“Is this real? It’s too good to be true.”
That’s the first reaction that went to my head when I first heard about this. It was a strong, visceral reaction I felt to the bone. The only thing that trumped that wave of initial feeling was my second reaction, which reverberated throughout my body.
“This is going to change the world.”
Kash can provide this stable interest rate for one reason: cryptocurrency. It’s difficult, because cryptocurrency is the intersection of (a) everything people don’t understand about our financial system with (b) everything people don’t understand about cyber security. To understand cryptocurrency, you must dig into this deep, weird, wonderful rabbit hole until you find yourself falling endlessly into a new world where King Kong lives (when he’s not fighting Godzilla). And you wonder in awe at how that magnificent monster can swing around the jungle like that in all his full glory. Then when you return, you realize you sound like a mad man.
My fiance gives me that look whenever I talk about crypto. It’s real damnet!
There’s two important crypto concepts here to understand: staking and overcollateralization. If you understand those two concepts, you can swing around with King Kong and me.
Concept one: staking. This is like voting. You validate that transactions are authentic, the same way you vote a new bill into legislation. All cryptocurrencies rely on staking as a way to confirm authenticity of transactions, which is what makes blockchain technologies so transparent and trustworthy. Now, why would anyone want to stake? Imagine if you got paid $100 to vote over the internet on every local election. I’d be the most patriotic person on the planet! That’s what cryptocurrencies do, they literally PAY YOU to validate transactions. Where does this money come from? It’s created from the system, so think of it like inflation, except programmatically stable and consistent.
Concept two: over-collateralization. Basically, you earn the 10% interest rate on $1000 because somewhere else in the world there’s someone who is borrowing $1000. This person, let’s call him “borrowing bob”, has to give at least $2000 in collateral via cryptocurrency. This is called “over-collateralization.” Now, crypto prices fluctuate all the time, and if the collateral ever falls below $2000, then Borrowing Bob instantly loses his collateral forever. So in reality Borrowing Bob wants to over-collateralize to something like a 1:3 ratio ($3000). This is called loan-to-value (LTV) ratio.
By doing this, the $3000 stored in the cryptocurrency system generates 10% staking interest (for the sake of simplicity), meaning $300. That’s way more than what’s needed to provide you with your 10% interest on your $1000 deposit. The overflow money goes into an insurance fund, which ensures that in any unforeseen disaster scenario that the 10% interest can still be paid out. This is how 10% is guaranteed.
Can you sniff King Kong yet?
Now…you probably have a million follow-up questions like “why would anyone take a loan like that”, “how does the system get 10% to pay the voters”, “what if there are a lot more earners than borrowers the math doesn’t work on that”, and yes…yes…yes…I’ve successfully inception’d you into this rabbit hole.
Welcome to the world of crypto. Now that you see it, you can learn. And together, we’re going to change the world.
