Fomo3D: Is A Scam Still A Scam If It Calls Itself A Scam?

Fomo3D, currently the most popular (non-exchange) application on Ethereum and the first project to generate more traffic than the monumental CryptoKitties, defies easy categorization. It could be called a game. It could be called gambling. It satirizes ICO and pyramid schemes, while maybe simultaneously being those things. It’s even been called socioeconomic performance art.

Fomo3D is one component of a larger project called PoWH3D, described on the project’s wiki in the following way:

“PoWH3D is a clever self-contained simulation of the cryptocurrency space as a whole. Cryptocurrency is first and foremost a technology. While cryptocurrency can be used as an investment as well, this is based on a form of ‘market speculation’ powered by the mathematics of Game Theory.”

Looking at PoWH3D’s materials, it quickly becomes clear that the “cryptocurrency space as a whole” is not a place the project’s creators have much admiration for. For instance, the website features an “inspiration board.” Headed with the words “because bad ideas like ours are built upon the cumulative failures of the crypto community,” the board features photos and brief bios of various perceived shitcoin shills and crypto con artists. John McAfee, pictured lighting a $100 bill on fire, is described as being able to control markets with a single tweet and also as being wanted for murder; Mark Karpeles, we are told, used embezzled money to purchase the services of more than 25 prostitutes. Vitalik Buterin, Charlie Lee, and Marquis Trill are all subjects of ironic admiration, and even Charles Ponzi (eponym of the famous scam) is cited as an inspiration for the project.

The game presents itself as a sort of parody of an ICO scam. Investors put money into a project, and then, as often happens, someone walks away with the money that went in without anything actually getting produced. The website URL is even “exitscam.me,” which refers to a scam in which someone takes money in exchange for goods or a service, then disappears, or exits, without providing those goods.

To understand how this work, imagine a bidding process – essentially an auction for a pot of money. But in this auction, as soon as you bid, your money is permanently taken, unlike a standard auction in which you only pay if you win the auction. Instead, every bid is added to the pot.

Let’s say, after several rounds of bidding a pot holds $100 – roughly half from you, half from your competitor. You bid another dollar. Now the pot is at $101, and someone else comes back with another $1 bid, increasing the pot to $102. Should you now bid another dollar for the pot (which would then become $103) or simply say goodbye to whatever money you’ve already put it? Loss aversion tends to be a powerful motivator, and continuing to bid seems to be the rational choice: what’s losing one dollar if you stand to gain $103? Hypothetically, this can go on indefinitely. It may only end when someone has finally put in their very last dollar.

For now there is less than 21,800 Ether in the pot, which accounts for only about 0.02 percent of Ether in circulation, but the bidding shows no sign of stopping. With a jackpot that is currently valued at the equivalent of about $2.7 million (the winner only receives 48 percent of the total pot, currently worth about $5.5 million) and a single bid costing the equivalent of less than $2, people will continue to be tempted. Fittingly, though the amount of Ether in the pot has continued to increase, the dollar value of the pot has declined due to the continual drop in the value of Ether. Just yesterday, for instance, the jackpot would have been worth about $3 million.

There’s more to the game than just bidding, however. For one thing, there is an extra benefit for those who hold PoWH3D tokens because they receive additional payouts. This incentivization raises a question – is this whole thing an ICO?

The game also presents itself as a pyramid scheme. Each bid (or “key,” in the terminology of the game) costs Ether, but, in addition to the possibility of the jackpot, players can also refer new players, earning 10 percent of the contributions of those referred. This means the pot size increases more slowly than the actual bids that are purchased as these “dividends” are paid out.

In a pyramid scheme, it is the last person in who loses. Those who get in early can make a healthy profit off of those who follow. In Fomo3D you win by getting in last. A designer of the game described this feature as an “hourglass scheme.”

There has been speculation about what this game means for Ethereum and the price of Ether in the long term. Shortly after the current round of the game launched last month, Vitalik Buterin gave his prediction on an Ethereum Research discussion board thread titled “Alert! Will Fomo3D destroy Ethereum?”

“If it just keeps on accumulating ETH, then that would just increase the value of the remaining ETH. If the ETH inside it does get to multimillion levels, then the natural two concerns are (i) someone finally wins, and gets all the money all at once, leading to market instability, and (ii) it gets hacked, with similar consequences.”

Seen this way, Fomo3D is not just a pyramid (or, rather “hourglass”) scheme, and its not just an ICO scam. It’s also potentially a form of price manipulation. With less than a tenth of one percent of Ether tied up in the game, these concerns about major market instability may be premature. However, the game shows no sign of stopping. In fact, it seems designed to never end. Last Wednesday, the clock had gone below five minutes. By Thursday, it was up to 21 hours. While writing this article, the clock repeatedly got down to under two minutes, but is again back over 10 minutes.

Possibly there will be an end to the number of people interested in playing, and an end to the funds of those who are currently playing. Or maybe not. A slowdown in bidding may lead new players to jump in, attempting to scoop up the pot from those who have already contributed more than they wanted to. Or maybe those who have bid a lot early on may be getting enough dividends that they will be able to continue playing indefinitely, nearly perpetually reinvesting their dividends.

While blockchain has promised to fix several significant problems, from securing online votes to curing cancer, the most popular applications have so far been far less high-minded (see: CryptoKitties). But if the game is indeed a satire of such projects, and all satire holds a lesson, what’s the lesson of Fomo3D?   

That the hunger to get rich quick is so strong that people are willing to put their money in a scam, even when they are told the project in question is, in no uncertain terms, a scam? Or that people tend to believe there will always be others more foolish or less lucky than they are? That people are willing to spend money just to make fun of themselves?

Fomo3D pretends to be a scam, and it pretends to be a pyramid (sorry, “hourglass”) scheme. But it’s also both of those things. It’s a parody of an ICO, but also it may really be one. It’s a warning about the danger and stupidity of many cryptocurrency projects, but is itself probably dangerous and stupid (and may even be a threat to the Ethereum network itself). It is financially risky and produces nothing of value. And either in spite of (or maybe because of) all that, it is currently the most attractive thing on Ethereum.