Are NFTs Just a Pyramid Scheme? 6 Facts

NFTs have blown up recently. People seem to be making millions off of them. But it’s also true that they have been met with doubt and skepticism by a large portion of the online financial community. Are NFTs safe to invest in, or are they just a pyramid scheme?

NFTs are not pyramid schemes, although they might appear to have some similar elements. Pyramid schemes are fraudulent and illegal, and unlike NFTs, they require buyers to recruit additional people to get a return on their investment.

However, that’s just a surface-level explanation. The remainder of this article will delve further into the details. I’ll also discuss why critics consider NFTs to be a fraudulent scheme.

NFTs and Pyramid Schemes – What Makes Them Different

Although some people believe that NFTs are pyramid schemes and feel hesitant to join the trend, there are several things that set NFTs apart from the illegal transaction.

Here are the main factors that differentiate the mechanism by which NFTs operate from a pyramid scheme:

1. NFTs Don’t Involve the Recruitment of Additional Members To Generate Profit

The signature element of a pyramid scheme is that they require the recruitment of additional members to operate. Prospects are lured in by high returns on investment. However, these returns are conditional and will be received by the investor only if they are able to recruit new members into the scheme.

The initial investor is coerced into recruiting new members as they may lose their investment if they fail to do so. Their success and the amount of profit they can make in this scheme solely rely on their ability to persuade innocent, unknowing people to join the scheme.

This mechanism for profit is markedly different from NFTs, which provide little to no tangible benefit to any individual seller to go out of their way to recruit new people to the NFT market.

There’s no additional commission provided to secondary sellers for the sale of the NFT (they only get the amount that they were able to sell the NFT for, whether that be a profit or a loss).

Only the creator (the original seller) can obtain a royalty from the NFT whenever it is sold down the line. 

In contrast, secondary sellers (members who attempt to recruit additional members) in a pyramid scheme receive (and rely for revenue upon) the commission from a recruit’s investment.

2. NFTs Offer Transparency and Accountability

As you can imagine, there’s no transparency or accountability provided by any parties involved in pyramid schemes. The entire process is fraudulent in nature.

Transparency is perhaps the most significant benefit of having artwork (or other digital mediums) be stored and traded as NFTs. NFTs operate on the blockchain, which provides them with all the benefits of transparency and accountability associated with cryptocurrency.

All transactional details for every single NFT minted on the blockchain are recorded and stored on a public ledger, which anyone can view. These records also contain important metadata regarding all the traders and owners of the NFT.

This provides interested buyers with transparency. If they feel the need to do so, they can authenticate the validity of any NFT using the records on public ledgers.

3. NFTs Are Similar to Cryptocurrency

NFTs are extremely similar to cryptocurrency. They operate on the same blockchains and have the same authentication processes involved.

NFTs and crypto are both digital currencies that can be invested into, bought, sold, and traded with the intent of making a profit.

Making a profit ultimately depends on how educated and literate one is about digital marketplaces. Supply and demand, economics, market trends, consumer habits, etc., are all factors which would determine success in physical marketplaces as well. A lot of thought, knowledge, and decision-making goes into it.

With NFTs, there’s also practical effort involved. Creating a unique, rare, and intriguing artwork that would grab people’s interest is a major factor in determining the sale price of the NFT.

4. NFTs Are Not an Investment Without Risk and Loss

NFTs are an investment, and like most investments, there’s the risk of loss. Creating an NFT through minting requires gas fees which essentially translates to high electrical costs. This investment may not pay off very well or might even result in a loss if the created NFT fails to fetch a high price.

Similarly, there’s always the risk of buying an NFT that suddenly depreciates in value. This is known to be a widespread occurrence with cryptocurrency in general since it’s volatile in nature.

5. NFTs Are a Digital Product That You Can Own

Pyramid schemes don’t involve the sale of products, or at least, they don’t use it as their primary mechanism of generating revenue. As mentioned before, pyramid schemes make their profit using the investments of naive recruits. Although recently, pyramid schemes have attempted to incorporate products into their selling systems to show legitimacy.

NFTs are digital products that, once you create or purchase, are entirely yours. They’re protected by intellectual property rights (including copyright), and the primary mechanism for generating income is via the actual trading of the NFT.

6. NFTs Have Real Value Compared to Pyramid Schemes

Pyramid schemes have no intrinsic value in their investments or services. NFTs, on the other hand, hold value (real monetary value) and have additional unlockable content. A smart contract determines the ownership of NFTs, and additional information or content only accessible by the owner can be embedded into the NFT.

This content can include keys to access additional items, real-world events, a digital library, a group, etc. You get the idea. NFTs have real value, whereas pyramid schemes do not.

Why People Associate NFTs With Pyramid Schemes

While they are technically different overall, similar elements exist in NFTs and pyramid schemes.

One of the more notable ones is unsustainability. Pyramid schemes fall apart as they rely upon funds from the continued recruitment of members as revenue. There are only a limited number of people to recruit, and when numbers start to dwindle, the scheme collapses.

This phenomenon is often compared to the NFT marketplace. Critics suspect that the NFT marketplace has an unsustainable nature, that it is a bubble that can burst at any time, and only those that got into the marketplace before the burst will be able to turn up a profit.

In more practical terms, this refers to how the seller market for NFTs has risen rapidly compared to the buyer market. An increase in supply and a more or less stagnant demand of this sort will inevitably result in NFTs slowly losing their value.

NFTs (and crypto) are also associated with pyramid schemes due to certain similarities in the amount of profit expected to be made. Critics argue that in both pyramid schemes and the NFT market, the people who got in early are the ones who will end up with the bulk of the profit.

And while there is certainly merit to these arguments, it’s not true that people who join the NFT marketplace right now (or at any time) cannot turn a profit with the correct combination of strategy, knowledge, and effort.

Although not a direct factor in the public’s viewpoint, there may be a bias in some people’s minds as NFTs are not eco-friendly and have a considerable contribution to carbon emissions.

Final Thoughts

NFTs aren’t a pyramid scheme. Despite the presence of similar elements, there are multiple foundational differences between the two.

The signature hallmark of a pyramid scheme is that members are required to recruit new members to gain a commission from the new members’ investment fees, which isn’t the case in the NFT marketplace, as secondary sellers do not earn a commission upon selling an NFT.

NFTs are an authentic, valid way to trade and invest, although it’s misleading to say that they are always profitable. Proper research and knowledge are required.

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