DeFi, Box Tokens and Ponzi Finance

Everyone who studies the history of finance knows the now-infamous story of Charles Ponzi. Ponzi is a swindler who, in the early 1920s, operated a loan company in a Boston suburb that promised unbelievable interest rates of 30% a month. He did this by paying out early investors from an inflow of new investors lured into his scheme by promises of phenomenal yields. This scheme is unsustainable, one cannot simply rob Peter to pay Paul indefinitely, and eventually, the press got wind of the murky operation, which was seemingly generating returns from no economic activity. The headlines in the papers famously declared, “Ponzi will not reveal business secret,” Although Charles had a good run at his grift, there was simply no way to run a Ponzi scheme for a sustained period of time, that is until crypto arrived.

While the scheme itself is now widely known, the general public generally doesn’t know the related term Ponzi finance, coined by the late economist Hyman Minsky. Ponzi finance is a broad term for a category of non-sustainable patterns of finance in which an enterprise can only meet its debt commitments if they continuously obtain new sources of debt financing to pay the interest rates on its existing loans. Enterprises involved in Ponzi finance constantly need to borrow at ever-increasing interest rates to pay the interest on their existing loans, thus the common cliche to describe…