The unsustainable exponential progression of
a classic pyramid scheme (here with a
branching factor of 6)


A pyramid scheme is a business model that
recruits members via a promise of payments
or services for enrolling others into the
scheme, rather than supplying investments or
sale of products or services. As recruiting
multiplies, recruiting becomes quickly
impossible, and most members are unable to
profit; as such, pyramid schemes are
unsustainable and often illegal.


Pyramid schemes have existed for at least a
century in different guises. Some multilevel
marketing plans have been classified as
pyramid schemes.


Concept and basic models
In a pyramid scheme, an organization compels
individuals to join and make a payment. In
exchange, the organization promises its new
members a share of the money taken from
every additional member that they recruit. The
directors of the organization (those at the top
of the pyramid) also receive a share of these
payments. For the directors, the scheme is
potentially lucrative—whether or not they do
any work, the organization's membership has
a strong incentive to continue recruiting and
funneling money to the top of the pyramid.


Such organizations seldom involve sales of
products or services with value. Without
creating any goods or services, the only ways
for a pyramid scheme to generate revenue are
to recruit more members or solicit more
money from current members. Eventually,
recruiting is no longer possible and most
members are unable to profit from the
scheme.

The "eightball" model
Many pyramids are more sophisticated than
the simple model. These recognize that
recruiting a large number of others into a
scheme can be difficult so a seemingly
simpler model is used. In this model each
person must recruit two others, but the ease
of achieving this is offset because the depth
required to recoup any money also increases.
The scheme requires a person to recruit two
others, who must each recruit two others, and
so on.


The "eight-ball" model contains a total of
fifteen members. Note that in an arithmetic
progression 1 + 2 + 3 + 4 + 5 = 15. The
pyramid scheme in the picture in contrast is a
geometric progression 1 + 2 + 4 + 8 = 15.
Prior instances of this scheme have been
called the " Airplane Game" and the four tiers
labelled as "captain", "co-pilot", "crew", and
"passenger" to denote a person's level.
Another instance was called the "Original
Dinner Party" which labeled the tiers as
"dessert", "main course", "side salad", and
"appetizer". A person on the "dessert" course
is the one at the top of the tree. Another
variant, "Treasure Traders", variously used
gemology terms such as "polishers", "stone
cutters", etc.


Such schemes may try to downplay their
pyramid nature by referring to themselves as
"gifting circles" with money being "gifted".
Popular schemes such as "Women
Empowering Women"[2] do exactly this.
Whichever euphemism is used, there are 15
total people in four tiers (1 + 2 + 4 + in the
scheme—with the Airplane Game as the
example, the person at the top of this tree is
the "captain", the two below are "co-pilots",
the four below are "crew," and the bottom
eight joiners are the "passengers".


The eight passengers must each pay (or "gift"
a sum (e.g., $5,000) to join the scheme. This
sum (e.g., $40,000) goes to the captain who
leaves, with everyone remaining moving up
one tier. There are now two new captains so
the group splits in two with each group
requiring eight new passengers. A person who
joins the scheme as a passenger will not see
a return until they advance through the crew
and co-pilot tiers and exit the scheme as a
captain. Therefore, the participants in the
bottom three tiers of the pyramid lose their
money if the scheme collapses.


If a person is using this model as a scam, the
confidence trickster would take the majority of
the money. They would do this by filling in the
first three tiers (with one, two, and four
people) with phony names, ensuring they get
the first seven payouts, at eight times the buy-
in sum, without paying a single penny
themselves. So if the buy-in were $5,000, they
would receive $40,000, paid for by the first
eight investors. They would continue to buy in
underneath the real investors, and promote
and prolong the scheme for as long as
possible to allow them to skim even more
from it before it collapses.

Although the "captain" is the person at the
top of the tree, having received the payment
from the eight paying passengers, once they
leave the scheme they are able to re-enter the
pyramid as a "passenger" and hopefully
recruit enough to reach captain again, thereby
earning a second payout.


Relation to Ponzi schemes

While often confused for each other, Pyramid
schemes and Ponzi schemes are different from
each other. They are related in the sense that
both pyramid and Ponzi schemes are forms of
financial fraud. [3] However, Pyramid schemes
are based on network marketing , where each
part of the pyramid takes a piece of the pie /
benefits, forwarding the money to the top of
the pyramid. They fail simply because there
aren't sufficient people, hence by the time one
comes to the tenth level, the pyramid needs
10 billion people to sustain it. Ponzi schemes,
on the other hand are based on the principle
of "Robbing Peter to pay Paul" - early
investors are paid their returns through the
proceeds of investments by later investors. In
other words, one central person (or entity) in
the middle taking money from one person,
keeping part of it and giving the rest to others
who had invested in the scheme earlier. Thus,
schemes such as the Anubhav teak plantation
scheme (Teak plantation scam of 1998) in
India can be called Ponzi schemes. Some
Ponzi schemes can depend on multi level
marketing for popularizing them, thus forming
a combination of the two.

https://en.m.wikipedia.org/wiki/Pyramid_scheme

cc: seun, lalasticlala