ELI5 edition Ponzi scheme: Mark gives me 10 dollars, and I promise him 10% back each month until he has double the money, with other words 20 dollars.

Each month I use Mark's own money to pay him the 10%, so: Month 1: Mark gets 1 dollar, I have 9 left. Month 2: Mark gets 1 dollar, I have 8 left, etc.

Mark now recruits all his friends because he doesn't know I'm just paying him back with his own money.

Lisa now invests 10 dollars too, and I start paying her back with her own money as well. Each month I lose 10% of all the invested capital so the goal is to get as much money invested as possible and then quite simply take it all. If the investments are higher than the expenses (paying back 10% each month, calling it "return on investment) then you can keep the scam going for as long as possible to increase the total sum of money invested and then just vanish with the money.

ELI5 edition pyramid scheme: I buy a product for 10 dollars, I call it a knife starter kit. I then make people buy these starter kits for 11 dollars, and tell them to sell them for 20 dollars. I take 10% of all starter kit sales, so for each sold starter kit I always make 1 dollar.

I tell them if they recruit more people to sell starter kits, they get 10% of anything they sell (so if they sell a starter kit for 20 dollars, you get 2 dollars, the person gets 18 dollars. They purchased the starter kit for 11 dollars so they are in 7 dollars profit).

What you want with a pyramid scheme is that you want as many people as possible to sign more people up to sell the kits. For each kit you make 1 dollar (if a kit is say, 500 dollars you make 50 dollars per kit trying to be sold...) no matter what so you're just raking in the cash.

Say that you have 10000 people trying to sell your stuff. You then have 10000 dollars, by essentially handing out kits for other people to sell. The people that are LOSING the money are the people at the bottom of the pyramid, those that can't sell the kits they bought.

I hope that explained it :)