Is DeFi The Best Opportunity For Passive Income? w/ Cathryn Lavery

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Welcome back to capitalism dot com. I'm Ryan Daniel Moran and today we're going to go a little bit further down the rabbit hole. I've already admitted that I was wrong about crypto and bitcoin and today we're going to take it one step further and talk about decentralized finance. I've been learning this world from my friend Kathryn Lavery. And if that name sounds familiar, it because she's spoken on stage at our events and she's been on the podcast in the past talking about a very successful e commerce business that she runs called Best Self Company. She's famous for selling lots and lots of journals and other products as well. But a year ago she started spending some time as a distraction from stress in her life learning about decentralized finance. And it turned out to be a very profitable distraction. So she has been catching me up to speed on what this world looks like. And from a business perspective, I want to know, how are these changes in the world going to impact business? How are they going to impact entrepreneurship? Right now we're still super early. Right now we're still speculating about how these developments are going to impact our lives. So we go a little bit further into that discussion in this talk with Catherine. Now, Catherine is very well versed in this space, so she throws around a lot of names of projects and tokens that I sometimes have to interrupt and say, hold on, let's define this for a second. Because if you're not familiar with the projects, this can just feel like people are name dropping a bunch of stocks that you've never heard of. So you'll hear me kind of slow down in the conversation a few times as we clean up certain pieces of the conversation. Because if you're not familiar with the projects, this could go off the rails very quickly. But if I was to summarize our conversation, I'd say that what we're seeing and what we're about to see is that individuals, entrepreneurs and investors are now able to participate in the financial rewards of the financial system. Loans are now becoming available in seconds. The ability to make money on your savings and on assets that you have will outpace the interest that you're getting at the bank and sometimes the return in the stock market. Because of the opportunities that are starting to become available. We will probably usher in a new era of savings rather than spending. And the reason for that is because the day is coming that you'll be able to get 6 to 8% on your savings. Yeah, your savings. And not only that, but your savings could go up in value, meaning you could appreciate your savings in the event that you put your money into something like an Ethereum and, and Ethereum goes up in value while also paying you an interest rate that is as safe as the bank. You could theoretically win twice. Now we are super early on this, but that could very well be what is coming. Can you imagine the day when your bank account doubles overnight while continuing to give you a fixed 6% interest? Things like that could theoretically happen based on what is happening in the world of decentralized finance. So we attempt to unpack this in this conversation with Katherine. It's tough to unpack something as vast as this topic in 45 to 60 minutes. But we start to go into how this could impact you, your business and your finance in this Defi conversation with Kathryn Lavery. Kathryn, it's so good to have you back. I was hoping we could start by talking about the transition that you kind of made a year or so ago when you started putting more focus into Defi because you've been on the show at least twice, maybe three times, always from an E commerce context. And then you started developing this other passion. So would you tell that story?

Yeah. So it's funny, I haven't really publicly. This is the first time I'm on an interview talking about Defi and crypto. So this is my alter ego here. But I think 2020 was just a rough year. There was a lot of stuff going on business wise for me and a couple of friends in this slack group were starting to get into Defi and it started last summer. So Defi is just like decentralized finance and on the Ethereum network and it's this thing called yearn and compound coming out. And it basically started this whole Defi summer that I kind of fell into. Didn't know anything about it, but it was such a nice welcome distraction from the stress of the E commerce stuff between Covid and business partner buyout negotiation and all this other things. And it was just like, oh, this is fun. And so I just kind of fell into it. And then by the time my business partner buyout happened, it was know, late September. By that time it was almost like I'm, I'm having an affair on my business with this fun thing on the side. And then the buyout happens and I own the E commerce business fully, but I'm like, oh, but I had such a fun time over here. I don't want to give this up. And so I've just been getting more and more interested in it. Not from, yeah, obviously it's been a profitable adventure, but more so like the possibilities for the future. I realized I really like figuring stuff out and that's been the fun part of like trying to understand it and then actually helping people do it themselves, which helps me understand how it all works.

Yeah. So that's actually why I wanted to talk to you about it today because you are thinking about what this could lead to and where the opportunities might evolve over the coming years or decades. And so let's go there because I was hoping.

I was hoping that you of all people could help me define DEFI from the perspective of the user. Now here's what I mean. Most of the time when we hear about anything cryptocurrency related, we're usually talking about it from the speculative perspective. What cryptos should I buy? What's your Bitcoin price prediction? What's Ethereum going to. But from a use case, how would you define decentralized finance?

Ethereum is. So let me just go back in 2017, I was that person, I was like, okay, number go up. I buy. Very speculative. I remember talking to you during this time and you're like, I'm not into crypto. Very anti. And to be honest, I didn't know anything about the technology part. And so whenever I learned a little more about it, the whole idea of Ethereum is what I would liken to the Internet. So it's basically a platform that you can build other things onto through smart contracts. And then the finance part of it is what DEFI is. And it's been the first thing that's really popped up which is building a whole financial ecosystem on the blockchain. So everything is secured on the blockchain. And so if you think of banks as the middleman handling like loans and money and insurance, that's all now being done on the blockchain. So when you used to, you know, you put your money in a bank and the bank turns on and lends it out to someone else and you get like a very, very small interest rate on that loan. And so what Defi actually allows is connects people through smart contracts that they don't know. You don't have to know anything personal about them or there's no board of directors that can say, no, you're not allowed to trade on here. There's, if you want to buy a shitcoin, the gamestop version on this exchange, nobody's going to stop you, not even your common sense sometimes. So that's what I would consider defi. It's taking out the middlemen and allowing people to trade with each other and securing it on the blockchain.

And how might that play out or how is it playing out from a user perspective? All I have really seen in the real world is other cryptos launching and then incentivizing people to mine them. I haven't seen a whole lot of use cases of end users preferring decentralized finance versus going to Chase and getting a loan. So do you see any of that? And where do you think that could go over the next couple years?

I mean, I. So for example, me an entrepreneur trying to get a mortgage, my first mortgage on my house was an absolute nightmare because somehow I like owning your own company was way more risky than having a W2 from like one employee. So it was just very frustrating. And it was the first time where I was just like, this is so dumb. Like this whole system of also credit checks for me, I only got a Social Security number in 2011. And so it's like building credit and all that sort of thing has been difficult just being in the US So in crypto you can actually just get loans on your crypto rather than. And they don't need to know anything about you. So for example, there's platforms like Aaven and Compound Finance where you put in your collateral so there's no risk to the platform and then you can borrow against it. So for example, you could put in Ethereum wrapped Bitcoin, a bunch of other coins, depending on the platform you're using, and then borrow stable coins against it. And so that could be a way that you could even transfer it back to your traditional bank account and use it, you know, to buy a house or to put into real estate. And the good thing about that is, is that say you've seen a huge run up with.

You know, with Bitcoin and Ethereum, right now we're at a lower than we were, but we're still up a ton from last year. And so if you didn't want to sell your crypto because you're thinking, you know, I believe in this long term, but you want to get some of that money out from just sitting in there, you could put it in one of these platforms and take a loan against it, and then you could use it in the real world, buy real estate or do something el. And because you're using leverage, there's no taxable event that you would be taxing on taking that value. So there's a great way of taking that Money out and using in the real world. And they also have these self paying loans, which is a whole other idea of putting your funds to work and the interest rate pays off the loan. And in the meantime you can borrow a synthetic token to do something else with.

Yeah, so I wanted to go there next. But first I want to clean up something you just said, which is if I'm hearing you right, then one use case is taking $100,000, putting it into Ethereum. And what these platforms allow you to do is borrow against the Ethereum and use it as a down payment for a house or to buy a car or what have you. And the upside to that is a you don't sell your Ethereum so there's no taxable event. But also if Ethereum doubles, you have essentially gotten a free car or a free down payment. Now that makes sense to me. The downside to this gives me the heebie jeebies. So if ethereum goes down 50%.

Are you then liquidating two assets? Do you then have to liquidate both your Ethereum and your car to pay this back?

Well, no, you don't have to liquidate your car. So you can never borrow more than 80% of what you are staked in there. And so I mean I would never advise someone to fly that close to the sun, especially in crypto. So I would never go above like maybe 40%. It depends what I'm putting it in and how secure it is. But yeah, you could get liquidated if you fly too close to the sun. But you're never going to if you buy a car with the money the car is not collateralized, the crypto in there. So they'll liquidate the Ethereum to pay off the loan. So you just won't have your Ethereum anymore. But you wouldn't have to sell your car or anything.

You might even be able to classify that as a taxable loss in that case.

In that case, and this is the first time I'm thinking about that. But if you borrowed against your Ethereum and paid cash for the car and then Ethereum goes down, you'd have to liquidate the Ethereum, but that could be a taxable loss. It could actually be a net benefit on your taxes.

Bought the crypto for less and then when it was liquidated, the cost, say you bought Ethereum at 400, it went up to 2000 and then you borrowed as much as you could against it and then it dropped a little bit, you would be liquidated. But since you bought it at 400 and it sold for 1200. It actually would still be counted as a sale event. So you'd basically be paying liquidation fees and you'd be taxed on that.

Okay, got it. Well, there goes my dreams. Boy can dream about not giving the government money. You did mention some platforms and the one that I'm thinking of is the one that Mark Cuban has popularized. I think it's called Alchemist, where it is essentially a self paying loan, where essentially same situation, you're going to buy a car, but you put $100,000 of Ethereum into Alchemist and your principal is still yours, but they're using your principal, that $100,000 to generate interest that is paying for the car or the mortgage payment. Am I getting that understanding correct?

Yes, you're correct. You can put, there's two different pools. You can put DAI Coin, which is a stable coin, in there and you can, I think I looked at it the other day, it was 7%. So you're making 7% on the DAI, which is automatically paying off the loan. And you can only borrow 50% of what you put in there. But you could also make, you know, so you're borrowing the loan that you're taking in their version of a stablecoin you can put in somewhere else and make more yield on it.

Yeah, that's interesting because now we're using true leverage in a situation like that. And I also appreciate the entire crypto space because of these innovations seem to me to be starting to usher in an era of saving rather than spending. Instead of going into debt to buy a house or a car, there's an encouragement to save and keep it in some asset and borrow against it and allow things to continue to appreciate. That to me is that's a libertarian fantasy where people are saving and that is actually what is driving the growth of the economy rather than government spending. You mentioned DAI Coin, which is a stablecoin, meaning it's tied to the US dollar. And I know there are several different stablecoins, each of their different uses. There's USDC and USDT and DAI and then the failed project of Titan. There's all these stablecoins, but I don't quite yet understand the difference.

Or how they interact or why some are more beneficial than others. Can you help me understand that?

So there's fiat collateralized coins, which is USDC and USDT Coinbase is the one that started USDC Coin and for every dollar that they have in usdc, they're supposed to have a dollar in reserves to basically cover that USDT is the same, but there's been a lot of.

Concern about that. I don't know that that's true. So the tether, I don't know. There's a lot of fud, which is fear, uncertainty, doubt, or on that. So I just read an interesting article. So that could be a whole house of cards in itself, but technically it's supposed to be for every dollar of tether minted that they would have won in reserves. And then the crypto collateralized coins is DAI Coin, which is run by Maker. And so they basically take Ethereum and say, I don't know what the collateral ratio is right now, I would say it was 200%. It means to be able to make $100 of DAI, you would be $200 of Ethereum. That's not the actual numbers, but that's how they peg the Dai to US$1. And it's actually been very stable, even with the market crashes and all that sort of thing. And something interesting that people who are scared to get into crypto because they're like. Because in 2017, when you saw Bitcoin run up to 19K and then drop, because stable coins weren't really a thing yet, you were basically to hold any value, you had to move it either into another volatile asset that would also drop when Bitcoin dropped, or you would take it out of crypto altogether and put it back into fiat currency and move it to your bank account. And so now that we have stablecoins, there's a lot more money just staying in the market because you can make.

Such a better return than you can if you've moved it back to your bank account.

Yeah. So let's go there, because I hear and see on some platforms that you can have a stablecoin which is just tied to the US dollar, getting 7, 8, 10, 12% per year in interest. But I haven't for the life of me, Katherine, been able to figure out what is on the other side of that transaction. Meaning who is it that finds it favorable to be paying 10 or 12% to users who just have their capital in a stablecoin that's sitting there.

Yeah. So there's definitely.

More riskier things than others. If you're seeing a very high interest rate, usually you're going to something a little more risky. If you look at things like Compound or DAI Coin, it's all supply and demand. So even though I got a loan from AAVE last year, it was like 20k or something, and I booked a stable rate of 5%. 5% in the normal world is. That's high. In crypto world, that's actually like, I locked in a great rate and compared to everything else I'm doing, like, I'll pay that one off last. And so in crypto, because you can get loans in minutes, people are willing to pay more because they can turn around and use those resources for something else. So, you know, it's a risk reward. Some, some new protocols are basically rewarding you for bringing your capital there. And it's kind of like if you think of Uber when they first launched, they're getting all this VC money, they're just losing money for years and you're getting all these free rides. It's the same idea in crypto, where the winner of the market will make a lot of money. And so they are basically pre funding their rewards to get people over there. So compound, they have their governance token on Polygon network, which is this new network it's kind of annoying to get over to. So to reward people, they were just giving crazy rewards. So basically, even if you took a loan, you were making more money.

Than you were borrowing because of the rewards you were getting. It was insane.

So just as an example, when you started first talking about this stuff and I started kind of following your work, I put my collateral into Aaven on the Polygon network and what was happening was I was getting more native token to pay for the interest on my loan. I was actually profitable on borrowing because of the reward system built into the platform. I still don't quite understand where that comes from and why they're paying it, which is where I'm still a little bit hesitant. But it does make sense what you're saying about the fact that because there's so much speed in the system, there's a premium. I'm paying for that because people are speculating and trading with that. So that makes sense to me. Is there anything else that would help me understand what, where the interest and where the native coins are coming from?

So when people put it into those platforms.

Like if you think of Yearn, for example, it's basically a hedge fund in defi. So they're finding the very best opportunities for yield that you might not even hear about, or if you do hear about it, you're the exit liquidity that they get to get out early. And so because they have opportunities that we don't have, they can find better yield for our money, just like a hedge fund in real life would. But most people don't get access to that unless they have a huge amount of capital. So some things like urine are like that. And then again, people are more open to paying more. So for example, I was trying to get a line of credit for my business, like six months, you know, every single detail later, and I'm still waiting for it. And my backup is like, I'll just take a loan on my crypto will take five minutes and I can get a few hundred grand if I wanted and put it back into usdc and still actually makes a little on that because of the reward system. So, yeah, I'll be paying more than I would possibly to a bank, but it's just so much easier. And so people will pay for the convenience, especially if they know exactly where it's going to go and how they will make a better return on that. So I think people are just more open to the higher interests. And so it's also supply and demand. So for example, if.

You'Ll go on to aave, for example, on Polygon, if there's a farm going on where people are borrowing the coin that they need for that thing, they are the ones taking the risk, but they're going to borrow from that. And so suddenly.

The cost to borrow goes up. So it might go up from like 4% to 12% because it works.

Meaning that the APRs and the APYs are dynamic based on supply and demand. So, for example, since we've had this market pullback in the last few months, APRs and APYs have gone down. It's cheaper to borrow right now, whereas when everything is in a bull market and Bitcoin and Ethereum are surging, it's now more expensive because there's more people trying to borrow. So what you had in the system is now more profitable. But from an annualized perspective, even just holding your cash or your collateral in one of these platforms can produce, you know, a reasonable enough return just on your savings. Am I summarizing correctly?

You'll basically make 10x what you will in your traditional savings, your high yield savings account, that's 0.35% a year. It's not even keeping up with inflation. On crypto, like you would make 7% if you just kept it in stable coins and kept it, you know, in one of the legit projects that are stable.

So would you tell us the legit projects, meaning if all someone was going to do because very few people should be speculators or try and figure out this world, but if someone were just to use this as seeing what's around the corner and putting some of their savings into stablecoins to get returns. What would be the actual legit projects?

So I think projects with a use case. So how I like to think about it is what projects or products am I using? So I use AAVE compound that you're both lending, borrowing platforms. There's Sushi, Uniswap. Those are basically exchanges. So just like it's kind of like Coinbase, but in a decentralized way. So it's not run by one organization or one board of directors or one guy cannot say, okay, Ryan, I don't like what you said about this political thing. You are no longer able to trade on our platform. Right?

Not that I would say anything controversial about politics.

Never. Of course. And so if you think of the money that Coinbase makes perf all of their fees, what happens with these decentralized organizations is they take the exchange. So they take 0.3% of every time you switch out a token and it goes to either governance tokens or to the token that it is. So Sushi is a great project that I think it's way undervalued. Uniswap, Yearn. So yearn is the hedge fund types where you are investing in their strategies and they go out and find the best return for your money. And because Ethereum has gotten so expensive to do, gas wise, they're basically moving a ton of money all at once. So for them it's like a rounding error when they do something.

So you've already given me nine questions to ask about exactly this. But the first one that I want to ask about what you just said is when you list off these projects are these companies.

They are not companies, as in they're not run by people work there, but they're not. They run it through a decentralized autonomous organization, which is basically a bunch of anonymous people that help the protocol run by voting, but not one person runs the project.

Yeah, I'm going to need you to say that again.

This is where I get really fascinated with where the world is going because I understand the idea that there could be completely decentralized companies. My brain still can't wrap completely around it, but now we're talking about real projects that are actively in use. So you're saying people work there, but they aren't companies.

Yeah, they're basically run on.

A bundle of smart contracts. So it's automated, decentralized. No one person is in control of it or can take it down.

I'm really not great at describing this.

Well, I mean, this is Hard to describe. So I mean, so for example, like I've used AAVE as a platform, right? I've put cap, I put collateral in there and I've borrowed against it. AAVE has a user interface, AAVE has a reward system. AAVE has an obvious platform where I can compare different APRs and APYs. And you're telling me that people work there, they're managing that, but that, that isn't a business.

So who's paying, who works there?

They are paid through the protocol. So the fees that they collect through the.

Through the platform would be paid out. And I believe like everything goes through voting systems. So for example, say they were like, oh, actually the careers need to be increased budget wise. So this, technically, I think there's a vote and there's voting members that would vote on that protocol and it has to get over 51% to vote on that. And then if you want to change things for the whole platform, for example, so say you wanted to on aave, there's a coin that's not available for collateral yet. So say it is sushi, right? And so there'll be a vote that everyone that owns or is on that platform will be able to vote in that governance proposal. And then it depends on a lot of times how, how many of the coin you have in your wallet. So say you have a million sushi, you get a million votes or something.

Yeah. Okay, so that is fascinating and terrifying.

I think I'm explaining it terribly, but it's a way to not have everything reliant on, on one person or a group where generally the consensus is what is the best for this protocol.

Yeah, I mean, I get it. In theory, as I've discussed before, there's, there's also benefits in centralized decision making. So I mean, there is, there are benefits and trade offs here. I mean, I think this creates some strengths and some weaknesses in a platform which we're in the wild west right now, where we're going to see what types of structures and protocols win, which is both exciting and terrifying for me as somebody who is figuring this out and also speculating on how this is going to impact business in the future. So the thing that I have come to the conclusion of at this point is I can see where this is going to increase the speed of borrowing and increase savings rates across the board. I think 10 years from now, I can't imagine that if Chase and Wells Fargo are still around, I can't imagine why they're not backed by Defi so that they can pay out at least 3, 4, 5% to their users. And when Square opens up personalized bank accounts, which they've already rolled out, business accounts, makes sense to me that they're going to have them backed by Bitcoin and then use that as collateral to be able to get 10, 12% so that they can pay out higher interest rates, which is going to create, I think, a savings generation. That's awesome. That is a very good thing for the world and for society. Is there any place else that this might impact our lives or our businesses that you can see on the horizon at this point?

I mean, I think we're only scratching one part of this, which is the financial aspect. There's also a ton of other ways that this same idea could be used across different industries. Any industry that has a lot of middlemen and complications where maybe there doesn't need to be. So, for example, I wrote a blog post just about Intro to Defi. And one way I was talking about this was real estate. You have so many people in transactions and a lot of it could be done on the blockchain. So like a title company that could be handled on the blockchain. Why do you have to pay to get information on who owned what? What's the history of the thing that could all be handled without these middlemen. And so I think there's a, you know, we hear about the NFTs that, that's a whole new market of, you know, secure art. And right now it's, there's, it's, I feel like it's ICO season as far as 2017. There's a lot of stuff that will not, you know, make it. But the whole idea behind the NFT market, it could be used for in real estate. For example, every house could be an NFT because it's unique. All of the history of who bought it, who sold it before. When you buy an nft, you can actually see, you know, the entire from when it was minted. So in a house, when it was constructed, who owned it, how much they bought it for any, you know, anything like that, if they transferred it, that's basically what a title company would do. And they do that in NFTs. And so that's a market I talked about NFTs for ticket, you know, for a concert ticket. So an nft, a concert ticket is an NFT because it's unique in that it's a date, seat number, concert. And so what if you could create a concert ticket NFT platform that basically removes the middleman, which is the Scalpers that go in, buy all the tickets up and then the real fans don't actually get to see the concert unless they pay an arm and a leg. And so what I could see, I remember a few years ago, Taylor Swift tried to do like quizzes in all these ways so her real fans were getting tickets. But what if you could create basically a smart contract that you minted the ticket and if you transferred it for over a certain amount, that profit was taken from that sale and then it's put into a fund that the artist can decide what they do with it. And I thought a cool way to basically give back to the funds is you give each person it's dispersed to their wallet for that concert and you can only buy merch with it. So the artist is getting it and then the fans are getting it. And the sculptors in the middle that are making all the money right now, but are not adding any value would just be like removed.

Now that's beautiful. Right? And I can see that impacting every fabric of society. I mean, I think about music royalties, if you only had a limited number of licenses or the album that you put out, Spotify pays a premium for one of them. They outbid everybody and they buy one of them so that they can stream it and Pandora buys one of them and eventually those licenses can be bought and sold and the royalties for independent music artists goes way up. And you as an investor could say, I've been watching this girl on YouTube for the last nine months, she's incredible. I'm going to buy one of these licenses as an investment. And every time that's played on the radio, you as an investor are getting that. I think this opens up a whole new world for people to bet on individuals.

That are releasing NFT projects.

I think it's a way that brings the power back to people that are creating things.

Absolutely.

And connects them better with the people that want their stuff. So for example, in the concerts, example, you would have your wallet with the concert ticket. And so technically Taylor Swift or whoever else could see, oh, I have, I know everyone that came to these concerts and I can send them a song that nobody else is going to get. I can send them an nft, I can send them whatever. And you're rewarding the people and it gives you more power without having to go through a record company or Ticketmaster or anything like that.

Yeah, that's beautiful. So. So what I like about this conversation is up until recently I was playing catch up on understanding all crypto because I was so anti Crypto for so long. And so I've been playing catch up and this is the first time that I'm like, oh, I can see how this creates more opportunities. Whereas before I just felt like I was missing out on the run up that everybody's making money but me. This actually, like, as an author, as a podcaster, as somebody who makes videos, I can see how this would open up more opportunities for revenue rather than less. What I want to ask you now is I wanted to shift gears to look at it from the speculation and investor side of this. So we've talked about what it looks like from the use case and how a lot of that is still in development. But from a speculator side, from an investor side, are you able to articulate your strategy or your thesis? As somebody who's been playing in this world for the last year, do you have a clear strategy when you are playing in the defi sphere?

Some days I feel like I have the right strategy. Some days I look on my portfolio and I think, wow, Catherine's a genius.

So there's a lot of opportunities in the space right now, but there's also a lot of scams in the space. And as you see more people coming into the space, there's more of that. I will say that we're super early in defi. I think. I don't remember the exact number but.

You know, single digit percentage of people that hold Ethereum are actually in it for defi at this point because it is difficult to get into. Like, you know, I kind of was walking you through, okay, you get to your wallet and then you send it over here and it's not easy and it's also, you're working with real money and so it's a little scary. You're saying, yeah, let's send it to this random number and hope it shows up. So I think we're still super early. But for me I, I pretty much hold like, what am I using? What do I see a use case for? And if I'm looking at something and not understanding what it would be used for, then I'm like, am I the product because I'm bringing the capital or is this product the product? And so I think, and then the whole idea of like, does it seem too good to be true? Because there's a lot of, does it seem too good to be true? And some, sometimes I've made a lot of money in the, oh, this seems too good to be true. And then I get out of that. But for me it's like Long term, what do I think is going to make it? So I know that Mark Cuban's talked about the lending platforms and these exchanges. So if you look at things in real life, so some markets, there's a thing called Nexus Mutual, which is insurance in crypto. And when you look at their profitability and how efficient they are compared to something like Lemonade, which is a public company and losing money, they're crushing it. And so if you think of, okay, that's an actual product that I could see with a use case, and it's actually doing it and it's making money. So all these.

The valuations in real life are so high, but in crypto they're actually not that high compared with the profit they're spinning out. So look for the product like, look for the valuation, like, what are they actually doing?

There's one, Katherine, I think what I'm hearing you say is you're talking about from a long term, what tokens you're owning. Right. So in the same way that you would own a share of a stock, you're buying the projects that you believe have real use cases from a long term holding perspective. But what about as somebody who is very active in the DeFi space that is doing things like staking and farming and forming liquidity pools, These are all terms I did not understand as recently as three months ago, and I only barely understand them now because I played with them thanks to your nudging. But what I want to know is when you're playing in that world, do you have an overall strategy that you're following?

So.

If I have an asset sitting in my wallet and not doing anything, I feel like it's a waste of space.

Meaning if you're just holding Ethereum or if you're just holding sushi or any of these other cryptos, you feel like it's not doing anything.

Yeah. So I want to be making yield on all of my crypto and there's ways to do that. So there's liquidity pooling, which you mentioned. So liquidity pooling, if you think about it, is like you are the airport exchange kiosk and so you're pulling two assets together. So, for example, DAI and ETH would be a liquidity pool.

You're combining dai, which is a stable coin we talked about earlier, and Ethereum. You're putting them into one pool.

And every time someone exchanges DAI for ETH or ETH for Daisy, you will get part of those fees, which depends on your percentage of the pool. For example, if there was $100,000 liquidity pool, and you had 10,000 in there, you would make 10% of every single time someone makes an exchange. And usually it's like 0.3% of every exchange. That's one way to do it. Then there's also yield farming, which is when you. And this is a huge range of risk reward. You can do pretty safe things. And yield farm is basically anytime you make yield on your money, you make profit. So this is staking. And staking is when you.

Use your assets to make a system stronger. So you can stake your ETH for the new Eth2 network and make a percentage on that.

Would you define that a little bit more? Because.

Staking your. I don't. I still don't quite understand what you're doing with your crypto when you stake it.

So when you, when you stake it, sometimes it's used as you're lending it to a project for something. If you're a validator, you're basically staking it to make this. So, for example, if you were a validator on the Polygon network, you're staking your mautic in in order to make the network more secure, because you're essentially becoming another node in the network and you get paid out for that.

Okay, I understood four of those words.

But I don't think it's necessarily. You don't need to know. There's a bunch of different ways to make yield. There's liquidity farming. There's just helping with the whole backbone of DeFi, which is bringing liquidity to the system.

Okay, so I just want to see if I understand. I think, think what you're saying about staking is where you are committing coins, you're committing crypto to a project so that it's there so the system can continue to run. And by you putting it there for a defined period of time, it is almost like putting your money into a CD at a bank. So the bank knows it's going to be there for a year and they can do things with it because they know it's committed for a year and they can pay a higher interest rate for that. Is that kind of what staking is?

Yes.

Oh, my goodness. I got something. Awesome. So, Katherine, that's exciting because that means that the everyday person who just buys a crypto and stakes it can have return on that. I know that things are. That things fluctuate, but what types of yearly APR.

Are paid when somebody just stakes a token?

When you stake a token, it's usually between. It depends on the network, but like 7%.

Okay, great.

It depends again, if you are an early. If you are an early person, you would likely get more and then as more people come in, you would get more diluted. Just like yield farming works the same way. The aprs can be insane because it works out okay. The price of the reward, the number of rewards in that pool, and then as more people come in, you basically get diluted. So you get less rewards than when you came in.

Got it. So in theory, someone could buy Ethereum or any of the other projects we've talked about, stake it back to the project and have 7%.

Put into their wallet in that native token and they still participate in any possible appreciation of the token, correct?

Oh yes.

Yeah, okay, awesome. So it's just a way to monetize your holdings. That's fantastic. Now I know part of your strategy has been looking at new projects and farming or participating in those early projects because the yields can sometimes be 1 to 2% per day in some cases. I have a friend that says he's getting 10% per day right now on a new project.

Is dyno a new project?

Oh yeah, I'm in that with stables.

Define what you mean by you're in a project with stables.

So I'm in dyno right now, but I'm in there with.

I think it's USD USDT. So the percentage is like 30% APR right now. And one thing you need to at look, look out for before you start farming or doing liquidity pools is this idea of impermanent loss.

And impermanent loss, I've become very familiar with impermanent loss.

Yes, it happens whenever you are pooling two assets together, 50, 50 ratio. And if one asset drops a lot in value, you are not going to get the same tokens back because it always has to be 50, 50 ratio. And so if the price of one drops then arbitrageurs essentially come in. You don't see any of this when you remove your liquidity from the pool. You will just see, oh, I've just lost a ton of value. Now if both assets go up in value, you will gain.

Your value of the pool will go up and the token ratio might change, but it's always going to be 50, 50. So when you pull things together, so say for example, dyno is going to be pretty volatile, you know, or actually I don't think it's as volatile as it was, but I know that I've done so many of these farms that the Pool 2 farm is what we call it is the degen high risk, high reward. But there's a very good chance you'll get wrecked from impermanent loss. And sometimes you'll, you'll hit impermanent loss but you're farming so many rewards that it doesn't matter. Like you're, you're able to make it up but, but more often you are actually just getting wrecked in your liquidity pool and you have no idea until you remove it.

So you mentioned farming several times in here. How is farming different than staking or creating a liquidity pool?

So it's taking a liquidity pool and putting it into a specific project. So you create an LP with usually two tokens and you stake it in a new farm where you're basically giving them access to this and you get rewarded with their platform. So on dyno I'm, I have a USDC USDT pool I believe and I have it in an auto compounding farm, which means it is I think every, I don't know, a bunch of times a day basically taking the rewards, selling them and then adding to my liquidity pool. So if they're getting dyno as a reward, they are every maybe twice an hour selling those rewards, adding back to my LP so that I'm not at risk of that impermanent loss because I have two stablecoins. Whereas if I had a dyno usdc, if dyno goes up, it's great because my LP will go up and I'm collecting rewards. But more often than not it will go down because as people are collecting them, they're selling them off because they know this token usually drops very quickly.

Yeah. So I mean if you're still listening and your brain hurts because we just threw a bunch of different terms at you, I just want you to know me too. I'm still playing catch up in this world, but now at least incompetent enough to interview somebody about it. But what I wanted to ask you Catherine, is for those who, you know, run full time businesses or work and aren't going to go down this rabbit hole, how would one participate in some of this world and some of like be an early adopter in this space that is probably going to play a bigger role in our lives over the next decade, how would someone take advantage of being early on this without going full on degen?

Right, yeah, it is a full time job I would say. I mean I would recommend if you wanted to just kind of get exposure to this is get a little ethereum, get Some stable coins. So if you have, you know, a little money in savings in US dollar sitting in account, making 0.2% a year, why not just switch it into USDC coin on Coinbase and put it in one of these protocols that you're making, you know, 5, 6% on and just kind of see how it works. I think it's very hard to describe. So as I've been like explaining it, it's a whole other language of like. I remember when I first was getting into this stuff and I was in this group and they had been in crypto and they're for years and years and I'm trying to understand what's what. They're like, yeah, just stake this over here and exchange this and then you just create an lp. I was like, I don't know what any of that means.

I remember one time you were like, look, you just need to convert your Ethereum, take it over the polygon bridge and then stake it. I'm like, what are you talking about?

Yeah, I realized. So now I've been teaching people how to do this because I find it so fascinating and I do think this will completely change people's mind, especially on crypto, which I feel has this buy Bitcoin or you're not going to make it. Whereas there's actually a whole other.

And actually, I know a lot of people are into Bitcoin, but I actually think Ethereum is. Bitcoin's like digital gold. She kind of just sits there. And Ethereum allows you. It's like a bank where you can lend out your money, you can do all of this stuff with it, and you can take Bitcoin onto Ethereum by wrapping it and actually be able to use it in a useful way.

Yeah. So at the very least, someone can just convert.

The cash that's on the sidelines into a different asset, even if it's just usdc, and then put it to use in a way that gets instead of 0%, 5%, 6%, 7%, which by the way, is a good dividend. That's a good dividend on the stock market.

That interest maybe more than the interest you're paying on your home loan, that's not insignificant. Which is why this is interesting to me, because I can see how this will change kind of the philosophies of how we spend and save. I do know you talk about this stuff sometimes you have a newsletter and some other stuff where you post. Where could people follow you if you're putting this stuff out publicly?

Yeah. Meanwhile, I Have a, it's a zero to defi course and it's like very much like here's the step by step and it starts, you know, okay, you don't have to go 0 to D gen but I will show you the way if you want to go there. And it's just been fun for me to learn and I really like figuring stuff out and also seeing when people get it because there's so many stuff in life where people, when they take action and they start seeing themselves like making yield on things, it's just like this is insane and.

It'S super fun. So you can go to zerotodefi XYZ and it will be up there.

And by the way, to anyone listening, I am a customer and a user so you will see me in there. Catherine, thank you for turning me into a degen. You've. Yeah, you've changed my perspective on a lot of this. So I appreciate you are phenomenal teacher and I really appreciate you sharing this with us. Thank you.

Well, I love being the one that could get you over to the crypto side.

To the dark side.

To the dark side. That's just so much fun.

Yeah, you, you and you and Michael Saylor have helped me understand that I was wrong on this. So thanks for catching me up to speed.

Awesome. Thanks for having me and thanks for just jumping in there.

Thanks Katherine. If you found value in this podcast and you're ready to go Deeper, here are three resources where we can help you. One, you can grab my book 12 months to 1 million on Audible or Amazon. It has over a thousand reviews and it's the playbook to building a seven figure business. Second, you can join our community of entrepreneurs who are following a path plan to build a 1% net worth by building businesses and investing the profits you can get plugged in@capitalism.com 1. And third, if you're looking to go deeper and build a seven figure business that you can sell, you can work closely with us inside the capitalism incubator and you can get on the waiting list and find out what we do over at capitalism.com Inc. That's capitalism.com Inc.