I know the term but I’ve never actually been able to understand what it is and what happens in one
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It’s a “pyramid” because the structure resembles a pyramid or “tree” diagram.
The concept is “robbing peter to pay paul”; you pay off early “investors” with the investment of later “investors”. So long as you have enough new “investors” to pay off older ones, things work… but the ‘pyramid’ part means you can’t do that forever, because the model requires infinite growth.
The idea is that the group running the scheme get people interested with large returns… but that requires many pay-ins for one pay-out (especially after the people running the scam skim some off the top for themselves). There’s a version called a “blessing circle” or something that makes a good example; what it boils down to is that you pay in $1000, and once you have 8 people ‘downstream’ who have paid in $1000, you get $7000 (with the 8th $1000 going to the organizers). This “success” makes the scheme look legit, making it easier to bring more people into the scam.
But now those 8 people need to each find 8 suckers of their own, meaning 64 people need to be brought in for the next ‘layer’ up to get paid. And 64 people requires 512 suckers to get paid, 512 needs 4096, and so on. Eventually there simply aren’t enough suckers left, and the late-comers have bought in for $1000 and never get paid.
It’s a pyramid because if you draw a diagram connecting each cohort, with the first person as the top, then their 8 followers as the next layer, and so on, it resembles a pyramid (moreso if you use a smaller number of people per new layer).
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