Most people do not understand how node projects are operating right now. And this is really important. Simply put, none of them are sustainable.

Node projects are basically just a system of gathering a lot of money in a short period of time because you pay for the node and that money is gone. That expense is justified by promising daily rewards. However, you will quickly make that ROI on that investment, and then where is the money to pay you?

Supposedly by investing that treasury accumulated from node creation into other investments – usually other DeFi projects. “Real” nodes don’t really make a big difference in this basic structure – they are just another form of investment. The problem is that the rewards are too high. People still haven’t internalized that even a 1% daily return is absolutely insane. It’s very hard or impossible to make any investment to pay that off unless it’s very risky.

Oversimplifying a bit, to pay 1% rewards, you need a 1% **stable **daily return investment in order to sustain it. And that does not exist right now. Period. Therefore, all node projects, in a technical sense, are ponzi schemes. The only way to pay back investors is with new investors. Furthermore, because of the exponential nature of these projects, they often create massive whales that then create huge sells and devalue the token.

However, the ponzi-like structure doesn’t mean it’s doomed to fail. It’s a transitional/experimental period. As mentioned, the system works by having a large amount of money available. The key is getting away from a purely internal revenue model to a stable external one that lasts. We don’t need to have a 100% purely external revenue stream and achieve perfect sustainability. Because it’s safe to assume that the projects will always grow to some degree, but that gap needs to be way smaller than it is now.

Investing in DeFi already helps that to some degree, just not enough. When you’re buying a node, unless you don’t mind the Ponzi structure (you should mind), what you’re truly doing is putting faith that the project will find a solution to all of this. This is why I keep saying teams are so important and not to chase price action or high rewards. The only way any of this will work is by having smart and dedicated teams finding solutions.

Many solutions are already being put into place. Some will transition to NFT markets, some will get into the metaverse field, etc. And there are several mechanisms that are being thought of and implemented to help with sell pressure as well. But remember that there is no guarantee of that happening. Not from me, not from anyone. It’s an act of faith.

But some facts of faith are more reasonable than others. If you think we will be able to put a human on Mars in 10 years, that’s still an act of faith but certainly more reasonable than putting a human on Saturn next month. This is why high rewards are a bad thing, not a good thing. The higher the reward, the shorter the runaway, and the less time the project has to figure this out before the whole thing collapses.

If you want to truly benefit from what node projects are supposed to be – long-term passive income, then pick your projects well: based on trust, professionalism and innovation.

This post was first published on February 2022, before I moved my writing to mirror.xyz