Crypto Relationships: Simple to Complex
I keep talking about how Cryptomining changed my relationship to Crypto, but what do I mean?
TL;DR: Inspired by the Simple to Complex challenge, here’s my take on people’s relationship to Crypto, from a financial instrument lens.
Hi Curious Readers of Professional Curiosity!
I was included in Top 333 Blockchain Leaders to Follow on LinkedIn. Much love to all those who have read my thoughts.
It got me thinking - 1 year ago my relationship to Crypto, and by extension, Blockchain, was very nonexistent. It was only in the last 7 months did my relationship evolve, going from Level 1 to Level 6 in Crypto - at least from a business POV.
As I’ve engaged with many terrific people from my network and by referral, ranging from anyone with no exposure to crypto, to crypto is a scam, to they make crypto products, I am constantly reminded of one line of thought:
My relationship to Crypto is very different than their relationship to crypto
To be an effective communicator, it is important to know what level people stand at when it comes to Crypto. Level is not a marking of superiority, but rather, a level of complexity in understanding the relationship to a subject matter.
I often talk about how I changed my relationship to Crypto by getting into Cryptomining, and then going off the deep end and learning about DeFi Yield Farming. Inspired heavily by Internet Shaquille’s 9 Level of Cooking Meat: Easy to Complex, and the inspiration video behind that inspiration video, TM Davy’s 11 Levels of Drawing Yourself: Easy to Complex, I have created:
The 8 Levels of Crypto Relationships: Easy to Complex
In Case You Missed It
Sections You Can Skim To
Beginners
Level 1 - Buy & Sell
Level 2 - Stake & Save
Level 3 - Mine It
Intermediate
Level 4 - Lending
Level 5 - Borrowing
Level 6 - Liquidity pool
Ape
Level 7 - Leveraged Borrowing and Lending
Level 8 - Liquidity Token Staking
Level ??? - Market Maker
Level 1: Buy & Sell
TL;DR: Crypto is like stocks.
The Level 1: Buy and Sell is a base transactional relationship that is very much the same as buying and selling stock in any publicly traded company.
You buy the item.
You hold it.
You let it appreciate in value.
You sell it off when ready.
Rinse and repeat.
Everyone that doesn't know Crypto, or has learned of Crypto from news but hasn't yet looked into it, will look at Crypto from this view point. In fact, their “Why Crypto” will be heavily influenced on the same way they relationship to stock is.
Level 2: Stake & Save
TL;DR: Crypto is like a savings account.
The Level 2: Stake & Save is a relationship focused on earning while saving. Not only are you riding on the elements of Level 1: Buy & Sell, you are also using the time in between when you would sell your Crypto to get more Crypto.
In Crypto, you can stake your tokens and get interest on it. Usually it’s around 10% APY minimum. Putting this differentl, you should expect a 10% return for saving and staking your Crypto for a year, all while being able to take advantage of rising Crypto prices in the future.
To put it into perspective, Ally Bank, a traditional bank, offers 1.25% APY on your cash you deposit.
Everyone that starts to learn about Crypto will first learn about this, which is a way to convince new people to hold Crypto, without knowing why.
Level 3: Mine It
TL;DR: Crypto is just my computer at work.
The Level 3 relationship with Crypto is to mine the Crypto directly using hardware. You buy a physical hardware with US Dollars, set it up, and each month you’ll earn tokens which can then be used however way you want, including selling at higher price, selling to cover immediate costs, and staking it to earn additional returns on your mining. Your APY will vary, but it’s a passive way to continously earn Crypto.
It is here that we start to see less of a traditional financial banking relationship, and more of a business and utility relationship emerge. That is to say, how do I generate passive income beyond only savings and market flips.
Level 4: Lending
TL;DR: Crypto can help others, and me.
Level 1 refers to basically Stock Trades, Level 2 is cash savings, and Level 3 Mineral Mining. All these are concepts are simpler to understand for anyone without a financial pedigree.
The Level 4 relationship is where you start to see the emergence of what I like to call, DeFi Thinking.
The first understood step of DeFi Thinking is Lending. This is where the fun begins. The Level 4 Relationship in Crypto is when you start to see, and notice, opportunities to earn additional income on your Crypto by lending it to someone else. It’s like cash savings, but more active.
Here’s the basis of it; I deposit crypto, and in exchange, you give me interest payments for the duration of the lending term, plus my total contribution. Expected APY is somewhere between 20% to 30% APY.
What’s fundamental is that you don’t lose access and rights to your Crypto, you still have it at the end of a period. With Lending, you are taking a more active relationship by letting others use it in exchange for interest, while retaining options to earn even more when you are done with lending.
Level 5: Borrowing
TL;DR: Crypto is both a passive and active instrument.
By natural progression, once you look at the beginning of DeFi Thinking - The Level 4: Lending, the next step is Level 5: Borrowing. I would pair Level 4 and Level 5 as interrelated, but where Level 4 focuses on supplying Crypto and taking a more “passive” approach to how your crypto is managed, Level 5 is when you start to get hands on about it.
Level 5: Borrowing is when you start to take out Crypto Loans. You have to know where you stand with financial loans, in order to consider Crypto Loans, as it operates in the same manner.
I borrow Crypto Token A. In order to do that, I put down Crypto Token B, in exchange for Crypto Token A. I owe a periodic fee, but I’m free to use the loaned out Crypto in anyway I choose, whilst my depositted Crypto I put down maintains, or even, appreciates in value.
In this manner you are paying to use something else’s crypto, while keep your original crypto safe. What you choose to do with that crypto, is up to you.
Level 6: Liquidity Pool
TL;DR: Crypto can democratize finance.
Level 4 and Level 5 are the entry points into DeFi Thinking and they have parallels to “off the shelf” traditional financial products. Level 6: Liquidity Pools is a WTF curve ball to that.
Level 6: Liquidity Pools is when you deposit two Crypto Assets into a funding balance, which is ultimately used to help traders of either type of asset make trades.
To put it differently, you are helping facilitate Crypto Trades of Two Assets. In exchange, you will get a % of all trade fees. Not interest. Trade fees.
You have a chance to profit 100% of the trade fees, so long as your contributed tokens maintain consistent value.
The closest traditional financial equivalent is not available to any of us, unless you hold $100k and are a registered market maker with NYSE, underwritten with a great insurance policy.
Understanding Liquidity Pools is your beginning step to undermining the entire traditional finance system.
Level 7: Leveraged Borrowing and Lending
TL;DR: I am now ape.
Level 7: Leveraged Borrowing and Lending is an intersection of DeFi Thinking and WallStreetBets.
Recall that in Level 5, you borrow Crypto Assets. In Level 7, you take your new borrowed Crypto Asset, you can then use it to take out another Crypto Loan. You then take out another Crypto Loan on that loan. While the overall value diminishes around 60% each time, you are effectively stretching $1 in to $2. Check out my previous writing including graphic explanation on Leveraged Lending here.
At this point, your relationship to Crypto is one of DeFi Ape, and you know who you are at this point. In fact, you are trying to find ways to undermind traditional finance.
Level 8: Liquidity Token Staking
TL;DR: Crypto doesn’t have to settle for how traditional finance does it.
Level 8 is uniquely unique to Crypto and DeFi Thinking, and I have not yet seen a traditional finance equivalent.
Level 6: Liquidity Pool allow you to deposit your two Crypto Tokens to earn trade fees. Certain Liquidity Pools provide you a Liquidity Pool Token, which represents your Liquidity Pool Position.
That token?
Yeah you can stake that in the same way as Level 2. I wouldn’t be surprised if a Level 5 possibility also exists with it too. That’s Level 8: Liquidity Token Staking.
It is at this point in the game where we have already departed greatly into the unknown. Level 8 is not purely Liquidity Token Staking; more so, it is a representation of the possible complexities that can be build in Crypto. We are effectively coming up with unknown possibilities for others.
The next level after 8 can be anything - infinity, perhaps. While I haven’t penned what Level 9, 10, or 15 would be, I do know these possibilities:
Crypto Orchestrator - the one who is building the system, literally
Market Maker - A Whale, who can out influence the market and has no need to understand intricacies.
Here’s how the stakes evolve completely after Level 8.
Bonus:
Level ∞: Market Maker
TL;DR: Why go up the Crypto Ladder when you buy the Crypto Ladder?
Restricted to only but a few of us who are extremely cognizant and have heavy resources, a Level 9: Market Maker is a level that 99.99999% won’t achieve. That’s because a Market Maker is anyone who has enough Crypto that when they sell 2% of their portfolio, it causes the overall Crypto price to drop.
That is to say, any transactional action you take will quite literally change the price of Crypto in aggregate for everyone else by a material amount.
At this point, you are looking for ways to make money off the market, without influencing the market, and your enemy is time. You can’t make any instant trades, because to do so would alert the rest of us, including our protocols. So you hire other companies to get clever and trickle-sell, or trickle-buy Crypto. Here’s a company that does just that.
In Terms of DeFi Thinking, you are at the point where both Traditional Finance and Decentralized Finance are the same thing. They are instruments of your influence.
Until next time! See you Friday at 9 am PST for my Career Break Reflections, and Next Wednesday for another Crypto Explainer, also at 9 am PST.