The Ponzi Scheme shone a light on DEFI.

Life works in the strangest ways. We may not have picked on DEFI as a financial tool if it was not for a crime committed in the very early days of the technology. The Ponzi scheme that is often credited with kicking off the DeFi (Decentralized Finance) movement is known as "MMM Global." MMM Global was a fraudulent financial scheme that operated under the guise of being a legitimate investment opportunity, but it was, in reality, a classic Ponzi scheme that relied on new investments to pay returns to earlier investors.

History of MMM Global

MMM Global was founded by Sergey Mavrodi, a Russian entrepreneur, in the 1990s. It was initially known as "MMM" and began in Russia as a traditional pyramid scheme, where participants were promised high returns on their investments. The scheme quickly gained popularity, attracting a large number of investors seeking to make easy profits.?

In its original form, MMM collapsed in the late 1990s, leading to significant financial losses for countless investors. Sergey Mavrodi was subsequently arrested and sentenced to prison for his involvement in the scheme.

However, MMM made a resurgence in the 2010s, this time adopting the name "MMM Global." Operating as a decentralized system, MMM Global used Bitcoin as its primary form of currency, allowing participants to invest and receive returns in cryptocurrency.

How MMM Global Worked

MMM Global portrayed itself as a mutual aid fund rather than an investment scheme. Participants were encouraged to "donate" their money to others within the system with the promise of receiving much higher returns in the future. The scheme attracted participants by offering impressive interest rates and enticing referral bonuses for bringing in new investors.

To create an appearance of legitimacy, MMM Global claimed that its high returns were made possible through various philanthropic endeavors and investments in emerging markets. However, in reality, the returns were funded by new investments flowing into the system.

As the scheme relied entirely on new investments to pay returns, it was inherently unsustainable. Eventually, as the number of new participants decreased, MMM Global faced a severe liquidity crisis, and the system collapsed in early 2016.?

Impact on the DeFi Movement

While MMM Global was a fraudulent scheme and caused significant financial losses to many participants, it inadvertently played a role in shaping the DeFi movement. The collapse of MMM Global highlighted the risks associated with centralized financial systems and centralized control over investors' funds. This event served as a stark reminder of the need for transparency, decentralization, and trustless systems in the world of finance.

The DeFi movement emerged as a response to such centralized financial failures, seeking to build financial applications and protocols that operate on public blockchains, governed by smart contracts, and are accessible to anyone with an internet connection. DeFi promotes transparency, financial sovereignty, and inclusivity, allowing individuals to participate in various financial activities without relying on intermediaries.

Conclusion

MMM Global was a Ponzi scheme that gained notoriety for its use of Bitcoin and its claims of being a decentralized mutual aid fund. However, its eventual collapse revealed the inherent flaws in centralized financial systems and underscored the need for DeFi's principles of transparency, decentralization, and self-custody.

?DeFi has grown rapidly since its inception, offering a vast array of financial services, including lending, borrowing, decentralized exchanges, and more, without the need for traditional intermediaries. As the DeFi ecosystem continues to evolve, the lessons learned from schemes like MMM Global serve as a reminder of the importance of building secure, sustainable, and trustless financial platforms for the benefit of all users.

"Thanks to the DeFi Talents program (https://web3-talents.io/defi-talents), a 18-week mentoring program to empower talent for leadership in the decentralized finance space."?