Ethereum Smart Contract Ponzi Schemes: Part 4
Handover Ponzi Schemes
This article is part of a series of articles on the types of Ponzi Schemes found on the Ethereum Network. Read part one, part two and part three!
Despite exhibiting a variety of incentives and risk to reward profiles, all of the schemes discussed in this series so far have very similar data structures.
The majority of schemes analysed the research piece utilize one of two data structures. The first is what we traditionally associate with Ponzi and Pyramid schemes: Tree-shaped. The second is a much simpler structure: Chain shaped. Read part one and part two to learn more about these.
The Handover scheme, which we’re diving into here, is chain shaped.
Handover
Unlike the basic chain shaped scheme which has a static minimum entry fee, the Handover has an initial entry fee which increases every time a new investor joins the scheme. This ensures the previous investor is paid as soon as a new member joins, but it also means that the scheme becomes less enticing as more users invest due to inflated entry fees.
Here’s how it works.
Walkthrough
As the owner, I deploy the smart contract and advertise it as a DOUBLE YOUR MONEY FAST AND EASY scheme. I take a small 10% fee every time someone invests. Let’s say the initial entry fee is 0.1ETH and doubles each time a new investor comes on board.
- Alice invests the entry fee: 0.1ETH. The previous member of the chain is me as the owner so I get 0.09ETH, plus the 10% fee. Profits: Me: +0.1ETH, Alice: -0.1ETH. I’ve handed over to Alice, so she is next to be paid. Entry fee is now 0.2ETH.
- Bob invests 0.2ETH. I take 10%, Alice gets the rest. Alice hands over to Bob. Profits: Me: +0.12ETH, Alice: +0.08ETH, Bob: -0.2ETH. Entry fee is now 0.4ETH
- Charlie invests 0.4ETH. I take my 10%, Bob gets the rest. Bob hands over to Charlie. Profits: Me: +0.16ETH, Alice, +0.08ETH, Bob: +0.18ETH, Charlie: -0.4ETH. Entry fee is 0.8ETH.
Because the fee doubles every time, the previous participant is paid (almost) twice as much as their original investment as soon as a new investor joins. The risk is that any one of the investors may be the last to invest if the entry fee becomes too high for anyone else to join.
Again, with all Ponzi schemes, the only way to guarantee profit is to get in at the beginning of the scheme.
Code
In Figure 1, we’re using the fallback function on line 19 to house the entry and distribution logic. We first require that the amount sent to the contract is equal or above the current entry fee. Lines 21–22 send the payout to the previous member, line 23 performs the handover, line 24 doubles the entry fee for the next entrant and then 25 sends the owner of the contract the remaining balance.
The benefit of using the Fallback function
In other schemes we’ve explored we’ve used specific functions to accept new investors. With this being the case, the Smart Contract needs to be executed with prior knowledge of the function names and parameters. Usually, the only way to guarantee investors, in this case, would be to build a front end, or assume they have technical knowledge of how to submit function-specific transactions to the blockchain.
Using the fallback function means that investors need not know function names or parameters inside the Smart Contract. Instead, executing the scheme requires ether to be sent directly to the Smart Contract address, just as one would to any wallet address. The benefit is that developing a web front end is not necessary. Although one may choose to create one anyway.
Twitter bots have been known to take advantage of this. In the crypto bubble of 2017, some accounts were known to impersonate influential figures in the crypto space claiming to “Double your money!” if you send ether to a specific Smart Contract address.
Conclusion
This concludes the four-part series on Ethereum Smart Contract Ponzi Schemes. We’ve mainly covered the anatomy of such schemes, but there is so much more information available in the research paper that inspired this series.
I encourage anyone interested in the space to take a look.
This article was inspired by a paper entitled “Dissecting Ponzi schemes on Ethereum: identification, analysis, and impact” by Massimo Bartoletti, Salvatore Carta, Tiziana Cimoli, Roberto Saia.
Learn More
If you enjoyed this post and want to learn more about Smart Contract security, Blockchain Development or the Blockchain Space in general, I highly recommend signing up to the Blockgeeks platform. They have courses on a wide range of topics in the industry, from Coding to Marketing to Trading. It has proven to be an invaluable tool for my development in the Blockchain space.
