How to Stop Smart Contract Pyramid Schemes Like Forsage, Meta Force, and Others

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How to Stop Smart Contract Pyramid Schemes Like Forsage, Meta Force, and Others

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Last week, the U.S. Securities and Exchange Commission (SEC) charged 11 people with making and promoting Forsage, the world's largest and longest-running smart contract-based pyramid scheme.

Lado Okhotnikov, the leader of Forsage, is still at large. He is thought to be living in the Republic of Georgia. Even though the original Forsage smart contracts aren't nearly as popular as they used to be, they still accept new money, no matter what the SEC says.

Worse, Okhotnikov's new pyramid of smart contracts, Meta Force, keeps growing. Since the alleged scam began a month ago, investors have put more than $42 million worth of DAI stablecoins into Meta Force without knowing it.

Pyramid schemers like Okhotnikov take advantage of people who are weak and vulnerable. How can we fight them better?

A pyramid scheme is an illegal way to run a business where returns to existing investors come from the money or fees paid by new investors. They can't last forever because there are only so many new investors.

Pyramid schemes have been around for hundreds of years. But pyramid schemers quickly saw how blockchain technology could help them. From 2014 to 2016, MMM Global, a pyramid scheme that spread through Nigeria, India, China, and other developing countries, took payments in bitcoin (BTC). Researchers who looked into the pyramid found that at its highest point, MMM Global was handling $150 million per day.

It's easy to see why bitcoin is a good thing. Authorities can shut down a pyramid scheme by putting pressure on its payment processors or bank, but they can't stop the Bitcoin blockchain.

With the launch of Ethereum, the smart contract pyramid scheme became the next big thing in pyramid schemes. This type of alleged scam not only used blockchains to make payments, but also used smart contracts on the Ethereum blockchain to build the pyramid structure.

Using a smart contract to run a pyramid can be helpful in some ways. Using code, the whole back office structure can be automated, which makes it easier for the scammer to run the office. It also lets the pyramid be sold as a "honest" Ponzi, which means that because it is run by code instead of by hand, it is always sure to work.

Also, because the code is public, users could, at least in theory, check it out.

Smart contract pyramids are safer for the scammer to run than traditional pyramids because they give the scammer some anonymity. And while the government can shut down a traditional pyramid by going to the office where it is run, it is much harder to stop one that is built on Ethereum.

Soon, smart contract pyramids were a normal part of Ethereum. In 2019, an Italian group of researchers made a list of the 184 smart contract pyramids that were in use at the time.

Most of them were not very big. Forsage by Lado Okhotnikov broke the rules. In 2020, Forsage's first Ethereum smart contract, x3/x4, would handle payments worth almost $240 million. At one time, it was the second most used contract on Ethereum, after tether.

Soon, the price of Ethereum gas would go up, which would force alleged pyramid scammers like Okhotnikov to move to cheaper blockchains. Over the next few years, Okhotnikov started five more smart contract Ponzi schemes on the Tron and Binance Smart Chain blockchains. Scammers have recently started to move back to Ethereum because level 2 systems, also called subsidiary blockchains, have lowered costs. Okhotnikov has set up Meta Force, his newest pyramid, on the Polygon Network.

Because blockchains are public, Sarah Meiklejohn and other researchers were able to do a detailed analysis of Forsage's payouts and losses, focusing on the $240 million Ethereum x3/x4 contract.

Even though the system's creators said it was open source and transparent, it took the researchers weeks to figure out how to read the code. This meant that almost no one who used Forsage could have actually audited the smart contract. So much for being honest.

Meiklejohn et al. found that the system was originally coded so that only a small number of people could use it. For example, people had to buy slots that gave them the right to get money from people who joined later. After three people signed up, a slot would be blocked, and the recruiter would have to pay fees to reopen it and get paid. But this rule was not written into the slots for the organizers.

The SEC found that Okhotnikov had coded one of his later pyramid schemes, Ethereum xGold, to send some investor money to a wallet that didn't have a Forsage ID. This went against what Okhotnikov said, which was that all the money had been given back to the investors. By 2022, more than 1,000 ETH had been taken from that address.

In the end, Meiklejohn et al. say that 88 percent of Forsage accounts lost money, which is a huge number. Half of all money made was by the top 1,000 users. Okhotnikov and the other cofounders made money by getting to the top of the pyramid. Meiklejohn et al. say that they owned the top five spots in the x3/x4 Forsage pyramid. The top spot earned 5409 ether (ETH), which is well over $1 million.

Okhotnikov and his coworkers used social media to promote their scams in a very aggressive way. Over 47,000 people are now following Forsage's official YouTube channel, which is now all about the new Meta Force pyramid. The most popular Forsage video is in Hindi and has been watched more than 380,000 times. Even though YouTube's terms of service say that you can't market pyramid schemes in any way, this is still happening.

In their paper, Meiklejohn and her coworkers found that most of Forsage's victims lived in developing countries, especially Nigeria, the Philippines, and Venezuela. This shows that these supposed scams are just a way for a few wealthy people to steal from poor and vulnerable people. We need to stop them. However?

Because smart contract pyramids are built on censorship-resistant blockchains, they can't be attacked at their base, and removing them from the payments system won't hurt them either.

Lex Sokolin wrote on CoinDesk that white-hat hackers should work together to find flaws in smart contract pyramids and bring them down. It's a good idea, but white-hat hackers haven't shown much interest in chasing after pyramids so far.

Attacking the reputation of smart contract Ponzis may be the best way to hurt them. Charges from the SEC will definitely help with this. Now, a potential victim can look up Okhotnikov or one of his "investment" products and see what the world's largest securities regulator thinks about them.

The good news is that what the SEC did seems to have worked. Meta Force, Okhotnikov's new (supposed) scam that has already taken in $42 million, started to lose money the day after charges were brought against him. On YouTube, a nervous Lado Okhotnikov said that the SEC's accusations were lies and slander.

But the SEC should have started its attack a long time ago. If securities regulators in Montana and the Philippines had put out a "cease and desist" notice early on, it would have hurt Okhotnikov's reputation before his alleged scams could hurt more people.

Regulators like the SEC should try to take advantage of the fact that blockchains are public. It's possible to see these things pop up and track how big they get. This means that regulators can quickly get resources ready to fight them.

The SEC should also think about fighting with the same kind of thing. Smart contract Ponzi schemes spread through YouTube through flashy videos. The SEC did not put its charges on its YouTube channel, which is a shame. A catchy video about Forsage would reach a lot more people than a short tweet.

Lastly, people with a lot of influence on the blockchain, like Ethereum's co-founder Vitalik Buterin and Binance's CEO Changpeng Zhao, should speak out against smart contract Ponzi schemes when they appear. They might not want to do this because if they admit the problem, it could bring bad attention to the technology. But if these scams are stopped as soon as possible, they won't hurt as many people and won't hurt blockchains' reputation as much in the long run.

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