As its name indicates, the pyramid scheme is structured like a pyramid. It typically starts with one person – the initial recruiter – who is on top at the apex of the pyramid.
This person recruits a second who is required to “invest” a certain amount, which is paid to the initial recruiter. In order to make his or her money back, the new recruit must recruit more people under him or her, each of whom will also have to invest. If the recruit gets 10 more people to invest, he or she will make a profit with just a small investment.
Named after Charles Ponzi, who ran such a plot from 1919-1920, the Ponzi scheme is a fraudulent investment plan; however, it is not necessarily a pyramid, which is hierarchical.
In a Ponzi scheme, there is one person who takes people’s money as an “investment” and does not necessarily tell them how their returns will be generated.
As such, the people’s return on investment could be generated by anything. It could come from money taken from new investors, which means new investors essentially pay off the old investors, or even from money made by gambling in Las Vegas.