Of Multi Level Marketing

What Is Multi-Level Marketing (MLM)?

Multi-level marketing (MLM) is a user acquisition strategy that distributes rewards through a hierarchical referral structure. Participants earn not only from directly inviting new users, but also from the activities of their downstream referrals. While MLM can be used to promote real product sales, it is sometimes abused as an unsustainable fundraising scheme.

In the crypto space, MLM is often combined with referral rebate programs. A "referral rebate" means that when you invite someone to register or trade, the platform returns part of the trading fees or rewards according to set rules. MLM adds additional layers on top of single-level rebates, distributing rewards through multiple levels of referrers.

Why Is MLM So Common in Web3?

MLM frequently appears in Web3 because projects aim to rapidly build network effects, reduce user acquisition costs, and shift marketing incentives to the community. Compared to large-scale advertising, sharing budgets among users as referral commissions enables faster dissemination of product information to potential users.

As of 2025, regulators and media often note fierce competition for new users in crypto, with projects embedding MLM features in token distributions, airdrops, and trading rebates to drive short-term registrations, deposits, or contract usage. However, long-term user retention depends on the actual value and sustainability of the product and incentives.

How Does Multi-Level Marketing Work?

The core mechanism of MLM is "tiered incentive allocation." The first-level inviter earns direct rewards, while second- and third-level referrers receive smaller shares according to the rules. Rewards can come from sales profits, trading fees, or campaign budgets, but are not generated out of thin air.

For example: A invites B to trade, and B invites C. The platform allocates 30% of trading fees for rebates: A receives 5%, B gets 10%, while B is C's direct referrer and A is an indirect one. If there are too many layers or overly high proportions, the budget depletes quickly and the quality of new users drops, making the structure unsustainable.

The source of funds is key to assessing health. If rewards mainly come from genuine usage and revenue (like fees or gross product margin), the model is more stable. If rewards mainly depend on deposits from subsequent participants without actual value creation, the risk increases significantly.

How Does MLM Manifest in Tokens and DeFi?

In tokens and DeFi, MLM often appears as "invite airdrops," "bonus multipliers," or "boosted staking rewards." Participants earn tokens or points by inviting others and engaging with the protocol, then receive smaller indirect rewards through multiple tiers.

Example 1: Invite-based airdrops for community tokens. After registering and completing tasks, you get a base airdrop; when your invitee completes tasks, you receive a small additional reward. If lower levels also generate rewards for you, this is an MLM structure.

Example 2: Staking and liquidity programs. Projects may allocate part of their reward pool for user acquisition within set limits and timeframes. If rewards are paid from trading fees, protocol revenue, or reserved funds—and transparently tracked on-chain via smart contracts—risks are more controllable thanks to auditability.

How Is MLM Different from a Ponzi Scheme?

The main difference between MLM and a Ponzi scheme lies in the "source of returns" and "verifiability." A Ponzi scheme uses new participants' funds to pay earlier promises, lacking real value creation and usually proving unsustainable. In compliant scenarios, MLM rewards derive from product sales or protocol revenue, governed by transparent budgets and rules.

Key factors for differentiation include: whether fixed high returns are promised; whether recruitment itself is the main income source; whether the origin and allocation of rewards are publicly disclosed; whether there are reasonable caps and time limits; and whether participants can earn value independently of recruiting others.

How to Identify Risks in MLM Structures?

Step 1: Assess reward sources. Are incentives coming from trading fees, product margins, or disclosed budgets rather than solely from new deposits?

Step 2: Evaluate promised returns. Be cautious if "high and stable returns" are advertised—strong guarantees warrant skepticism.

Step 3: Examine depth and rates. More layers and higher proportions usually mean less sustainability. Check if there are clear caps on rebates and duration.

Step 4: Check transparency. Are rules and data openly viewable? On-chain disbursement is more transparent; manual backend adjustments indicate higher risk.

Step 5: Review exit mechanisms. Are there unreasonable lock-up periods, complex withdrawal conditions, or high fees? Assess fund safety independently and avoid risking essential or high-risk funds.

How Does MLM Compare with Gate’s Referral Rebate Program?

There are important differences between MLM structures and Gate’s referral rebate system. Gate’s rebates are typically distributed based on trading fees—referrers receive returns as per published rules to incentivize genuine trading activity. Gate primarily uses single-level rebates focused on "direct invitation—direct rebate," not unlimited multi-level splits.

Gate’s official pages specify rebate percentages, eligible products, and campaign durations. Compared to MLM’s multi-tier model, single-level rebates are simpler with clear funding sources (trading fee returns). Participants do not need to recruit sub-referrals to earn main benefits. Refer to Gate’s product pages and official announcements for actual terms.

What Are the Compliance Issues with MLM?

MLM compliance requirements vary by country and region. Many jurisdictions distinguish between legitimate direct sales/referral rewards and illegal pyramid schemes. The key factor is whether returns come from real products/services or mainly from recruiting downstream participants, as well as whether misleading marketing exists.

As of 2025, regulators remain cautious about exaggerated returns and opaque tiered commissions in crypto user acquisition campaigns. Before participating, understand local laws, review project disclosures/audits, and maintain risk awareness.

Is It Worth Participating in Multi-Level Marketing?

Participation depends on your goals and risk tolerance. If you’re a regular product user, single-level rebates may offer some cost savings. If the model involves many layers, relies heavily on recruiting new users, or lacks transparent funding sources, risks increase substantially.

Best practice: First assess whether the product itself has independent value; then check if incentives act as an accelerator rather than the main profit engine. Use "transparency of information, real funding sources, limited and verifiable rules" as your baseline—don’t let promises of high returns override sound judgment.

Key Takeaways on Multi-Level Marketing

Multi-level marketing is a tiered incentive model for user acquisition, frequently combined with referral rebates, airdrops, or staking rewards in Web3. The health of an MLM structure depends on reward sources, layer count/proportions, transparency, and exit mechanisms. The fundamental difference from Ponzi schemes lies in whether there is real value creation and sustainable returns. Platforms that use single-level referral rebates emphasize genuine use and trading fee refunds rather than recruitment-driven profits. Always prioritize fund security—understand rules and compliance boundaries before participating; never invest more than you can afford to lose in uncertain structures.

FAQ

My friend invited me to a project promising earnings for bringing in new people—is this MLM?

This likely involves an MLM model. The core feature of MLM is that most income comes from recruiting new members rather than selling real products; participants must keep expanding their downline to profit. As a rule of thumb: if over 80% of income comes from recruitment rather than actual product sales, be cautious. Check for income structure transparency—a legitimate project will clearly disclose the proportion of profits from sales versus recruitment.

What’s the fundamental difference between MLMs and standard referral rebate systems?

The main differences are profit source and hierarchy depth. Referral rebate systems share profits generated from real product sales and typically limit tiers to two or three; participants can earn by using the product even without recruiting others. In contrast, MLMs lack real product value—their profits come entirely from entry fees of new recruits, with no cap on levels. Downlines cannot profit merely by using the product itself. Gate’s referral rebates fall into the former category since commissions come from actual trading fees—fundamentally different from pyramid schemes.

Why does it become harder to make money after joining an MLM project?

This stems from mathematical inevitability—MLM growth follows an exponential pattern but markets are finite. If each participant recruits 10 people: first layer has 10, second has 100, third has 1,000… soon exceeding global population size. Once the market saturates, new joiners can no longer recruit effectively and end up being exploited. Statistics show that 99% of MLM participants eventually lose money—the later you join, the higher your risk since most potential downlines have already been taken.

In Web3 projects featuring “referral rebate + token reward” systems, does this count as MLM?

It depends. If token rewards are based on real usage (such as trading or liquidity mining), with transparent rebate rates and limited hierarchy (usually two or three layers), it’s a normal incentive mechanism. However, if most rewards come from new deposits, tokens have no practical use case, or recruitment is the sole revenue source—it has evolved into an MLM structure. A simple test: ask yourself “If I stop recruiting new users, can I still earn money?” If not, be very cautious.

What should I do if I fall victim to an MLM scam? Is it possible to recover my losses?

First, stop further investment immediately to avoid deeper losses. Next, gather evidence such as transaction records, contracts, or screenshots of promises—and report to your local police department. For cross-border cases, use online fraud reporting platforms. Be aware that many MLMs disguise themselves as legal businesses; pursuing justice can be difficult and time-consuming. The most effective protection is proactive awareness—before joining any “high return” program, calmly assess whether its profit structure is sustainable; never act impulsively.