By identifying recurring patterns and underlying mechanisms, we aim to provide a
framework for recognizing, analyzing, and ultimately preventing fraudulent behavior.
2.1. Classification Criteria
We categorize crypto frauds based on three dimensions:
1. Modus operandi: How the fraud is technically and operationally implemented.
2. Investor relationship: The type of promise or misrepresentation made to users.
3. Structural complexity: The level of obfuscation, layering, or decentralization (real or simulated).
This multidimensional approach enables us to distinguish between, for example, a simple exit scam
and a highly structured DAO fraud, even though both result in user losses.
2.2. Main Categories of Fraud
2.2.1 Exit Scams
• Projects that raise funds (typically through ICOs, IDOs, or presales) and disappear without
delivering on promises.
• Indicators: Anonymous teams, sudden website shutdowns, no code commits, disappearing
Telegram groups.
• Impact: Immediate financial loss; no recourse due to anonymity.
Example: Squid Game Token (SQUID). Disappeared shortly after launch, raising over $3 million
and blocking users from selling. Covered globally by mainstream media.
2.2.2 Rug Pulls
• Common in DeFi protocols with liquidity pools. Developers withdraw liquidity after users have
added funds, crashing the token's price.
• Variants: Soft rug (slow drain of value), hard rug (immediate withdrawal).
• Tools used: Centralized control over liquidity, backdoor functions in smart contracts.
Example: AnubisDAO. $60 million vanished overnight despite marketing as a decentralized
project.
2.2.3 Pump and Dump Schemes
• Price is artificially inflated through coordinated hype or fake volume, then rapidly sold off by
insiders.
• Mechanisms: Social media manipulation, use of influencers, bot trading.
• Legal parallels: Similar to traditional market manipulation.
5
Example: SafeMoon. Subject of a U.S. class action lawsuit, with allegations of coordinated price
manipulation and misleading promotion.
2.2.4 Ponzi and Pyramid Tokens
• Returns to existing investors are paid with funds from new investors. Sustainability depends on
continuous inflows.
• Red flags: Promises of fixed ROI, aggressive referral systems, no identifiable utility.
• Often overlaps with: MLM structures, which are legal but prone to abuse.
Example: BitConnect. One of the largest crypto Ponzi schemes, shut down by the SEC after
defrauding investors out of over $2 billion.
2.2.5 Fake Airdrops and Phishing
• Users receive tokens that prompt them to visit fake dApps or sign malicious transactions.
• Objectives: Steal private keys or drain wallets.
• Tactics: Use of airdrop aggregators, impersonation of real projects.
Example: Uniswap Phishing Airdrop (2022). Fake tokens redirected users to malicious dApps
designed to drain wallets.
2.2.6 Governance Exploits and Fake DAOs
• Projects that claim to be decentralized but are entirely controlled by insiders. In some cases,
voting is real but power is concentrated via token distribution.
• Tools: Whitelisted voters, voting tokens held by dev wallets, absence of quorum thresholds.
• Consequence: Illusion of democracy used to legitimize predatory actions.
Example: FEI Protocol (early version). Faced criticism for centralization and lack of effective
decentralized governance mechanisms.
2.2.7 Liquidity Pool Manipulation
• Fake liquidity created through self-paired tokens or circular trading.
• Techniques: TokenA/TokenA pools, bots simulating volume.
• Goal: Create false market confidence or inflate token valuation.
Example: Self-paired pools on BSC (2021–22). Multiple tokens launched with TokenA/TokenA
pairs to simulate liquidity and price discovery.
2.2.8 Exchange-Based Fraud
• Unregulated exchanges acting maliciously, including freezing funds, manipulating order books,
or disappearing.
Examples: Sudden delisting, fake token listings, withdrawal limits imposed during crashes.
Example: Thodex (Turkey). Founder disappeared with an estimated $2 billion. Legal actions led
to a sentence of 11,000+ years.
2.2.9 Impersonation and Social Engineering
• Fraudsters pose as known figures or support teams to steal funds.
• Channels: Twitter, Discord, Telegram.
• Techniques: Fake accounts, urgent requests, "official" support bots.
6
Example: Elon Musk Giveaway Scam. Dozens of verified Twitter accounts hijacked to promote
fake giveaways.
2.2.10 Fraud-as-a-Service (FaaS)
• Emergence of marketplaces offering templates and automation tools to run scams.
• Tools sold: Token launch kits, fake white paper generators, bot farms.
• Parallel: Industrialization of fraud, similar to malware kits in cybersecurity.
Example: Solana scam kits on Telegram/Darknet. Offered complete fraud templates for deploying
fake tokens in minutes.
2.3. Cross-Cutting Themes
Decentralization as a façade: Many frauds exploit the rhetoric of decentralization to mask central
control.
• Tokenomics misuse: Token models engineered to deceive rather than create value.
• Legal grey zones: Exploiting regulatory gaps across jurisdictions.
• Community manipulation: Cult-like branding and emotional leverage.
2.4. Toward a Typological Awareness
Recognizing these fraud categories helps investors, regulators, and researchers adopt a critical lens
when evaluating projects. Typological awareness is a first defense against deception. In subsequent
chapters, we will analyze each of these categories in depth, with technical breakdowns, legal
implications, and real-world examples.
By naming the frauds, we begin to tame them.
3. How to Spot a Fraud: Tools and Red Flags, a practical guide for recognizing deception in crypto
projects
3.1. From FOMO to Forensics
Many investors fall victim to crypto scams not because of a lack of intelligence, but due to a lack
of time, tools, and critical distance. In an environment driven by hype, fear of missing out
(FOMO), and rapid price fluctuations, fraudsters exploit urgency and opacity to push their
schemes.
This chapter provides a structured guide to identifying red flags in crypto projects, offering
practical instruments for due diligence and a mindset shift from excitement to evaluation.
3.2. Red Flag Categories
A. Project Transparency
• Anonymous or unverifiable team: Lack of LinkedIn profiles, no academic or entrepreneurial
history.
• Vague or plagiarized white paper: Text copied from other projects, generic buzzwords without
substance.
• No clear roadmap or unrealistic milestones: Promises of full ecosystem delivery in a few weeks.
B. Tokenomics Structure
• Excessive total supply: Trillions of tokens with no scarcity.
7
• No vesting or lock-up for team and insiders: Risk of immediate sell-off.
• Guaranteed returns: APYs above 1,000% without sustainable model.
C. Smart Contract and Technical Audit
• No external audit or fake audit reports: Unverifiable firms or documents.
• Closed-source or unavailable code: No GitHub, no repository activity.
• Owner-controlled smart contracts: Admin keys with unlimited mint or pause functions.
D. Community and Communication
• Overly moderated or censored channels: Questions deleted, critics banned.
• Heavy influencer involvement: Celebrity endorsements not disclosed as paid.
• Inactive or botted social media: Low engagement, fake followers.
E. Behavioral Patterns
• Aggressive countdowns and FOMO tactics: Limited-time offers, early-bird traps.
• Referral and giveaway loops: Incentivizing users to spread the project without understanding
it.
• Evasive answers to legal and financial questions: Team avoids concrete explanations.
3.3. Due Diligence Toolkit
To assess a project’s legitimacy, several public tools and methods can be used:
• Block explorers: Use Etherscan, BSCscan to verify token supply, holders, contract creator
wallet.
• Token scanners: Platforms like TokenSniffer or RugDoc help detect risky smart contracts.
• Smart contract analysis: Services like MythX and Slither analyze contract vulnerabilities.
• Team verification: LinkedIn, Crunchbase, and GitHub for identity and track record.
• Website checks: Use WHOIS and SSL validators to assess domain transparency.
• Bot detection: Analyze Twitter with BotSentinel or TwitterAudit.
3.4. The 10-Question Checklist
1. Before investing, ask yourself:
2. Who is behind the project? Are they verifiable?
3. What is the real utility of the token?
4. Is the tokenomics model economically sustainable?
5. Has the smart contract been audited? By whom?
6. Can I sell the token freely, or are there restrictions?
7. What is the project’s business model?
8. Where are the funds stored? Is there an escrow?
9. How is governance structured? Are decisions truly decentralized?
10. Are risks disclosed transparently?
11. In case of issues, which legal jurisdiction applies?
3.5. Case Study: Applying the Checklist
Let us consider the example of DeFi100, a project that publicly mocked investors after allegedly
executing a rug pull in 2021.
8
• Team: Pseudonymous, no clear identity. Failed to respond to inquiries.
• Utility: Vague promises of yield aggregation with no clear mechanism.
• Tokenomics: No vesting; tokens heavily concentrated in dev wallets.
• Audit: No independent audit. GitHub was inactive.
• Liquidity: Liquidity was removed from pools shortly before the token collapsed.
• Website: Taken down shortly after the incident.
• Legal: No jurisdiction or legal recourse declared.
The infamous message allegedly left on their website, “We scammed you guys and you can’t do shit about
it” became a symbol of the brutal honesty of some crypto frauds. Although the team later claimed
their site was hacked, the event remains an iconic example of red flags being ignored.
3.6. Toward a Culture of Critical Thinking
Tools and checklists are not enough. Avoiding fraud requires a mindset of skepticism, diligence,
and education.
The crypto space must promote not only innovation but also critical thinking and financial literacy.
Future chapters will explore the role of influencers and the ethical responsibilities of those who
promote projects. For now, the best defense remains awareness, and the courage to ask the right
questions before it’s too late.
4. Auto-Paired DeFi Pools: Simulated Liquidity and Misleading Metrics
4.1 What Are Auto-Paired Liquidity Pools?
Auto-paired liquidity pools are pools in which a token is paired with a derivative of itself, for
instance, X paired with X2025, rather than with an independent asset like USDC or ETH. These
configurations create a deceptive impression of liquidity, often without any actual external value
backing the system.
4.2 Why Are They Created?
These pools are not merely a curiosity; they are strategic instruments used to:
• Simulate demand and price stability
• Artificially inflate TVL (Total Value Locked)
• Avoid real market price discovery
• Create the illusion of future unlocks and token commitment (e.g., X vs. X2025)
They often serve narrative-driven projects that need to showcase success metrics quickly without
engaging in real value creation.
4.3 User Behavior and Perception
• Auto-paired pools exploit psychological biases:
• Anchoring: Users take the apparent price at face value
• Legitimacy by design: Visual presence on dashboards implies trustworthiness
• Bandwagon effect: New users see volume and join in, unaware of circular logic
This results in a distorted view of token value and risk.
4.4 The Illusion of Real Liquidity
Auto-pools often lack true exit options:
9
• No external liquidity providers
• No secondary market for the derivative token
• Hardcoded swap rules that prevent real arbitrage
The liquidity appears deep, but users find themselves locked in a closed system with no way out.
4.5 Manipulated Metrics and Visibility Games
• Projects using these techniques manipulate key indicators:
• Fake TVL: Calculated using self-referencing token pairs
• Wash trading: Inflate volume metrics with automated swaps
• Misleading rankings: Appear on DeFi dashboards (DeFiLlama, CoinGecko) as "successful"
These visibility games create a halo effect that further misleads retail users.
4.6 A Hypothetical Case Study
Imagine a project that launches a token called TRUST and a derivative called TRUST2026. The
team creates a pool TRUST/TRUST2026, adds 1 million of each, and claims a $2M TVL.
Since no one can trade TRUST2026 for USDC or ETH, the price remains artificially stable. New
users see the stability, buy TRUST, and add to the loop. The price seems steady, but the entire
system is circular. Eventually, the team exits, selling TRUST for real assets while users are left
holding TRUST2026 with no market and no exit.
4.7 Red Flags: How to Spot a Manipulative Auto-Pool
1. Token is only paired with its own derivatives
2. No liquidity in major DEX pairs (e.g., X/USDC)
3. Price never fluctuates, artificial peg
4. TVL is large but non-redeemable
5. Project shows high volume but low community
6. Derivative token lacks any real function
7. No audit or explanation of pair logic
8. Project avoids third-party listing or comparison
4.8 Are Auto-Pools Always a Scam?
Not necessarily. In rare cases, self-pairing may be legitimate:
• Vesting or time-lock use cases
• Governance delegation models
• Early-stage bootstrapping, if transparently disclosed
To be considered ethical, a project must:
• Explicitly disclose the pool structure
• Provide user-friendly explanations
• Allow opt-out or access to real market pricing
4.9 Conclusion: Liquidity Illusions and the Need for Vigilance
Auto-paired pools are a tool, one that can be used for good or ill. When used to manipulate
perception, they undermine trust and distort market dynamics.
DeFi needs a new layer of transparency: automatic pool labeling, visual flags for self-referencing
pairs, and public education about liquidity illusions. Because in this game, not all liquidity is real,
and not all volume tells the truth.
10
5. Fraudulent Exchange Practices: The New Intermediaries, When the platform itself becomes the
scam
5.1. The False Promise of Disintermediation
One of the founding narratives of the crypto movement is the disintermediation of finance:
removing middlemen, enabling peer-to-peer value transfer, and fostering a trustless environment.
Yet, paradoxically, centralized crypto exchanges (CEXs) have emerged as powerful gatekeepers.
While claiming to operate within the decentralized ethos, some have perpetrated frauds that rival
or exceed traditional financial scandals.
This chapter examines the rise of exchange-based fraud, from outright theft to subtle
manipulation, and explores how these platforms often operate in regulatory grey zones, masking
traditional risks with crypto jargon.
5.2. Typology of Exchange-Based Frauds
A. Exit Scams by Exchanges
Platforms suddenly shut down, taking user funds with them.
Example: Thodex (Turkey) disappeared in 2021 with over $2 billion in user assets. Its founder fled
and was later sentenced to 11,196 years in prison.
B. Withdrawal Freezes
Exchanges block users from withdrawing funds during downturns, often citing "maintenance" or
"liquidity issues."
Notably seen in FTX and Celsius, both of which froze withdrawals just before collapse.
C. Wash Trading and Fake Volume
Exchanges inflate volume metrics to attract traders or increase token rankings.
Many small or offshore exchanges have been caught simulating trading activity through bots or
internal accounts.
D. Pay-to-List Schemes
Projects pay large sums (sometimes over $100,000) to be listed, often without due diligence.
Raises concerns about conflicts of interest and market manipulation.
E. Front-running Users
Internal teams or bots execute trades ahead of large customer orders.
Violates basic principles of fair market access and trust.
F. Fake Tokens and "Ghost Listings"
Exchanges list tokens with no real project behind them, or allow users to trade against non-existent
liquidity.
Example: Several users reported buying into tokens that could not be sold or withdrawn.
5.3. Case Studies
Thodex (Turkey)
• What happened: Suddenly shut down in April 2021. Founder fled with ~$2 billion.
11
• Aftermath: Legal prosecution, international arrest warrant, and eventual sentencing.
• Significance: Exposed lack of oversight in crypto exchange regulation.
FTX (Bahamas/USA)
• What happened: Allegations of misuse of customer funds, hidden liabilities via sister company
Alameda Research.
• Aftermath: Bankruptcy, investigations, arrest of founder Sam Bankman-Fried.
• Significance: Showed that even the most "trusted" CEXs can implode if oversight is weak.
QuadrigaCX (Canada)
• What happened: Founder reportedly died in India in 2018. ~$190 million in crypto became
inaccessible.
• Aftermath: Investigation revealed fund mismanagement, suspected foul play.
• Significance: Highlighted risks of single-key custodianship and lack of contingency planning.
5.4. How These Frauds Persist
• Regulatory arbitrage: Operating in lenient jurisdictions to avoid scrutiny.
• Lack of audits: No mandatory financial disclosures or proof-of-reserves.
• User naivety: Trust based on brand perception or influencer endorsements.
• Speed and opacity: Transactions and withdrawals can be halted instantly, with little recourse.
5.5. Identifying High-Risk Exchanges: A Checklist
1. Where is the exchange legally registered?
2. Who are the founders and executives? Are they public and verifiable?
3. Is proof-of-reserves published and independently audited?
4. Are there clear terms of service regarding custody and withdrawal rights?
5. What happens if the platform becomes insolvent?
6. How transparent is the listing process?
7. Is the volume organic or potentially inflated?
8. Are there reports of unexplained withdrawal issues?
9. Does the exchange engage in predatory referral programs?
10. Is there a working complaint resolution mechanism?
5.6. Alternatives and Policy Proposals
• Decentralized exchanges (DEXs): Reduce counterparty risk but introduce smart contract risk.
• Regulatory sandboxes: Allow exchanges to be tested under observation.
• Mandatory proof-of-reserves: Cryptographic or audited verification of user funds.
• User-controlled custody: Encouraging use of wallets over exchange storage.
• Cross-border enforcement: Collaboration among regulators to prosecute frauds globally.
5.7. Conclusion: When Infrastructure Betrays Trust
Frauds perpetrated by exchanges undermine the very foundation of crypto adoption. When the
infrastructure itself becomes predatory, users are left defenseless. Moving forward, education,
transparency, and enforcement must evolve together.
12
Disintermediation is not a given. It must be actively defended, especially when the new
intermediaries wear the mask of decentralization.
6. The DAO Mirage: When Governance Is a Lie, Decentralization theater and the illusion of
collective control
6.1. The Myth of the DAO
Decentralized Autonomous Organizations (DAOs) have been heralded as a breakthrough in
collective governance, enabling token holders to make binding decisions without centralized
intermediaries. Yet, in practice, many DAOs are "decentralized" in name only.
This chapter explores how the DAO label is often misused as a marketing tool, concealing highly
centralized structures and decision-making processes that undermine the core ethos of
decentralization. We call this phenomenon the "DAO Mirage": a governance theater where power
is retained by insiders while users are lulled into a false sense of participation.
6.2. What Makes a DAO Legitimate?
• A truly decentralized DAO requires:
• Token distribution: Broad and fair distribution with no concentration of voting power.
• Open governance: Transparent processes, accessible to all token holders.
• Quorum and proposal thresholds: Clear rules that prevent manipulation by whales.
• On-chain execution: Smart contracts that enforce decisions automatically.
• No backdoors: Absence of owner-only functions that can override governance.
6.3. Common Governance Deceptions
A. Whale-Controlled Voting
• A few wallets hold enough tokens to determine every vote.
• Token holders believe they have influence, but outcomes are pre-determined.
B. Developer Veto Power
• Core team retains privileges to halt, reverse, or override votes via admin keys.
• True decisions rest with developers, not the community.
C. Fake Proposals and Manipulated Quorums
• Proposals appear to be community-led but are scripted or staged.
• Artificial quorum rules ensure only insiders can meet thresholds.
D. Off-Chain Decision Making
• Discussions and decisions happen on Discord or Telegram, not on-chain.
• Token holders vote on irrelevant or non-binding topics.
E. Obscure Voting Interfaces
• Participation is limited by technical complexity or poor UX.
• Voter suppression by design, not accident.
13
6.4. Case Studies
FEI Protocol (early governance)
• Initially praised for decentralization, but early votes were dominated by insiders.
• Key decisions were made by the core team without meaningful community input.
Wonderland DAO
• Promised radical financial decentralization but operated as a closed group.
• Governance was opaque; treasury was mismanaged by a founder with a criminal past.
BadgerDAO attack (2021)
• Governance process was sound, but emergency powers allowed key holders to pause
withdrawals.
• Raised concerns about what "autonomous" truly means in DeFi.
6.5. Red Flags: Spotting a Fake DAO
1. Who controls the top 10 wallets?
2. Are proposal processes open or gated?
3. What is the quorum requirement, and who usually meets it?
4. Do smart contracts execute decisions automatically?
5. Are there admin keys that can bypass governance?
6. Has the DAO ever reversed a vote?
7. Is there independent community moderation?
8. How often do votes affect real protocol parameters?
9. Is treasury management transparent?
10. Is the governance structure audited or open-sourced?
6.6. Toward Real Decentralized Governance
• Progressive decentralization: Start centralized but commit to scheduled token redistribution.
• Quadratic voting: Reduce influence of whales.
• Multi-sig with community oversight: Hybrid model for transparency.
• Governance mining: Reward meaningful participation.
• Legal clarity: Clarify DAO liability, jurisdiction, and voting rights.
6.7. Conclusion: Governance Without Power Is Theater
Fake DAOs exploit the aesthetics of decentralization to mask centralized control. This deception
is particularly harmful because it weaponizes the trust of engaged users and misleads regulators
into thinking effective self-governance exists.
In the chapters that follow, we will continue to explore how crypto’s rhetoric of empowerment is
too often used to justify opacity, manipulation, and fraud. Real decentralization is not easy, but
pretending is far more dangerous.
7. MLM and Pyramid Schemes Masquerading as Blockchain Projects, when decentralization
becomes a disguise for financial exploitation
14
7.1. Introduction: Old Tricks in New Code
Multi-level marketing (MLM) schemes and pyramid structures have existed for decades, often
skirting legality by offering intangible products and incentivizing recruitment over sales. In the
crypto world, these models have been reborn under the guise of decentralization, cloaked in smart
contracts, tokenomics, and referral systems.
This chapter analyzes how crypto projects replicate classic MLM mechanics, exploit social
networks, and create unsustainable economic incentives that benefit only early entrants. While not
all referral-based systems are inherently fraudulent, certain structural patterns reliably signal
manipulation and high risk.
7.2. What Defines a Pyramid or MLM Scheme?
Core characteristics include:
• Referral or commission-based rewards for recruiting new members.
• Lack of real utility or product: The token is the only offering.
• Rewards tied to network growth, not token use.
• Exponential growth promises, usually unsustainable.
• High rewards for early adopters, with diminishing returns for latecomers.
Legal regulators (e.g., the SEC and ESMA) typically investigate:
• Whether profits derive primarily from recruitment.
• Whether the scheme operates without a real underlying asset or service.
• Whether financial claims are misleading or unverifiable.
7.3. Crypto Variants of MLM and Pyramid Structures
A. Smart Contract-Based Pyramids
• Self-executing contracts that automatically distribute referral rewards.
• Claimed to be "trustless" but still structurally unsound.
B. Ponzi Tokens with MLM Layers
• High-APY staking platforms where rewards depend on continuous inflows.
• Often paired with aggressive affiliate systems.
C. Airdrop Loops and Shilling Contests
• Incentives for promoting the project on social media without meaningful engagement.
• Artificial community growth to build exit liquidity.
D. Tokenized "Academies" and Education Scams
• Users pay in tokens for access to basic content or courses.
• Real profit comes from bringing in new paying members.
E. Decentralized Autonomous Pyramid Schemes (DAPS)
• Fully on-chain and open-source pyramids marketed as "experiments."
• Exploit gray areas by claiming transparency while ignoring economic sustainability.
15
7.4. Case Studies
Forsage (Ethereum, BSC)
• Structure: Smart contract MLM with binary matrix.
• Action: Investigated and shut down by SEC and Philippines SEC.
• Losses: Over $300 million in user funds globally.
PlusToken (China)
• Structure: Wallet offering daily interest with strong referral program.
• Action: Considered one of the largest crypto Ponzi schemes; core team arrested.
• Losses: Estimated at over $6 billion.
BitConnect
• Structure: ROI-based token with referral rewards.
• Action: Shutdown by SEC; globally infamous for its collapse.
• Losses: More than $2 billion; a cautionary tale in crypto history.
7.5. Red Flags for Users and Regulators
1. Are profits primarily driven by new user recruitment?
2. Is there a real utility or product behind the token?
3. Are rewards unsustainably high (e.g., 1% daily)?
4. Is the business model based on staking or holding only?
5. Is the referral system multi-level and incentivized?
6. Are financial returns clearly explained and justified?
7. Is there an internal market or only token resale?
8. Is the project registered or legally disclosed?
9. Are influencers promoting the project with paid incentives?
10. Can the system survive if user growth stops?
7.6. Regulatory Perspectives and Legal Gray Zones
• SEC: Classifies many crypto MLM schemes as unregistered securities.
• ESMA and national regulators: Focus on consumer protection and financial advertising.
• Enforcement challenges: On-chain structure, jurisdictional ambiguity, and pseudonymity.
Some projects attempt to escape legal scrutiny by branding themselves as experiments, DAOs, or
gamified systems, yet the economic structure remains exploitative.
7.7. Conclusion: Decentralization Does Not Justify Exploitation
The border between community marketing and financial exploitation is often blurry. While referral
programs can serve a legitimate function, when network growth becomes the primary goal rather
than token utility, the system starts to resemble a pyramid.
It is essential that regulators, users, and developers learn to distinguish between sustainable
incentives and exploitative mechanics, not only to protect capital, but to preserve the credibility of
the crypto ecosystem.
8. Influencer Responsibility and the Ethics of Crypto Communication, from hype to harm: when
influence becomes complicity
16
8.1. The Power and Peril of Crypto Influencers
In the decentralized world of crypto, trust often flows not from institutions, but from personalities.
YouTubers, Twitter accounts, Telegram admins, and TikTok creators have emerged as central
figures in shaping investor sentiment and promoting projects. However, this new power dynamic
comes with ethical and legal implications.
Crypto influencers have played pivotal roles in both the growth of legitimate projects and the
amplification of scams. This chapter explores the blurred lines between financial education,
marketing, and manipulation, and asks: when does promotion become complicity?
8.2. Typologies of Influencer Involvement
A. The Educator-Turned-Promoter
• Starts with genuine intent, shifts to paid promotion without clear disclosure.
• Blurs the boundary between neutral content and marketing.
B. The Hype Machine
• Promotes dozens of tokens weekly based on price potential.
• Rarely performs due diligence; content optimized for engagement.
C. The Shill Influencer
• Paid in tokens or USDT to promote early-stage projects.
• Often signs non-disparagement clauses and avoids criticism.
D. The Exit Partner
• Hypes projects just before insiders exit (pump and dump).
• Generates retail demand that creates exit liquidity for others.
E. The Fake Expert
• Claims inside knowledge or technical skills they do not possess.
• Builds credibility through staged AMAs or manipulated metrics.
8.3. Legal and Ethical Standards
• EU Regulation (MiCA & MAR): Treats certain promotions as market manipulation if unverified
or misleading.
• SEC Guidelines (USA): Require disclosure of paid promotion under securities law.
• FTC (USA): Mandates influencers disclose financial relationships.
• UK FCA: Warns that unauthorized promotions may lead to enforcement action.
Ethically, influencers must balance transparency, education, and integrity — especially in high-risk,
high-volatility sectors like crypto.
8.4. Case Studies
Kim Kardashian & EthereumMax
• Event: Promoted token to 250M+ followers without clear disclosure.
• Aftermath: Fined $1.26 million by the SEC.
17
BitBoy Crypto (Ben Armstrong)
• Event: Accused of shilling projects later revealed as scams.
• Aftermath: Involved in lawsuits; faced reputational damage.
FaZe Clan (Esports Influencers)
• Event: Promoted SaveTheKids token, which plummeted post-launch.
• Aftermath: Internal investigations, several members dropped.
8.5. Red Flags: Unethical Influencer Behavior
1. No disclosure of sponsorship or financial incentives.
2. Frequent "urgent" buy recommendations.
3. Promoting unaudited or anonymous projects.
4. Repeated promotion of failed or exit-scammed tokens.
5. Aggressive referral programs.
6. Deleting past content after project failure.
7. Censorship of critical comments.
8. Cult-like branding around the influencer persona.
9. Use of price predictions without basis.
10. No engagement with negative feedback or critical analysis.
8.6. Toward Ethical Crypto Communication
• Transparency: Disclose affiliations, compensation, and risks.
• Accountability: Accept responsibility for due diligence.
• Education over speculation: Prioritize long-term understanding over short-term FOMO.
• Community standards: Platforms should define ethical guidelines and enforce them.
• Collective enforcement: Empower users to report abuse and demand integrity.
8.7. Influence Is Power and Responsibility
In a sector defined by decentralization and asymmetry of information, influencers are not just
content creators. They are de facto financial intermediaries.
The ethical vacuum in crypto communication must be filled by regulation, community pressure,
and personal integrity. Because in crypto, a single tweet can move markets. And sometimes, destroy
lives.
9. Conclusion: Fighting Fraud Without Losing Faith
The world of crypto was born from a dream: decentralization, financial empowerment, and the
liberation from institutional failure. But the dream has drawn shadows with it. Like any frontier,
crypto has attracted innovators and opportunists.
In these eight chapters, we have dissected the anatomy of crypto fraud. From exit scams and rug
pulls to fake DAOs and influencer manipulation, the landscape is as diverse as it is dangerous. Yet
it is not hopeless.
Fraud is not a crypto problem. It is a human problem. Greed, manipulation, herd behavior, and
misplaced trust existed long before blockchains. What the crypto space adds is speed, opacity, and
scale, but also transparency, programmability, and the possibility of building better systems.
18
The fight against fraud begins with education. With skepticism. With asking uncomfortable
questions. But it must continue with tools, governance, and ethical responsibility from developers,
investors, and influencers alike.
Regulators have a role to play, but so do we. Users must stop romanticizing decentralization when
it serves as a smokescreen for predatory schemes. Founders must stop hiding behind smart
contracts when their design enables manipulation. And communities must stop silencing critics in
the name of unity.
This paper is not a manifesto against crypto. It is a call to protect its potential.
Because if we do not learn to recognize the tune of the magic piper, the music will keep playing
and too many will keep dancing to it.
Let’s break the spell.
About The Author
Andrea Cesaretti is a former finance professor, DeFi researcher, and founder of the Empowerment
Laboratory. With a background in technological finance and venture building, he focuses on
bridging innovation and compliance in the crypto space. Cesaretti has authored multiple works on
decentralized finance and teaches courses on financial innovation, monetary policy, and startup
funding. His mission is to empower serious projects, and expose fraudulent ones, in the evolving
landscape of blockchain and digital assets.
andrea.cesaretti@andreacesaretti.com
LINKEDIN | UNICATT | RESEARCHGATE
References
- Bloomberg. (2022). Sam Bankman-Fried Charged With Fraud Over FTX Collapse. Retrieved
from https://www.bloomberg.com
- BotSentinel. (2023). Bot Detection for Social Media. Retrieved from https://botsentinel.com
- Chainalysis. (2022). Crypto Crime Report. Retrieved from https://www.chainalysis.com
- Certik. (2022). Smart Contract Security and Audit Reports. Retrieved from
https://www.certik.com
- CoinDesk. (2020). Forsage Investigated by SEC for Alleged Ponzi Scheme. Retrieved from
https://www.coindesk.com
- CoinDesk. (2021). EthereumMax: Kim Kardashian Fined by SEC Over Crypto Promotion.
Retrieved from https://www.coindesk.com
- Elliptic. (2020). PlusToken: Unmasking a $6 Billion Ponzi Scheme. Retrieved from
https://www.elliptic.co
- Financial Times. (2022). Inside the FTX Meltdown: How a Crypto Empire Imploded. Retrieved
from https://www.ft.com
- Financial Times. (2022). The Crypto Influencer Crackdown Has Begun. Retrieved from
https://www.ft.com
- Globe and Mail. (2019). What Really Happened at QuadrigaCX?. Retrieved from
https://www.theglobeandmail.com
- Messari. (2021). FEI Protocol Governance Review. Retrieved from https://messari.io
- MythX. (2023). Automated Smart Contract Analysis. Retrieved from https://mythx.io
- PeckShield. (2021). BadgerDAO Exploit Post-Mortem. Retrieved from
https://peckshield.com
- Reuters. (2023, September 8). Turkey jails Thodex founder for 11,196 years over $2B crypto
fraud. Retrieved from https://www.reuters.com
19
- RugDoc. (2022). Common DeFi Scams and Risk Indicators. Retrieved from https://rugdoc.io
- SEC. (2021). SEC Charges Promoters of BitConnect With Fraud. Retrieved from
https://www.sec.gov/news/press-release/2021-90
- SEC. (2022). SEC Charges Kim Kardashian for Unlawfully Touting Crypto Security. Retrieved
from https://www.sec.gov/news/press-release/2022-183
- The Block. (2021). Crypto and Multi-Level Marketing: The Thin Line Between Referral and
Fraud. Retrieved from https://www.theblock.co
- The Block. (2022). The DAO Mirage: How Decentralized Are Crypto Projects, Really?.
Retrieved from https://www.theblock.co
- The Guardian. (2021, May 23). DeFi100: Alleged Rug Pull Leaves Investors Stunned. Retrieved
from https://www.theguardian.com/technology/2021/may/23/defi100-crypto-scam
- The Guardian. (2022). Crypto Exchanges Under Scrutiny After FTX Collapse. Retrieved from
https://www.theguardian.com